Tax Foundation Study Highlights True Risks of Graduated Income Tax Proposal
January 27, 2026
Article written by the SBAM Policy Team for SBAM’s Lansing Watchdog newsletter
The nonpartisan Tax Foundation is one of the most respected U.S. research organizations focused exclusively on tax policy. For decades, their work has been cited by academics and policymakers on both sides of the aisle, analyzing the economic effects of different tax policies. A report released last week by the Tax Foundation analyzes the potential pitfalls of a proposed Graduated Income Tax Proposal, and the effects it would have on Michigan’s economy.
The New Rate Would Fall on Small Business
Because sole proprietorships, partnerships, LLCs, and S corporations are pass-through businesses who report their business income on the owner’s income tax, entrepreneurs with more than $500,000 in adjusted gross income (or $1,000,000 for joint filers), would be subject to the new rate. These higher rates will yield reduced investment, higher attrition, lower employee wages, and higher customer prices.
Michigan Would Lose an Estimated 43,000 Jobs
While proponents tout a projected $1.7 billion annually in additional revenue, this study suggests that the harm to Michigan’s economy from this proposal would be drastic. Using established economic models that link tax changes to labor market outcomes, a 9.25% top rate would result in roughly 43,0000 fewer jobs in Michigan, shrinking Michigan’s overall economy by $8.5 billion. By shrinking the economy, the proposed tax would also generate less revenue.
Michigan Would Become an Outlier
Most states looking to grow their population and attract investment have kept income tax burdens low or have even lowered them in recent years. Since 2021, 23 states have cut their top marginal income tax rates, while Michigan’s proposal would raise its top rate to among the highest in the nation and the highest among Midwest competitor states. High marginal tax rates influence decisions on where businesses locate, where people choose to live and work, and whether or not an entrepreneur decides to expand and invest in their business.
Similar Taxes Have Failed Elsewhere
The study also evaluates other states that have approved increases to income tax rates in the highest brackets and have found that projected tax revenue numbers often fall short of expectations. This is due to the reduced in-state investment, slower economic growth, and increased out-migration. The wealthy taxpayers who are the intended target of similar tax rates are also those who are most mobile, and can migrate to avoid high tax rates, leaving the businesses paying the top-level rate behind as the primary payers of the tax.
Read the full report here.
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