Income Tax Projected To Drop To 4.05% This Year At Cost Of Roughly $600M

Article courtesy MIRS News for SBAM’s Lansing Watchdog e-newsletter

Michigan’s income tax rate may automatically drop from 4.25% to 4.05% this year if final year-end revenues come in as projected, based on information discussed today by state economists. Such a scenario would cost the state budget $600 million a year with the possibility of the income tax rate dropping further in future years.

The tax year 2023 is the first year of a trigger within the 2015 gas tax hike bill that permanently reduces the income tax if annual General Fund revenues is 40% higher than FY ‘21 General Fund revenues after inflation. 

Hypothetically, if the trigger were activated every year into perpetuity, the state income tax rate would eventually drop to 0%. There’s no provision in the current law to restore the rate. 

Principles at today’s Consensus Revenue Estimating Conference (CREC) said they couldn’t announce definitively if this occurred for tax year 2023 because the final numbers from FY ‘22 won’t be released until the end of March.

However, both the House Fiscal Agency and the Senate Fiscal Agency warned that based on what it knows at the moment, the trigger will be activated. Absent passing another law, there’s no way to restore the income tax rate back to 4.25% once it’s been reduced under P.A. 180 of 2015.

MIRS asked Senate Appropriations Committee Chair Sarah Anthony (D-Lansing) if her initial feeling was to roll along with the income tax cut or kill the trigger.

“I don’t know, yet. We are literally days into the new majority. We’re just starting to look at these numbers, but we have to be responsible, right. A mild recession is on the horizon, but I think we can do both. At least we’re hopeful we can do both.”

The state of Michigan’s surplus currently sits at $9.2 billion, meaning the hit to the state budget in the short-term may not be significant. But when the surplus is gone and the state is back to living hand-to-mouth, either spending will need to be cut or more revenue raised to balance the budget.

Meanwhile, Republican legislators celebrated the development today as proof that GOP leaders continue to lead the way on tax relief.

“Practical policies put in place by legislative Republicans – and the economic growth our state has experienced as a result – is going to result in an income tax decrease for every single Michigan taxpayer,” said Rep. Sarah Lightner (R-Springport), adding this is coming to pass despite “repeatedly vetoing” broad-based tax cut bills from Republican legislators last year.

Added Sen. Jon Bumstead (R-North Muskegon), the ranking Republican on the Senate Appropriations Committee: “We must continue to responsibly manage the state’s budget surplus to help Michiganders whose budgets are stretched further and further each month just to buy groceries and gas. This is not the time to grow the size of state government in unsustainable ways.”

Following today’s Consensus Revenue Estimating Conference, Treasurer Rachael Eubanks said the numbers that would be required to determine if a change to the 4.25% personal income tax would not be set until the end of March.

“The law is very specific in terms of the process that we’re supposed to undertake to calculate any income tax trigger,” Eubanks said.