Michigan Looks to Lower Corporate Income Tax Rate to Improve State Competitiveness

Michigan lawmakers are considering lowering the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate to alleviate the 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. burden on businesses still emerging from the pandemic and to make the state more competitive. Senate Bill 392 would retroactively reduce the state’s corporate income tax rate from 6 percent to 5.5 in tax year 2021, and then lower it again to 4.9 percent for tax year 2022. The bill has passed out of the Committee on Finance but has not yet been considered by the full Senate.

Michigan is far from the first to float rate reductions this legislative session. Ten states (Arizona, Idaho, Iowa, Louisiana, Missouri, Montana, Nebraska, New Hampshire, Ohio, and Oklahoma) have enacted income tax cuts this year, with five of those (Idaho, Louisiana, Nebraska, New Hampshire, and Oklahoma) reducing their corporate income tax rate.

Because so many states are moving on income tax reform, it is even more essential that Michigan consider its competitiveness in the context of the changing tax landscape. Currently, Michigan’s flat corporate income tax rate of 6 percent is in the middle of the pack compared to other states, but if SB 392 were enacted, the Great Lake State’s top rate would be among the 10 lowest in the country in 2022. It is presumably no coincidence that the fully implemented rate reduction would put the state on equal footing with neighboring Indiana, whose previous 5.25 percent rate dropped to 4.9 percent today, July 1.

The rate reduction would cost the state $240 million a year when fully implemented. While this change is significant, Michigan can afford to forgo that much revenue, especially for the sake of improving its business climate. As was common throughout the country, the state saw a drop in revenue at the beginning of the pandemic but ended fiscal year 2021 with a large surplus. Even though much of that revenue is due to one-time federal assistance, much of it is also due to significant increases in the state’s own tax collections.

The Senate Fiscal Agency (SFA) predicts continued revenue growth in the coming years that would surpass the amount forgone by the proposed income tax cut. However, the SFA also predicts that this marked improvement will lag behind the rest of the country. As the state can afford it, lawmakers would do well to shore up the state economy by reducing the tax burden on current businesses and making the state more attractive to new businesses as well.

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