Michigan Income Tax Reduction Moved Up Three Months

Last week Michigan Governor Rick Snyder signed HB 5699, a law that will accelerate a scheduled reduction of the state's individual income tax rate. The income tax rate is scheduled to fall from 4.35 percent to 4.25 percent in January. HB 5699 moves that scheduled reduction a few months earlier, to October 1, 2012. This acceleration of the tax cuts will be funded by the state’s projected $300 million surplus. Additionally, another bill, HB 5700, was enacted which increases the personal tax exemption from $3,700 per individual to $3,950, which will also become effective on October 1, 2012.

In 2007, to cover the state’s budget shortfall, the individual income tax rate was increased from 3.9 to the current rate of 4.35, falling to 4.25 in 2013. When lawmakers proposed raising the state’s income tax in 2007, then Governor Jennifer Granholm said that the $1.3 billion tax increase could be invested in social programs that she argued would encourage job creation. However, one of our economists warned that the rate increase would make the state less competitive. Even after the 2007 tax hike, in 2008, the state faced a budget shortfall between $350 million and $550 million largely due to the deteriorating economy.

HB 5699 does not bring the tax rate back to pre-2007 levels, however another bill currently before the Senate (HB 5729) would reduce the individual income tax rate back to the 2007 level of 3.9 percent by 2018. Although, HB 5699 only reduces the tax rates slightly, proponents of this measure argue that the taxpayers should be the first to benefit from a budget surplus, not the state government.