Michigan Should Lower the Personal Income Tax Rate in 2015

State can afford to cut residents a break

In 2007, Michigan's Legislature and governor hiked the state's individual income tax, extracting more from a struggling private sector in order to avoid government spending cuts. Now is the time to revisit that decision. Tax revenues have grown, the budget is balanced, and this state can afford to be less of a burden on its residents.

There is never a good time to raise taxes, but extracting more from taxpayers is especially inopportune at the onset of a national recession, which was the case in late 2007. The state had already lost one out of every 11 jobs from 2000 to 2007, the worst job loss in the country over the period. And with a recession beginning in December of 2007, Michigan’s struggling private sector was suddenly hit with a heavier tax burden.

Economic growth (or its absence) matters for government tax collections. This is why the state collected less revenue the year after imposing an 11.5 percent tax hike. Prior to the increase, the income tax delivered $6.4 billion to the state. By the 2010 fiscal year, it collected $5.5 billion from taxpayers.

With the state economy now rebounding, Lansing can afford to let residents keep more of their income. In 2013, the state collected $8.3 billion in individual income taxes. This levy is projected to bring in $8.5 billion during the current fiscal year. Considering that state government survived on $5.5 billion from this source just four years ago — $3 billion less than currently — reducing the individual income tax rate to 3.75 percent is justified.

Based on the incremental revenue impact sheet from the Senate Fiscal Agency, this would mean that the state taxes roughly $1.1 billion less. This is a static analysis that would ignore revenue changes for this or other tax rates now or in the future that would be raise more revenue because of economic growth.

The change would make Michigan more competitive with its neighbors. Our income tax rate advantage over Ohio and Wisconsin would increase and Michigan would improve against Indiana and Illinois.

(While Michigan’s state income tax is currently less than in Illinois, that state doesn’t allow local governments to levy income taxes. Thus, residents of a number of major Michigan cities including Detroit, Grand Rapids and Lansing actually face higher rates than Chicago taxpayers.)

Most importantly, it allows households to spend more of their money how they would like. Taxpayers were asked to take on greater burdens during the recession. It’s time that they have it eased.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.