Michiganders will pay a lower individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate next year thanks to high general fund revenues, but these savings may be short-lived following an opinion released by the state’s attorney general.
In 2015, Michigan enacted legislation that amended the state’s Income TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Act and instituted automatic triggers that would reduce the individual income tax rate if certain economic factors were met. Broadly, a reduction is triggered when the rate of growth of the general fund in the previous fiscal year exceeds the rate of inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. for the same period, but only if the inflation rate was positive. The size of the reduction is calculated using a formula detailed in the statute.
The 2023 tax year is the first year that a rate reduction is possible under the legislation. Given the statutory formula and the economic factors, Michigan taxpayers will find their income tax rate reduced from 4.25 percent to 4.05 percent when they file their 2023 returns. The effect of this reduction could be a lower tax payment or a larger refund. For each year thereafter, state officials must calculate whether a rate reduction is triggered by the metrics outlined in the statute.
The Attorney General’s Argument
Although many—including Republican lawmakers—understood these triggers to yield progressive rate reductions subject to revenue availability, the Michigan attorney general’s opinion concluded that the 2023 rate reduction is temporary. This means the rate will return to 4.25 percent for the 2024 tax year unless another reduction is triggered. Under this analysis, all rate reductions must be calculated using 4.25 percent as the reference rate. Therefore, a reduction for one year does not permanently reset the rate for future years, causing uncertainty (discussed more below). Some lawmakers disagree and argue that a triggered rate reduction was intended to be permanent. This would not only mean maintaining the 4.05 percent rate in subsequent years, but also referencing the reduced 2023 rate when calculating a rate reduction in a future year.
The attorney general’s argument hinges on principles of statutory interpretation that strive to ensure the intended effects of the statute are realized. Therefore, the statute must be read as a whole and without the selective interpretation of phrases or words. Further, where a statute is unambiguous, the legislature is presumed to have intended the meaning expressed and the statute must be enforced.
Taking these principles together, the attorney general finds it “apparent” that the legislature in 2015 “intended” any tax reduction to be temporary because of the term “current” rate, which is undefined in the statute, but refers to the 4.25 percent rate established in subsection (1)(b). Moreover, if the legislature intended the rate cut to be permanent, such language could have been clearly stated in the statute itself. According to the attorney general’s office, the failure to insert such language cannot be remedied by an interpretation of the statute that contradicts its plain meaning.
Lastly, the attorney general argues that the tax rate reduction must be temporary because the metrics that trigger the reduced rate are temporary. The statute requires that the measurement of the growth in the rates of revenue and inflation be measured “each year.” Given the potential changes to revenue and inflation growth, permanently reducing the rate below 4.25 percent cannot be the intent of the legislature, as understood by the attorney general.
A Contrasting View
To be clear, the statute could have been more precisely drafted to include language regarding the permanence (or temporality) of the triggered rate reduction to resolve any doubts. One such example is Missouri House Bill No. 816 which proposes to repeal certain sections of the state’s corporate tax law and replace them with new language. The bill states:
Beginning with the 2025 calendar year, the rate of tax under subsection 4 of this section may be reduced by one percent. No more than one reduction shall occur in a calendar year and no more than one reduction shall be made under this subsection. The reduction in the rate of tax shall take effect on January first of a calendar year and such reduced rate shall continue in effect for all tax years on and after the year of the reduction [emphasis added].
Putting the precision argument aside, reasonable people may differ on matters of legal interpretation, as is the case here. The attorney general asserts that because the statute does not define the term “current rate” it must refer, according to the plain meaning of the phrase, to the rate listed in section (1)(b) of the statute (the 4.25 percent rate). However, the lack of a definition gives rise to another plausible interpretation, one in which the “current rate” is understood to be the rate in effect at the time of the most recent tax year. For example, in 2022, the rate in effect was 4.25 percent—making it the “current rate” at the time. However, for tax year 2023, this rate is reduced to 4.05 percent making it the new de facto “current rate” and the reference point for future tax reductions. Moreover, there is no language in the statute that reverts a previously reduced rate to the one listed in section (1)(b) for future years. Reading this into the statute suffers the very infirmities that the attorney general seeks to avoid.
Michigan’s House Fiscal Agency (HFA) analysis alludes to the permanency of the rate cut because such rate determinations begin in 2023 and continue “indefinitely on an annual basis.” Additionally, HFA’s January 2023 Economic Outlook and Revenue Estimates shows no indication of a temporary rate. Rather, it states that “the income tax rate will be automatically reduced” when triggered. While not binding, these reference points are persuasive, particularly given the ambiguities in the statute, as others have noted.
If these triggers were intended to yield a series of one-off rate reductions, with rates subsequently reverting, that would make them highly unusual, as this is not how other states’ tax triggers function. That an approach is novel does not make it impossible, of course, and statutory language cannot be ignored simply because its drafting does not properly express the intentions of the drafters. But a permanent reduction is at least as plausible a construction of the text as a temporary one; most reading it would likely assume a series of contingent but, once implemented, permanent reductions were intended. Given that this is how tax triggers generally work, and that we have no indications that lawmakers intended to create something radically different here, the attorney general’s interpretation strains the statutory language more than the alternative.
Sound Policy
As we have written in the past, well-designed tax triggers balance the economic impetus for tax reform and the governmental need for revenue predictability. Notwithstanding the legal arguments here, sound tax policy suggests providing the taxpayers of Michigan with greater clarity as to whether they can expect their rates to rise or hold at the lower rate. Saddling individuals with a potential yo-yo of rate increases and decreases could affect spending patterns and the competitiveness of the state overall. Michigan’s individual income tax currently ranks 12th in the 2023 State Business Tax Climate Index. Lower rates could help build an even more competitive environment, but uncertainty blunts the impact of the policy even when lower rates are in effect, since no one can invest with any confidence about lower rates in the future, and all reductions will be ex post—after the investments have been made.
Additionally, Michigan’s lawmakers and the public deserve predictability regarding the future of the state budget. As James Hohman of the Mackinac Center for Public Policy correctly highlights, it would be unwise for lawmakers to set future budgets under the assumption that the tax cuts are temporary. Uncertainty in the budgetary process could also negatively impact the state’s competitiveness overall for many of the same reasons stated above.
The reality remains that the attorney general’s opinion will carry the day unless successfully challenged in court. Lawmakers in Michigan should consider the implications of this tax rate uncertainty and find ways to bring greater clarity to the statute and its implementation. And for those in other states, the Michigan controversy should motivate them to ensure clarity in their own enactments.
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