Michigan’s fiscal 2022 tax surge will result in a $650 million income tax cut, but it will remain in place only for 2023, state officials announced Wednesday.
All signs pointed to an income tax cut when state finance officials and economic forecasters discussed the fiscal landscape at the annual February revenue estimating conference but Treasurer Rachel Eubanks cautioned at the time final audited results were needed.
The state released the 2022 Annual Comprehensive Financial Report accompanied by a legal opinion from Attorney General Dana Nessel that the formula was met and the income tax rate will fall to 4.05% from 4.25% for the current year resulting in a roughly $50 impact for individual taxpayers when they file their tax returns in 2024.
The state put the trigger into a 2015 road funding law. It requires a reduction of the state income tax if the general fund grows faster than the rate of inflation in any year starting in 2023.
“Michigan’s strong economic position has led to a reduction in the state income tax from 4.25% to 4.05% for 2023,” said Treasurer Rachael Eubanks. “When Michiganders file their 2023 state income taxes in 2024, they will see the rate adjustment in the form of less tax owed or a larger refund.”
Some GOP members in February said they worried that Gov. Gretchen Whitmer, a Democrat who enjoys a legislative majorities, would try to block the cut either through repeal or retroactive temporary tax cuts. Her proposed relief using fiscal 2022 that would have reduced 2022 general fund revenues lacked enough GOP support to take effect immediately.
Democrats said the 2015 law was not clear on whether the tax cut should be a permanent or temporary so Eubanks asked Nessel, a Democrat, for legal guidance.
“Because that situation is only temporary, it makes sense that, rather than provide a permanent tax reduction based on the (perhaps unusual) economic circumstances of a single fiscal year, the Legislature intended the relief to taxpayers to be only temporary as well,” Nessel’s advisory opinion says.
Former Republican state leaders in office when the law passed countered the legal opinion saying a permanent cut was their intention and current GOP lawmakers attacked the interpretation of the opinion.
“The language, history and legislative intent of the law all make clear that the tax cut should be permanent,” Republican House Minority Leader Matt Hall said in a statement.
Critics would have to mount a legal challenge to the interpretation to pursue a permanent cut.
The revenue estimating conference will adopt the new projections that incorporate the tax cut when they meet for their May conference. The conference members must also reevaluate fiscal results annually to determine the status of the tax cut.
At the February conference, economic advisors warned that the rosy revenue picture was fading with a recession is expected to strike this year because of the Federal Reserve’s monetary policy moves, international conflicts, inflation and consumer spending trends.
Whitmer touted that in addition to a $9 billion surplus that’s in play as lawmakers finalize a fiscal 2024 budget, the state has paid down $14 billion in debt and raised the rainy day fund to a peak level of nearly $2 billion. The income tax cut follows a rollback of the tax on retirement incomes and a hike in the earned income tax, bringing to $1.6 billion the total tab of tax relief.
Whitmer proposed a record $79 billion budget for the fiscal year beginning begins Oct. 1 that would spend most of the $9 billion surplus by pouring more spending into education, infrastructure and economic development, offering tax relief, and making new rainy day deposits.
The package would spend down surplus dollars primarily with one-time measures, keeping the state’s books structurally balanced.
The state’s flush revenues, structural balance, and healthy reserves helped draw a Fitch Ratings upgrade to AA-plus from AA in July.
In a supplemental appropriation to the current budget, the state would deposit an additional $200 million into its budget stabilization fund, bringing it to a peak level of nearly $2 billion by the end of fiscal 2024, or 13% of general fund revenues.
Whitmer’s proposed budget would establish a new budget stabilization fund for the school aid fund of $900 million. The package would also set aside $500 million into a pension reserve account to offset anticipated higher payments due to 2022 market losses.
Whitmer won a second term in the November election that flipped control of the state legislature to her fellow Democrats. Republicans had attacked the plan and expectation that it could roll back the potential income tax rollback.
The state’s projected surplus swelled to more than $9 billion after Whitmer and the previous Republican controlled legislative left billions on the table with last November’s election looming.
S&P Global Ratings rates Michigan AA with a stable outlook. Moody’s Investors Service rates Michigan Aa1 with a stable outlook.