In Blog: Factually Speaking

While no news is often regarded as good news, in this case, it’s not. Michigan’s tax structure is still highly regressive, and taxes Michiganders with low incomes at a higher rate than Michigan’s wealthiest residents, according to a report by the Institute on Taxation and Economic Policy.

The report models state and local taxes, including sales and excise taxes, property taxes, and income taxes, in all states and Washington, D.C. and determines how they impact taxpayers in different income groups. The report finds that tax systems in most states are inequitable and upside-down; tax structures actually make income inequality worse in 45 states—including Michigan; and states that are often commended as “low tax” often end up being high tax for families with low and middle incomes.

In Michigan, the report found that taxpayers in the bottom 20%—those having less than $17,600 in annual income—pay an effective state and local tax rate of 10.4% while the top 1%—those making more than $422,100 a year—pay only 6.2% of their income in state and local taxes. The middle 20% of Michigan’s taxpayers—literally the middle class—pay 9.2% of their income in state and local taxes. What’s more, taxpayers in the top 1% and the next 4% (combined top 5%) pay lower effective rates (6.2% and 7.5% respectively) than the effective rate for all Michigan taxpayers (8.4%).

Additionally, Michigan has the 22nd most unfair state and local tax system in the country, and incomes in Michigan are more unequal after state and local taxes are collected than before. The story is much the same with regard to our immediate neighbors. Illinois, Ohio, Indiana and Wisconsin all have highly regressive tax systems, with Illinois being among the worst 10 states in terms of tax inequality. Minnesota is the one exception; Minnesota is among the best 10 jurisdictions, including one of six jurisdictions where state and local tax systems do not worsen income inequality.

Unfortunately, the tax changes most often discussed in Michigan by the Legislature and candidates will not help our upside-down tax system; they will make it worse. State income tax rate cuts or—worse—elimination of the Michigan income tax only provide steep tax cuts to the most wealthy Michigan taxpayers while providing little benefit to the rest of us. Michigan’s income tax is the only slightly progressive tax system, and this is only due to a refundable state Earned Income Tax Credit (EITC), albeit a comparatively low one, and a refundable property tax credit. Also, of the “terrible ten” states, seven of them do not have a broad-based personal income tax, including Texas and Florida, which are often cited as examples as to why we should eliminate our income tax, and ultimately have to rely heavily on regressive sales and excise taxes. Lawmakers and candidates also fail to acknowledge that Michigan has an income tax rate reduction on the books that has yet to be triggered that should be repealed before it takes effect.

Cutting income taxes like this will only put Michigan in a situation where the wealthier get wealthier, the rest of us get little, and the state is left without adequate revenues to fund the things we all rely on—education, transportation, and clean air and water.

Instead, Michigan needs to look at ways to adequately and fairly raise revenue, such as a graduated income tax, while providing targeted tax relief to those who need it and will use it to boost our economy, like a restoration of or modernization of our state EITC. Only then will we be able to move our state in the right direction.

Showing 4 comments
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    John Darling

    I would encourage you to send this data to the media. It needs to be part of the public discussion.

  • Avatar
    Cheryl Berrien

    what is a property tax “circuit breaker”?

    • Laura Millard Ross
      Laura Millard Ross

      Hi, Cheryl! Here’s some info from ITEP (The Institute on Taxation and Economic Policy):

      The basic idea behind the “circuit breaker” approach to reducing property taxes is quite simple: taxpayers earning below a certain income level should be given some amount of property tax relief when their property taxes exceed a certain percentage of their income. But states that have implemented this basic idea have made a range of choices about who should receive the credit and how the credit should be calculated.

      In 2018, 18 states and DC offered property tax circuit breaker programs. These circuit breakers provide a sophisticated formula to target reductions for those most in need, low-income families who owe significant property taxes relative to their incomes.

      Another thirteen states provide property tax credits to some low-income families based on their income. With eligibility established based solely on income, these credits do not include a provision requiring property taxes to exceed a set percentage of income to qualify for the credit. As a result, those most in need may not be fully protected from a property tax “overload.”

  • Avatar
    Cheryl Berrien

    How do I know if I’m qualified and where do I sign up for this

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