Inflation relief checks v. income tax cuts. What saves you more in Michigan?

• Qualifying tax filers will start to see relief in tax year 2023
• $180 inflation relief checks aren’t happening
• The state income tax may lower because of a 2015 trigger law

Lower-income workers and pensioners will get some relief from tax relief signed by Gov. Gretchen Whitmer this week, but residents hoping for $180 rebate checks from the government can kiss that goodbye.

Whitmer had sought to pay Michigan tax filers $180 inflation relief checks, but Republicans blocked that in an effort to help ensure a permanent reduction in the state income tax that would provide more relief over several years.

Related:

• Gov. Gretchen Whitmer signs Michigan tax relief, minus $180 checks
• Michigan lawmakers send Whitmer tax cuts; $180 payments are dead

Confused? Here’s what to know.

Will Michigan’s income tax be reduced? 

Definitely maybe.

Whitmer signed legislation Tuesday but it won’t go into effect until early 2024 because Senate Republicans denied the bill a two-thirds supermajority it needs for immediate effect. 

They did this to preserve a projected income tax rate reduction that could be triggered by a 2015 law. That law requires the state to cut income taxes if revenue significantly outpaces inflation.

It looks like that could happen when finalized revenue numbers are expected later this month. Non-partisan agencies have predicted fiscal year revenue growth from fiscal year 2022 would automatically cut the income tax rate from 4.25 percent to as low as 4.04 percent.

It’s still theoretically possible, however, Democrats could avoid the trigger by voting to change the law or move money to prevent it from taking place before the state officially “closes the books” on the past fiscal year.

Republicans believe the potential tax rate cut would be permanent. But Democratic attorney Steve Liedel, who served as chief legal counsel to former Gov. Jennifer Granholm, has questioned whether the 2015 law would only require a temporary, one-year cut.
Pressed on the issue by reporters this week while signing the tax relief legislation, Whitmer said: “I think that there is a lot of work yet to do to close the books.”

What’s better? $180 now or a permanent tax cut.

It depends on your situation. 

Over time, everyone who pays taxes would save more money with an income tax reduction. But lower earners would take far longer to realize those savings.

Filers who make $30,000 per year, for instance, would save about $53 per year if the income tax rate falls to 4.04 percent. If the cut is permanent, that means it would take nearly four years to get the same savings as the $180 onetime check.

Those who make $100,000 would get the savings far sooner: They would save $210 every year under a rate reduction to 4.04 percent.

Whitmer’s plan also would have only sent rebate checks to tax filers, meaning that married couples who file jointly — as most do — would receive only one $180 check.

What about other tax cuts?

Under the law Whitmer signed, more than 730,000 residents will benefit from a reduction of the Michigan Earned Income Tax Credit from 6 percent of the federal credit to 30 percent boosting average state savings from $150 to $750.

The EITC is a refundable tax credit for those who work but don’t make a ton of money. For 2022, a married couple with two children could qualify if they earned less than $55,529 combined. 

Federal credits last year ranged from $560 to $6,935, while the Michigan version ranged from $34 to $416 and averaged $150. Under the new law, those state credits would have ranged between $168 and $2,080 and averaged $750.

The expansion will take effect in the 2023 tax year and so would impact 2024 filings. Lawmakers also included a retroactive provision that will require the state treasury to issue refund checks for tax year 2022 EITC filers, according to the nonpartisan Senate Fiscal Agency.

Expanding the credit will cost state revenues some $883 million in fiscal year 2024, that reduction will be closer to $441 million in future years.

What about the pension tax?

Whitmer also repealed a 2011 tax over the course of the next four years. Beginning in tax year 2023, filers can choose whether to take advantage of the phased-in pension exemption or continue to claim an existing exemption for any type of retirement income, up to $20,000 for an individual or $40,000 for joint filers. 

The Whitmer administration estimates the new law will mean an average savings of $1,000 for 500,000 households that have pension income. 

The change is expected to cost the state about $281 million in lost revenue next year and $492 million once fully implemented in fiscal year 2027. 

Editor's note: This article was updated at 7:20 a.m. March 9 to include correct figures for savings for those making $30,000 per year.