Traverse City Record-Eagle

Michigan

February 17, 2013

Tax increases affecting more Michigan residents

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LANSING (AP) — In the height of tax season, don't be surprised if you owe more to the taxman in Lansing.

Some major income tax changes approved 21 months ago by Gov. Rick Snyder and lawmakers are just now starting to hit Michigan taxpayers filing their state tax returns.

One of the most significant adjustments: Homeowners and renters used to qualify for a credit if their household income was no more than $82,650 a year. Now they don't get it unless their total household resources are $50,000 or less and their home's taxable value (roughly half the market value) is no more than $135,000.

That will affect about 400,000 returns.

The child deduction is gone. So are special exemptions for seniors and those getting at least half their income from unemployment checks.

A refundable credit for low-income workers was reduced, impacting about 783,000 returns.

Eliminated are state credits for city income taxes, college tuition, adoptions and donations to universities, public radio and TV stations, food banks and homeless shelters.

Add it up and about half of all Michigan filers are seeing a considerable tax increase ahead of the April 15 deadline, said Terry Conley, a tax partner at Grant Thornton in Southfield.

"There's quite a bit of surprise, quite a level of frustration with the increases," he said. "There's going to be some unhappy campers out there. It's relatively common for radical tax changes to be enacted and not really be understood until it's time for returns to be filed."

The Republican governor signed the sweeping tax changes in May 2011. To offset a $1.6 billion business tax cut, he and GOP legislators approved a $1.4 billion increase on individuals, which included setting the income tax rate at 4.25 percent instead of letting it eventually drop to 3.9 percent in 2015 under a previous law.

Debate at the time centered on a contentious decision to start taxing pension and 401(k) incomes of retirees, many of whom began paying a year ago because the pension tax was withheld from their checks.

But non-retirees expecting a break from the state Treasury Department owe more for the 2012 tax year, too.

"It's devastating to our most low-income folks. This is the one time per year they often had a significant enough pot of resources to play with to be able to do a big investment," said Sen. Rebekah Warren, an Ann Arbor Democrat. "Those at the very bottom of the socioeconomic ladder are really struggling more than ever right now."

A 2011 analysis by the nonpartisan House Fiscal Agency shows how people are being affected:

n Before the tax changes, a single parent with two children and $22,000 in annual income would have owed no state income tax and qualify for a $444 refund for the 2013 tax year. Instead they will get back $80.

n A married couple with two kids and about $55,000 in earnings would have paid $963. Now they will pay $1,702, or $739 more.

n A married couple with two kids and $250,000 in income would have owed $9,636. The new bill is $10,625, an increase of $989.

Snyder defends his tax overhaul, saying a "right-sizing" of business and personal taxes was overdue when he took office two years ago. The tax system now is simpler, fairer, more efficient and structurally better for the state budget, said spokeswoman Sara Wurfel.

The Treasury Department worked hard to notify the public and accountants of the changes so taxpayers weren't caught off guard, she said.

Senate Finance Chairman Jack Brandenburg, a Republican from Macomb County's Harrison Township, said he's hearing from constituents and "it will get worse going toward April 15." One woman told him the pension and homestead tax changes cost her $1,500.

Brandenburg, who voted against the tax changes, expects lawmakers in coming months to provide some tax relief — in the form of legislation to gradually lower the sales tax collected on new car sales if buyers trade in old cars. Michigan is among just six states to make vehicle buyers pay taxes on the full price without subtracting the value of their trade-in.

"We've been trying to get sales-tax-on-the-difference signed for two years now," Brandenburg said. "I do believe we have a commitment from the administration to sign it before May."

Democrats, meanwhile, want to reinstate deductions for pension and retirement income and raise the tax credit for low earners to the previous level. But they're outnumbered in the Legislature and Snyder is committed to staying the course on taxes.

Wurfel argued that while the state's Earned Income Tax Credit is lower, the previous break wasn't substantial enough for the working poor to justify continuing it.

Low-income families are being helped in other ways by government programs paid for in part by the lower tax credit, she said.

"He absolutely believes very strong it was the right thing to do and is in the best interest of Michigan," Wurfel said of the tax rewrite.

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