INCOME TAX
IT’S TIME FOR A FAIRER INCOME TAX IN MICHIGAN
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- Michigan has a flat income tax of 4.25%.
- The personal income tax accounted for 30.8% of state revenue in 2020.
- A “trigger” introduced in 2015 may reduce the tax rate beginning as early as 2023, causing the state budget to take a major hit.
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- Michigan should enact a graduated income tax.
- Michigan should increase the state Earned Income Tax Credit to at least 20% of the federal credit.
- Michigan should eliminate the income tax trigger.
The personal income tax represents the largest single source of state tax revenue. The majority of income tax revenue is allocated to General Fund/General Purpose (GF/GP) spending with the bulk of the remainder going to the School Aid Fund (SAF).
Michigan’s personal income tax was first enacted in 1967 at a rate of 2.6%. The rate fluctuated over the years, reaching a high of 6.35% in 1983 before finally settling to the current rate of 4.25% following tax changes of 2011.[1]
Michigan’s flat tax structure, found in only nine states, means all income earners are subject to the same tax rate regardless of their income base. While the vast majority of states have a graduated income tax, meaning the rate rises with income, Michigan’s Constitution explicitly bans the state from adopting this fairer tax structure.
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- Rate = the percent of income owed
- Base = the taxpayer’s net taxable income, generally adjusted income after deductions and exemptions
The State Supreme Court even held that phasing out personal exemptions or deductions for higher-income earners, as was attempted in the 2011 income tax reforms, created an unconstitutional graduated income tax.[2]
The ban on a graduated income tax is one of the key features contributing to inequity in Michigan’s tax system. By maintaining a flat income tax, Michigan is asking the wealthiest household to pay the same marginal rate as the household with the least income.
A flat tax also makes it difficult for Michigan to narrow racial income and wealth gaps. Decades of discrimination in housing, education, and the workplace have contributed to large disparities in the incomes of Black and brown households. Compared to the Michigan average earnings of $75,000 annually, Black households earn on average $44,300, Indigenous households earn $48,600 on average, and Hispanic households earn $56,300 on average. Meanwhile, White households earn an average income of $81,200 per year.
Because White households are overrepresented in the top 20% of incomes while Black, Indigenous, and Hispanic households are overrepresented in the bottom 20%, a flat income tax tends to benefit White households.
Income tax exemptions, deductions and credits help make Michigan’s income tax marginally progressive, partially offsetting the regressive nature of Michigan’s tax structure as a whole. One of the most important ways Michigan creates more fairness in taxes is through the state’s Earned Income Tax Credit (EITC), a tax credit targeted to families with low incomes. In Michigan, the EITC is refundable, meaning it will be paid even if a household owes $0 in taxes. Refundable credits are generally more equitable than nonrefundable credits, which often leave out the households with the greatest need.
Prior to 2011, Michigan’s EITC provided a refundable credit equal to 20% of the federal credit. Today, that amount has been reduced to 6%, meaning working families are receiving only $150 on average compared to the $500 they would receive if the Michigan EITC were restored to at least 20%.[3]
EITC expansions at the federal level, as seen temporarily with the 2021 American Rescue Plan, can also have positive ripple effects for Michigan workers and families. Because Michigan’s EITC is coupled with the federal credit, an increase in benefits at the federal level leads to greater benefits at the state level. Progressive tax credits like the EITC are associated with higher levels of economic and intergenerational mobility, higher test scores for children and lower levels of food insecurity.[4]
In 2015, the state implemented an income tax rate reduction trigger. Beginning in 2023, this will force a rate reduction during any year when GF/GP revenue growth exceeds the rate of inflation by 1.425 times.
A primary problem with the trigger is how it interacts with unknown economic conditions as well as state tax and spending policies. Economic events, changes in federal tax policy, or modifications to state tax and spending policies causing one-time revenue jumps could trigger reductions even if they do not reflect anticipated long-term revenue growth.[5] Fortunately, because the trigger is linked to 2021 revenue, which came in far above expectations, the measure is unlikely to reduce the tax rate in the near future.[6]
[1] Elizabeth Pratt and David Zin. “History of the Michigan Individual Income Tax Rate.” State Notes. Senate Fiscal Agency, Spring 2015. https://www.senate.michigan.gov/SFA/Publications/Notes/2015Notes/NotesSpr15lpdz.pdf.
[2] “Advisory Opinion Regarding Constitutionality of 2011 PA 38.” State of Michigan Supreme Court, November 18, 2011. https://www.courts.michigan.gov/4a50df/siteassets/case-documents/uploads/opinions/final/sct/20111118_s143157_29_advisoryopn-op.pdf.
[3] IRS. “Statistics for Tax Returns with EITC | Earned Income Tax Credit,” December 2020. https://www.eitc.irs.gov/eitc-central/statistics-for-tax-returns-with-eitc/statistics-for-tax-returns-with-eitc.
