Michigan Republicans advance income tax cut plan. Will it work?

• House Republicans are again trying to roll back Michigan’s income tax rate from 4.25% to 4.05%
• The state automatically lowered its rate to 4.05% in 2023, but courts ultimately ruled the cut was temporary
• Democrats backed the court’s decision in 2023, and none voted for the GOP legislation on Tuesday

LANSING — Whether Michiganders will see a tax cut remains the subject of debate in Lansing after House Republicans voted Tuesday to advance a measure to roll back the state’s current 4.25% income tax rate to 4.05%.

The small cut could save the average Michigan taxpayer a few hundred dollars a year, said state Rep. Kathy Schmaltz, R-Jackson, who’s leading the charge but has yet to convince any Democrats to back the plan. 

It’s the latest Republican attempt to return the state to a 4.05% income tax rate, which Michigan had briefly in 2023 until a unanimous Court of Appeals decision limited an automatic cut to a single year. The short-term tax reduction came about after growth of the state’s general fund outpaced inflation.

“Families need this relief now more than ever … too many families are having to make impossible choices,” Schmaltz told lawmakers on the House Finance Committee, who sent the proposal to the chamber floor in a 9-3 vote about one month ahead of this year’s tax filing deadline. 

No Democrats on the panel voted yes, with some asking Republicans what existing spending they planned to cut to make way for the income tax reduction. It’s estimated the cut would reduce state revenue by more than $700 million a year, according to the nonpartisan House Fiscal Agency. 

The Whitmer administration signaled early opposition, with a state treasury liaison informing lawmakers the department opposed the plan. 

Related:

• Michigan income tax cut not permanent, court rules
• Michigan income tax rate to drop to 4.05 percent, but just for one year
• Tax, cut or both? Gretchen Whitmer needs House GOP help to fix Michigan roads

Conservatives contend the 2023 cut should have continued in perpetuity, though Democrats and the Michigan Department of Treasury maintained the 2015 road funding law that triggered it contained no such language. 

Now back in control of the state House, Republicans are trying again to permanently lower the rate to 4.05%. The proposal, sent to the House floor for a potential vote, would make the cut retroactive to Jan. 1 of this year. 

That was an issue for Rep. Kelly Breen, D-Novi, who questioned how the cut could be retroactive when the state was three-quarters of the way through the fiscal year, asking: “What are we cutting in the current budget?”

“Are we just going to be offsetting costs so that maybe somebody has to pay for a car repair because a road doesn’t get fixed or somebody’s got to pay out of pocket for some medical care that would otherwise be covered?” Breen said. “What are we going to cut?”

Schmaltz insisted that the state has “the money there to be able to give back to taxpayers.” Republicans have pointed to the growing state budget, which has risen from $57 billion in 2018 to $82.5 billion this year.

Should the state’s general fund again outpace inflation, Schmaltz’s bill calls for subsequent and permanent cuts to the state’s income tax rate, though it doesn’t specify by how much.

A House Fiscal Agency review of the proposal notes that because the income tax cut would be retroactive to January, state revenue would drop by an estimated $539.3 million in the current fiscal year, which began in October. 

After that, Michigan’s income tax revenue would drop by $713 million in the first full fiscal year and by $727.6 million in the 2026-27 fiscal year, according to the analysis. 

“To be blunt, lawmakers owe this to the people of Michigan,” said Michael LaFaive, senior director of the Mackinac Center for Public Policy’s Morey Fiscal Policy Initiative, who pointed back even further than 2023. 

He noted that then-Gov. Jennifer Granholm signed legislation to raise the state's income tax rate in 2007, and then-Gov. Rick Snyder signed bills to freeze a scheduled rate rollback in 2015. 

Nine other states have already implemented income tax cuts this year, LaFaive added, including neighboring Indiana, which dropped its rate from 3.15% to 3.05%. Another 14 states cut their income tax rates the year before, including Ohio, which dropped its rate from 3.99% to 3.5%.

"Taxes matter to economic and population growth,” said LaFaive, “and Michigan is losing out on both while other states prosper."

House Speaker Matt Hall, R-Richland Township, told reporters at a separate press conference Tuesday to expect a vote on the bill “very soon.” 

Whether Democrats, who still have control of the state Senate, will take up the legislation is another matter. They resisted making the 2023 tax cut permanent on the grounds it was fiscally unsustainable. 

A spokesperson for Senate Majority Leader Winnie Brinks, D-Grand Rapids, did not immediately respond to a request for comment. 

It’s time for Senate Democrats to “get on board the train that’s going,” Hall told reporters, adding: “We’re proposing serious policy … Senate Democrats should get with it and engage in these conversations.”