As the issue of “tax fairness” continues to arise and the state faces a significant budget shortfall, perhaps it’s time to seriously consider changing Michigan’s income tax structure. Michigan is one of only eight states with a flat income tax rate, and, because of this structure, low-income taxpayers pay the 9th highest personal income taxes for their group in the country, while the top 1% actually pay at a slightly lower rate than their counterparts in other states. A graduated income tax structure, where those who earn more would pay more, makes the income tax system fairer and generates new funds.
With the recent defeat of Proposal 1, which would have raised funds for roads, schools, and communities while protecting low-income families, the state faces a difficult task of coming up with the funds necessary to make Michigan a thriving place to live, work, and play. According to Rep. Jim Townsend, who has introduced graduated income tax legislation, replacing the current flat tax with a graduated tax rate could raise new revenue, and in a way that makes the income tax structure fairer for low- and middle-income families.
Even with a move to a graduated income tax system, if lawmakers eliminate the state’s Earned Income Tax Credit to help pay for road improvements, Michigan’s bottom earners would experience a tax increase. According to an analysis from the Institute on Taxation and Economic Policy, the tax shift would be more severe for individuals with children, stressing the significant role the state EITC has in assisting low-income working families. A proposed repeal comes after changes in 2011 that reduced the state EITC from 20% to 6% of the federal credit resulting in low-income working families shouldering a tax increase of $275 million. However, the analysis also shows that if the state EITC remains in place and the flat income tax rate is replaced with a graduated system, then low-income workers would experience an overall tax decrease.
However, aside from the politics, a barrier to putting into place a graduated income tax structure is that Michigan’s constitution prohibits such system, and, therefore, would require a two-thirds supermajority vote in the Legislature followed by voter approval. Although, a voter-led petition drive could get around this. The last three times it was on the ballot—most recently in 1976—it failed, but current polling suggests otherwise with over 65% of voters supporting the change.
While Michigan’s income tax structure is somewhat progressive given the state EITC and the Homestead Property tax credit, it is somewhat proportional with those making between $26,000 and $47,000 paying almost the same share of their income in income taxes as those in the top 1% of earners. As income inequality grows and low- and middle-income families experience tax increases from tax restructuring that took place in 2011, moving to a graduated income tax system would make the tax fairer.
– Alicia Guevara Warren