[4] Raj Chetty, John N. Friedman, and Jonah Rockoff. “New Evidence on the Long-Term Impacts of Tax Credits.” IRS, November 2011. https://www.irs.gov/pub/irs-soi/11rpchettyfriedmanrockoff.pdf.
[5] Suzanne Lowe and David Zin. “Income Tax Rate Reduction Bill Analysis.” Senate Fiscal Agency, November 4, 2015. http://legislature.mi.gov/documents/2015-2016/billanalysis/Senate/pdf/2015-SFA-0414-E.pdf.
[6] Bob Schneider. “With COVID’s Fiscal Impact Clearer, Lawmakers Should Re-Examine Michigan’s Automatic Income Tax Rate Trigger.” Citizens Research Council of Michigan (blog), March 31, 2021. https://crcmich.org/with-covids-fiscal-impact-clearer-lawmakers-should-re-examine-michigans-automatic-income-tax-rate-trigger.
[7] “2020 Time Series Study.” American National Election Studies, July 19, 2021. www.electionstudies.org. These materials are based on work supported by the National Science Foundation under grant numbers SES 1444721, 2014-2017, the University of Michigan, and Stanford University.
Emily Jorgensen joined the Michigan League for Public Policy in July 2019. She deeply cares about the well-being of individuals and families and has a great love for Michigan. She is grateful that her position at the League enables her to combine these passions and work to help promote policies that will lead to better opportunities and security for all Michiganders.
Jacob Kaplan 
Mikell Frey is a communications professional with a passion for using the art of storytelling to positively impact lives. She strongly believes that positive social change can be inspired by the sharing of data-driven information coupled with the unique perspectives of people from all walks of life across Michigan, especially those who have faced extraordinary barriers. 
Rachel Richards rejoined the League in December 2020 as the Fiscal Policy Director working on state budget and tax policies. Prior to returning to the League, she served as the Director of Legislative Affairs for the Michigan Department of Treasury, the tax policy analyst and Legislative Director for the Michigan League for Public Policy, and a policy analyst and the Appropriations Coordinator for the Democratic Caucus of the Michigan House of Representatives. She brings with her over a decade of experience in policies focused on economic opportunity, including workforce issues, tax, and state budget.
Donald Stuckey 
Patrick Schaefer
Alexandra Stamm 
Amari Fuller
Renell Weathers, Michigan League for Public Policy (MLPP) Community Engagement Consultant. As community engagement consultant, Renell works with organizations throughout the state in connecting the impact of budget and tax policies to their communities. She is motivated by the belief that all children and adults deserve the opportunity to achieve their dreams regardless of race, ethnicity, religion or economic class.
Megan Farnsworth joined the League’s staff in December 2022 as Executive Assistant. Megan is driven by work that is personally fulfilling, and feels honored to help support the work of an organization that pushes for more robust programming and opportunities for the residents of our state. She’s excited and motivated to gain overarching knowledge of the policies and agendas that the League supports.
Yona Isaacs (she/hers) is an Early Childhood Data Analyst for the Kids Count project. After earning her Bachelor of Science in Biopsychology, Cognition, and Neuroscience at the University of Michigan, she began her career as a research coordinator in pediatric psychiatry using data to understand the impacts of brain activity and genetics on children’s behavior and mental health symptoms. This work prompted an interest in exploring social determinants of health and the role of policy in promoting equitable opportunities for all children, families, and communities. She returned to the University of Michigan to complete her Masters in Social Work focused on Social Policy and Evaluation, during which she interned with the ACLU of Michigan’s policy and legislative team and assisted local nonprofit organizations in creating data and evaluation metrics. She currently serves as a coordinator for the Michigan Center for Youth Justice on a project aiming to increase placement options and enhance cultural competency within the juvenile justice system for LGBTQIA+ youth. Yona is eager to put her data skills to work at the League in support of data-driven policies that advocate for equitable access to healthcare, education, economic security, and opportunity for 0-5 year old children. In her free time, she enjoys tackling DIY house projects and trying new outdoor activities with her dog.
Amber Bellazaire joined the Michigan League for Public Policy as a policy analyst in June of 2019. Her work primarily focuses on state policy and budgets affecting Michigan’s Medicaid programs. Previously, Amber worked at the National Conference of State Legislatures tracking legislation and research related to injury and violence prevention, adolescent health, and maternal and child health. She also brings with her two years of Americorps service. As a full time volunteer, Amber had the opportunity to tutor high school students in Chelsea, Massachusetts and address issues of healthcare access and food insecurity through in-person outreach in Seattle, Washington.
Simon Marshall-Shah joined the Michigan League for Public Policy as a State Policy Fellow in August 2019. His work focuses on state policy as it relates to the budget, immigration, health care and other League policy priorities. Before joining the League, he worked in Washington, D.C. at the Association for Community Affiliated Plans (ACAP), providing federal policy and advocacy support to nonprofit, Medicaid health plans (Safety Net Health Plans) related to the ACA Marketplaces as well as Quality & Operations.
