Earlier this year, the Michigan Legislature debated the best way to provide citizens with much-needed relief from burdensome state income taxes. Some legislators argued for a cut in the tax rate, while others favored raising the personal exemption.

Lawmakers finally adopted Governor Engler’s plan to cut Michigan’s 4.4 percent tax rate by a half-percent over five years. Will the rate cut really provide workers with greater relief than a larger personal exemption?

The answer is yes, and here’s why. A bigger personal exemption would lower your tax bill by taxing less of your current income, but if you earned additional income—whether from a raise, working longer, taking another job, or investing—it would be taxed at the higher 4.4 percent rate.

If instead the rate were cut a half-percent to 3.9 percent, the same amount of your income would be subject to tax, but at a lower rate. You could also keep more of any extra income you earned.

In other words, lower tax rates not only leave more money in workers’ pockets, they encourage economic growth by creating incentives for people to be more productive.

Lansing did the right thing for Michigan workers by cutting the income tax rate.

For the Mackinac Center, this is Catherine Martin.

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