Michigan’s government may be planning for more revenue than it is entitled to. The state’s income tax rate has dropped to 4.05%, but administrators refuse to collect less from people’s paychecks this year. In addition, Attorney General Dana Nessel made a bad reading of the law that triggered the 0.20% reduction in the income tax rate, arguing that the rate is going back up at the start of next year.
Nessel’s opinion will likely get challenged in court, and the income tax rate will likely remain at the lower rate. But the confusion created by the Democrats’ campaign against the tax cut is creating a problem for the state’s budget.
While this question remains unsettled, lawmakers have to plan for next year’s spending. They may be tempted to assume the rate will go back up and budget based on that.
Michigan, like every other state, operates with a balanced budget. Lawmakers can spend as much as they raise in tax revenue, plus anything they’ve set aside in the past, but no more.
This is a limit, not a recommendation. They can always spend less.
However, lawmakers tend to spend all of the revenue that is available. It matters whether they assume that income taxes are going to increase next year. The difference between the previous rate of 4.25% and the mandatory new rate of 4.05% would amount to roughly half a billion dollars in extra revenue. Legislators hope to get their hands on that money if the tax rate pops back up to 4.25%.
It’s a bad call. As my colleague Pat Wright explains, the statute clearly calls for a permanent reduction in income tax rates when revenue increases above inflation. Reading the law a different way requires some mental acrobatics.
This is also how the language was read at the time and recently. Nothing from the analysis of the bills at the time or since suggests that the requirement to reduce tax rates in this section was temporary. As the review of the language when the law was passed states, “This determination would begin with tax year 2023 (based on final FY 2021- 22 GF/GP revenue growth) and continue indefinitely on an annual basis.”
If administrators increase the rates, they ought to expect a legal challenge. That may or may not involve the courts preventing the state from administering the rate increase as they make their decision. Even if legislators believed that it was temporary, it would be imprudent to budget next year based on the assumption that it is.
Legislators will be tempted to spend more because they’re already dealing with more requests than available revenue. Between the extra spending authorized and the fiscal effects of the recent tax bill, legislators have already blown through half of the budget surplus. They cannot afford all of the extra spending that the governor has called for without further raising taxes.
Legislators should practice restraint. Passing a Sustainable Michigan Budget would ensure that lawmakers have enough resources to keep the income tax low.
Michigan’s lower tax rate should stay in place. Legislators ought to ensure that they spend that way, too.
Permission to reprint this blog post in whole or in part is hereby granted, provided that the author (or authors) and the Mackinac Center for Public Policy are properly cited.
Get insightful commentary and the most reliable research on Michigan issues sent straight to your inbox.
The Mackinac Center for Public Policy is a nonprofit research and educational institute that advances the principles of free markets and limited government. Through our research and education programs, we challenge government overreach and advocate for a free-market approach to public policy that frees people to realize their potential and dreams.
Please consider contributing to our work to advance a freer and more prosperous state.