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Lawsuit Filed To Keep Income Tax Rate At 4.05%

August 30, 2023

Article courtesy MIRS News, for SBAM’s Lansing Watchdog newsletter

Note: For SBAM’s insight into this income tax lawsuit, watch our Small Business Briefing from August 28, 2023.

A coalition of groups, individuals and lawmakers filed suit against the state treasurer Thursday in an effort to preserve the income tax cut that took effect this year. 

The suit, filed in the Court of Claims by the Mackinac Center Legal Foundation, wants the tax rate cut from MCL 206.51(1)(c) to remain in place next year. 

“Most small businesses in Michigan pay the personal income tax rate,” said Shane Hernandez, president of the Associated Builders and Contractors of Michigan (ABC), who is a named plaintiff. “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 Mackinac Center requested the case be decided on an expedited basis. 

A Department of Treasury spokesperson said the department “has not been served the lawsuit yet and does not comment on pending litigation.” 

In addition to ABC, named plaintiffs include the National Federation of Independent Businesses (NFIB), Sen. Ed McBroom (R-Waucedah Twp.), Rep. Dale Zorn (R-Onsted) and six individual taxpayers from across the state. 

Lawmakers, including McBroom and Zorn, passed legislation in 2015 that incorporated an income tax reduction trigger that lowers the current rate when the state’s revenue outpaces inflation by a set amount. 

This rollback from 4.25% to 4.05% was triggered in 2022. 

If successful, the lawsuit will prevent an annual tax hike of around $700 million, according to the Mackinac Center Legal Foundation. 

State Treasurer Rachael Eubanks announced in March the state income tax would drop to 4.05% for the 2023 tax year only. 

One day prior, Attorney General Dana Nessel issued an opinion that the tax decrease had a one-year lifespan. 

Patrick Wright, vice president for legal affairs at the Mackinac Center, said a clear reading of the statute shows that the Legislature meant for the tax cut to be a “permanent income tax rate reduction.” 

Zorn agreed, saying it was “perfectly clear to everyone” in the committee hearings that the “reduction was meant to be permanent.” 

“Any change to the statute would require the Legislature to act, which we have not done,” Zorn said. 

McBroom agreed, noting that some lawmakers “complained it could lead to a 0% rate eventually.” He said Thursday’s “novel interpretation” has thrown citizens and the Legislature “into an uncertain position” and the lawsuit will help define what the law says and that the tax reduction will continue. 

The House Fiscal Agency’s 2015 analysis also stated the reductions would “continue indefinitely on an annual basis.” 

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