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Opinion | Michigan GOP tax cut plan helps wealthy at expense of equity

At the beginning of 2022, the national Institute on Taxation and Economic Policy (ITEP) forecasted the “tax cut fever” that has been sweeping through state legislatures across the nation — including here in Michigan, with the Legislature’s passage last week of a major, permanent and unsustainable cut to the personal income tax.

 Neva Butkus, Monique Stanton
Neva Butkus is state policy analyst at the Institute on Taxation and Economic Policy. Monique Stanton is president and CEO of the Michigan League for Public Policy. (Courtesy photos)

As ITEP noted, most state budgets are flush with cash due to billions in federal aid and a rebounding economy, positioning state policymakers to make transformative investments in programs, such as healthcare, education and infrastructure that will help communities rebound from the ongoing pandemic. Unfortunately, most state legislatures are instead opting for premature, myopic tax cuts that will inevitably widen racial inequities and erode public services that are still reeling from cuts due to the Great Recession.

Current state surpluses are deceptive and fleeting. Many states lowered revenue estimates at the beginning of the pandemic, making surpluses appear larger. States pushed back tax filing deadlines amid the chaos which, while helpful for some families, means the 2020 and 2021 tax returns of some households will be counted in the same year. State health department budgets are being propped up with higher match rates for Medicaid dollars. Stimulus payments and unemployment insurance boosts helped increase spending and, therefore, state sales tax collections.

Last week, the Republican-led Michigan Legislature passed Senate Bill 768, their own tax cut proposal framed as helping all residents. But significantly cutting the personal income tax rate really prioritizes tax cuts for the wealthy while having little to no impact on everyone else.

Based on data from ITEP requested by the Michigan League for Public Policy, reducing the Michigan personal income tax rate to 3.9 percent would mean an average tax cut of:

  • $12 for the lowest 20 percent (less than $23,000) of earners;
  • $92 for the middle 20 percent ($41,000-$70,000) of Michigan workers; and
  • A whopping $4,901 for the top 1 percent (making $539,000 or more) of Michigan earners. 

Based on these estimates, Michigan’s lowest earners will barely get enough money to buy a single pizza while the state’s wealthiest residents will get a tax break big enough to pay for a round-trip flight to Italy, where pizza was invented. ITEP’s analysis also found that 69 percent of the tax cuts will go to the wealthiest 20 percent whereas only 31 percent of the benefits flow to the bottom 80 percent of Michigan workers.

This reckless bill will also come with an immediate revenue hit of around $3.1 billion, and an ongoing annual cost of around $2.4 billion. Without Gov. Gretchen Whitmer’s veto, this bill will result in drastic budget cuts, meaning larger classroom sizes, increased barriers to healthcare access, and more potholes leading to higher car repair bills. This proposal will also jeopardize vital federal aid provided under the American Rescue Plan Act, dollars intended to help struggling workers, families and businesses recover from the economic impacts of the pandemic.

State budgets have the power to reduce disparities, promote racial and economic justice, and bridge political divides, especially with our current one-time surplus and federal aid. Gov. Whitmer’s budget includes a number of proposals to improve equity in the state, including increasing the Michigan Earned Income Tax Credit (EITC), making major investments to support students and schools with the greatest needs, and improving housing access, healthcare, assistance programs and other support for struggling families. A broad tax cut to drastically reduce state revenue will negatively affect our state’s ability to provide for its residents for years to come.

Claiming that tax cuts will make state economies more competitive and will spur economic growth are short-sighted and unfounded. States that cut taxes after the Great Recession often saw slower economic growth than the nation as a whole, while simultaneously worsening racial inequities. Meanwhile, the loss in state revenue can jeopardize a state’s ability to fund vital public services that all Michiganders need to thrive like K-12 schools, water infrastructure, public health services, broadband access, and more.

Tax cuts cannot be a solution to everything, especially at a time when the richest Americans are amassing more wealth than ever. Surges in state revenue are temporary, and are particularly so right now with the pandemic and the related influx of federal support. Prematurely pulling the trigger on state income tax cuts for the wealthy will not grow a state economy. It will only jeopardize a state’s ability to create thriving communities now and down the line.

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