Income tax drop is elephant in the room

August 11, 2010

Joanne Bump

An elephant sits in the room but few are talking about it. As Michigan’s legislative leaders grapple with the upcoming year’s budget gap, a scheduled income tax rate reduction is going to further increase budget pressures.  

As noted in the League’s new fact sheet Waiting for the Other Shoe to Drop?, the decrease in the income tax rate will result in over $1 billion of lost revenue over three years, starting in fiscal year 2012.  

 In 2007, the Legislature increased the state income tax rate to address a budget gap. At the time, lawmakers wanted to ensure that the law was temporary so they included a reversal in the tax rate from 4.35 percent back to 3.9 percent. The income tax rate will be reduced by 0.1 percent each October 1, beginning in 2011, until the rate returns to 3.9 percent.

The Michigan revenue picture is even worse now than when the rate increase was passed. Undoubtedly no one could have guessed in 2007 how bad things would get here in Michigan. As unemployment soared and personal income plummeted, state revenues have fallen dramatically.

In January, Michigan state government will experience a significant change in leadership, with a new governor and many new legislators. They will quickly learn that laws passed by a previous Legislature are going to lower future revenue streams and create additional budget gaps.

The League’s fact sheet points out that in the past when the income tax rate has been increased during difficult economic times, it has not been reduced until the unemployment rate has fallen and the economy is stronger.

It’s hard to imagine that by October 2011 the state economy will be recovered enough that we should be cutting revenues that are needed to support basic needs for people in our state.

— Joanne Bump