The Michigan Attorney General’s office has filed for dismissal regarding a challenge to the state’s scheduled income tax increase. The lawsuit, initially brought forth by the Mackinac Center for Public Policy with support of various co-plaintiffs like local State Senator Ed McBroom (R-WaucedahTownship), has garnered attention not only for its potential financial implications but also for the diverse coalition it represents.
The suit is based on the long-term effect of a law that decreased the state’s income tax requirements, which is currently ranked 17th highest amongst the 50 states. Amongst the plaintiffs in this suit are McBroom, the Associated Builders and Contractors of Michigan, the National Federation of Independent Business, Representative Dale Zorn of Onsted, and six individual taxpayers from different corners of the state. The genesis of this legal skirmish can be traced back to 2015 when Michigan legislators, including two of the current plaintiffs, enacted legislation incorporating an income tax reduction trigger. This mechanism dictated that the current tax rate should decrease when the state’s revenue surpasses inflation by a set margin. Consequently, last year’s robust revenue figures triggered a rollback, reducing the tax rate from 4.25 percent to 4.05 percent.
“Most small businesses in Michigan pay the personal income tax rate,” emphasized Shane Hernandez, president of the Associated Builders and Contractors of Michigan. “This lawsuit protects them and all individual taxpayers from the more than half a billion-dollar tax increase set to go into place next year.”
The lawsuit’s primary objective is to halt the state treasurer from implementing an income tax hike in the coming year. If successful, it would stave off an annual tax increase estimated at around $700 million.
“The tax cut was a welcome relief to Michigan’s small businesses,” explained Amanda Fisher, Michigan state director for the NFIB. “As small employers plan their expenses, it is important that they have certainty in what tax provisions are offered. If the attorney general’s interpretation is upheld, it will cause significant tax burdens on small businesses at an already fragile time in the economy.”
However, the Attorney General’s office had thrown a wrench into the works earlier this year when Dana Nessel issued an opinion in March, asserting that the income tax reduction was a one-time deal for this year alone. When the legislation was initially passed, there was widespread agreement from politicians on both sides of the aisle and the media that the rate reduction was intended to be permanent. The House Fiscal Agency’s 2015 analysis of the bill had indicated that the reductions would “continue indefinitely on an annual basis.”
Representative Dale Zorn remarked, “When we debated passing the tax cut trigger in committee hearings and on the floor, it was perfectly clear to everyone there that the reduction was meant to be permanent. Any change to the statute would require the Legislature to act, which we have not done.”
The Mackinac Center is now asserting that not only legislative history but also the dictionary definition of the word “current” make it evident that the reduction should remain at 4.05 percent until the trigger once again lowers the rate. Any attempt by lawmakers to avert these rate reductions and hike taxes, the Center contends, necessitates changing the law.
“When we passed this particular issue, those opposing it were clear they understood it was a permanent drop—they even complained it could lead to a zero percent rate eventually,” McBroom said. “Now they have created a novel interpretation to suit their present need and have thrown the people and the Legislature into an uncertain position. This lawsuit will provide the people and the Legislature with the certainty they need and deserve that the law does what it says and the tax reduction will continue.”
The lawsuit creates confusion about what could happen for the state’s 4.9 million taxpayers without a speedy ruling by the end of the fiscal year.
“This is about the law,” declared Patrick Wright, vice president for legal affairs at the Mackinac Center for Public Policy. “A clear reading of the statute shows that lawmakers put in place a permanent income tax rate reduction. The personal income tax rate on all Michigan citizens went down to 4.05 percent and should stay there absent new legislation.” The battle lines are drawn, and the outcome remains uncertain as Michigan awaits a decision that could significantly impact the financial futures of its citizens.
