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The Mackinac Center Legal Foundation has filed suit against the treasurer of the state of Michigan for illegally hiking taxes on Michigan residents. If we win, we will save Michiganders nearly $714 million a year and prevent the state government from using a shaky interpretation of the law to pocket taxpayer dollars.
The Michigan Legislature amended the state’s tax code in 2015 to include an automatic trigger mechanism for individual income taxes. The trigger mandates that the “current” rate be reduced if the state budget accumulates a large enough surplus. That condition was met this year, when unexpectedly high revenues left Lansing flush with cash.
The House and Senate fiscal agencies predicted that the surplus would trigger this 2015 law, resulting in a reduction in the personal income tax rate from 4.25% to 4.05%. They understood this law to be a permanent reduction of the most recent tax rate.
Hoping to avoid this permanent tax cut, Gov. Gretchen Whitmer tried to run out the state’s surplus by writing checks worth almost $800 million to Michigan households. Her proposal failed to secure passage by a March 1, 2023, deadline, however. The governor then accepted the cut for calendar year 2023, saving residents nearly $714 million for the year.
A few weeks later, State Treasurer Rachael Eubanks asked Attorney General Dana Nessel’s office whether the tax cut could reasonably be interpreted as a temporary one. The very next day, the attorney general responded, claiming that the law’s mention of the “current rate” referred specifically to the tax rate at the time of the law’s adoption. In other words, the “current rate” language specifies a default higher rate to which the tax rate resets after a one-time reduction.
Attorney General Nessel’s view of the 2015 law is shaky at best. If the Legislature had wanted “current rate” to refer to a specific, fixed percentage, it would have written that number into the statute. Likewise, if lawmakers had wanted the rate to revert to that percentage after a year of reduced taxes, they would have said so. Volumes of state and federal tax law contradict the attorney general’s reading: State governments use numbers when referring to specific rates and phrases like “current rate” when referring to the most recent rate, which changes permanently after a tax cut.
What the law demands is a permanent reduction of Michigan’s income tax rate. “Current rate” describes the most recent rate at the time of a revision, not a fixed percentage to which all tax rates revert after one year. It is legally incorrect to use the 2015 law to hike income taxes; this is an automatic law which lowers taxes every time there is a sufficiently large budget surplus.
Although the attorney general’s opinion contradicts years of legal precedent and hinges entirely on one unlikely meaning of the term “current,” Treasurer Eubanks accepted it as legally binding. Unless the courts overturn this illegal tax hike before the end of the year, the increase will take effect on Jan. 1, 2024, letting Lansing collect nearly $714 million more per year from taxpayers.
The Mackinac Center Legal Foundation filed suit in August against the state treasurer. If we win in court, we will preserve Michigan’s 2023 tax cut for future years and save Michiganders hundreds of millions every year.
Since most small business owners file their state taxes as individual taxpayers, this cut will also boost Michigan’s small business economy and keep entrepreneurs in the state. Even more importantly, a victory in this case means that state officials must answer to the law as it is written instead of redefining it as they think would be expedient.
The Mackinac Center Legal Foundation successfully sued the Michigan Economic Development Corporation in 1995, during Gov. Rick Snyder’s term, for failing to disclose massive General Motors tax credits. Now, we’re suing Gov. Whitmer’s administration for trying to reverse this year’s personal income tax cut. Regardless of who is in power, the Mackinac Center is proud to hold public officials accountable to the law and ensure that they govern with integrity.
