Michigan’s income tax will be lowered from 4.25% to 4.05% in 2023 after Michigan’s treasury department finalized account totals from the last fiscal year.
The Department of Treasury’s audit found that the state took in about $700 million in 2022 above what would have been required to trigger an automatic income tax reduction baked into a 2015 law.
For an unmarried filer with no children making about $52,500 a year, the state’s median income for workers in 2021, it means a reduction of about $95 over the next year. The average taxpayer, the department said in a release, will save about $50.
State Treasurer Rachael Eubanks said in an interview the economic circumstances that led to the tax cut were “unique” among the decades of state finances she’s reviewed as a fiscal official.
“What we’ve seen the last couple years has been pretty extraordinary,” Eubanks said. “The last several fiscal years, we’ve seen really tremendous revenue growth in the state of Michigan, and that’s resulted in us continuing to raise our revenue estimates, year in and year out.”
Consumer spending and wage growth have grown since the height of the COVID-19 pandemic, she noted, raising the tax dollars Michigan received from all types of taxes.
“Fundamentally what drives all that is just a strong economy,” Eubanks said.
While the law that reduced the income tax rate was enacted under the administration of former Gov. Rick Snyder and with Republicans controlling the legislature, Gov. Gretchen Whitmer touted the cut alongside a tax package Democrats passed in early March.
“This year, we permanently rolled back the retirement tax on our seniors, quintupled the Working Families Tax Credit for 700,000 families, and now, everyone’s income tax will decrease for a year,” Whitmer said in a statement. “In total, we have put $1.6 billion in tax relief back in people’s pockets without cutting any critical services or programs.”
What the state won’t do, however, is ask employers to withhold less in taxes, Eubanks said.
“We don’t underestimate the effort it takes for employers to change their withholding amounts ... especially when we’re contemplating that we could return to the 4.25 as early as January,” she said.
Instead, withholding in paychecks will remain the same, and most workers will instead just receive a larger refund or owe slightly less when tax returns are filed. Eubanks said employers can still lower the amount being withheld if that’s their preference, and the state will be issuing guidance about the changes.
The income tax is set to return to 4.25% in 2024 unless the state experiences another revenue boom, according to a formal opinion issued Tuesday by Attorney General Dana Nessel.
The opinion determined, “it is apparent that the Legislature intended any income tax reduction ... to be for that tax year only.”
Eubanks’ department is bound to follow the decision, which drew immediate protests from Republicans leaders past and present who said the law calls for a permanent cut. Snyder and former Republicans who lead the legislature when the tax cut trigger was passed asserted that in a statement Tuesday.
Read more: Attorney General rules anticipated Michigan income tax cut will only last 1 year
Nessel’s opinion undercut the central argument Republican legislators used to oppose a key provision in Democrats’ tax plan. Whitmer and legislative leaders had proposed directly mailing taxpayers $180 checks, which would’ve retroactively diverted enough money from the state coffers, analysts estimated, to head off a tax cut.
Republicans quickly united against the move, insisting a permanent tax cut would be preferable to a one-time payment, and a party-line Senate vote left Democrats six votes short of the two-thirds majority needed to make the payments a reality.
Unless Nessel’s interpretation is overturned via a lawsuit, it means each tax filer earning less than $95,000 will receive less than they would have under Democrats’ original plan.
Republicans haven’t said whether they intend to file suit. Jeff Wiggins, spokesperson for Senate Minority Leader Aric Nesbitt, R-Porter Township, said “at this point, we’re keeping all options on the table in our fight to defend Michigan’s working families.”
Multiple sources indicated any lawsuit might have to wait until 2024, when the income tax returns to 4.25%. Attorney Steve Liedel, who worked in former Gov. Jennifer Granholm’s administration, said years of precedent in Michigan courts dictate the language of the law matters most, and he argued the text of the 2015 law wouldn’t support Republicans’ claims.
“They know how to clearly drop a tax rate. They know how to clearly make it permanent,” Liedel said. “There is nothing in the language that was used that does either of that. They had multiple opportunities to clarify it. They didn’t.”
In a statement, House Minority Leader Matt Hall, R-Richland Township, called the announced cut “a major win for Republicans, and a major win for Michigan taxpayers,” in spite of Democrats, the statement alleged, “trying and failing to take it away through accounting gimmicks and legal maneuvers”
Eubanks estimated the government will see revenue decline by $600 to $650 million from the income tax cut. This is a small amount relative to the surplus the audit reported, about $7.5 billion, meaning it will likely not significantly restrict Democrats’ plans as they craft their first budget with full control of the legislature in 40 years..
In February, Whitmer proposed the largest state budget in Michigan’s history, and Bob Schneider, senior research associate at the nonpartisan Citizens Research Council, estimated the portfolio of initiatives laid out in her proposal will draw the surplus down to zero over the next two years.
“The governor’s budget proposal does propose to draw that down over the next two years, by one-time spending, but also a lot of tax cuts that are implemented now,” Schneider said.
Democrats have already appropriate well above $1 billion of the surplus in supplemental spending for a potpourri of additional projects.
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