Legislators Should Give Taxpayers the Income Tax Cut They Deserve

With revenues increasing, the state can easily afford to lower rates

Some modest proposals to reduce the income tax have been introduced in the state Legislature. This triggered a backlash from pundits and politicians as they defend current spending levels by forecasting doom if the state dares to let Michigan families and small businesses keep more of their own money.

But Michigan’s economy has been in growth mode for half a decade, putting more money in the state treasury year after year. Lawmakers can afford to give residents the income tax cut they deserve.

In 2007, the state hiked the income tax from 3.9 percent to 4.35 percent to plug a budget hole. This was supposed to be a temporary tax hike, with rates dropping gradually in 2011 and continuing to decrease until they fell back to 3.9 percent in 2015.

That never happened. As part of a larger tax reform in 2011, lawmakers also stopped the annual income tax rate reductions.

It’s time to put those rates back down. The state budget can afford it. State revenues, excluding federal transfers, are up $4.7 billion since 2011, an 18 percent increase and twice the rate of inflation over the period.

Income tax revenue in particular continues grow. It generated $6.8 billion in fiscal year 2009 and is up to $9.9 billion in the current fiscal year, even though the rate is slightly less in 2017 (4.25 percent) than it was in 2009 (4.35 percent). The state revenue estimators also expect that taxes will generate $764.8 million more in the upcoming fiscal year. Just holding spending constant for one year could allow the state to lower the income tax to 3.93 percent.

Reducing the income tax from 4.25 percent to 3.9 percent might not sound like much, but this small improvement could make a big difference. Consider that the state economy turns over one out of 19 jobs every three months — no doubt the cost of paying Michigan’s income tax is a factor in some of these decisions.

Michigan’s growing economy means that state lawmakers could reduce the income tax and wouldn’t necessarily have to cut money out of the budget each year. A reduction would set the state on a better course that would generate more income for residents and still leave tax revenues on the upward trend.

Michigan has a balanced budget requirement, but it should have the money to pay its bills without going into debt. But even if revenues make a U-turn and start declining, lawmakers can still afford an income tax cut — they’ll just have to offset the lost revenue with reductions in spending. My colleagues and I have recommended numerous ways to spend less.

Lawmakers have toyed with this idea for too long, introducing bills to lower the income tax every session since the 2007 tax hike. They’ve failed to garner consensus among legislators over how much to cut and when, and discussions typically dissolve during budget sessions when lawmakers are approving ever-larger budgets.

With this in mind, if lawmakers want to overcome these barriers and implement the income tax cut taxpayers deserve, they ought to focus on getting the largest rate reduction they can and implement it as early as they can.

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.