Wealthy Michiganders pay lower taxes than everyone else, including those earning the least ⋆
The top 1% of income earners in Michigan are paying a lower overall share of taxes than the bottom 99%.
That’s according to a new national study published Tuesday by the nonprofit, nonpartisan Institute on Taxation and Economic Policy (ITEP) which examined the tax structures of all 50 states and the District of Columbia.
The report, titled “Who Pays?”, ranked Michigan as the 34th most regressive in the nation when it comes to taxes, describing it as a “hybrid system that is progressive through the bottom part of the income distribution and regressive through the top part.”
In its breakdown of the state, ITEP determined that the top 1%, or those earning $670,300 a year, pay an average effective state and local tax rate of 5.7%, while the lowest 20%, or those earning $21,300 or less, pay 7.1%.
“Michigan’s tax code is near the middle of the pack, compared to other states, but that’s not especially encouraging given that the typical state tax code is very regressive,” Carl Davis, ITEP’s research director, told the . “High-income people in Michigan are paying far lower tax rates than any other group. Your typical middle-income earner in Michigan pays about 70% more, as a share of income, than folks at the very top.”
According to the report, those middle-income earners, making up 40% of the total and bringing in between $43,200 and $135,000 a year, are paying a 9.7% tax rate.
“States that have less regressive tax codes than Michigan tend to have robust income taxes that ask more of high-income people,” said Davis. “Michigan’s low, flat-rate income tax just doesn’t do that. It can’t balance out the regressive impact of all the other taxes that Michiganders are paying on the things they buy and the homes they live in.”
Among the regressive components of Michigan’s tax structure listed by the report were the lack of both an estate tax and Child Tax Credit (CTC), real estate transfer taxes that do not include higher rates for high-value sales and a flat rate for personal income taxes.
On the progressive side, the ITEP report noted that Michigan excludes groceries from its sales tax base, requires combined reporting for corporate income taxes but excludes profits booked overseas, has a refundable property tax “circuit breaker” credit that includes renters and applies to all ages, and a refundable Earned Income Tax Credit (EITC).
Rachel Richards is the fiscal policy director at the Michigan League for Public Policy (MLPP) and agrees that the state’s flat income tax rate is one of the largest underlying drivers of income inequality in Michigan.
“Flat rate taxes do tend to benefit high income earners in the long run,” she told the Advance. “In previous legislative cycles, we’ve seen bills that have moved through the legislature that have posed rate cuts to our income tax rates, going from 4.25% to 4%. When we’ve modeled those changes, we see how higher income Michiganders get kind of outsized benefits from those tax rate cuts. So, it provides very little, if any, benefit to cut a flat income tax rate for low to moderate income families, but provides these outsized benefits for high-income earners.”
Richards said many of the regressive tendencies in Michigan’s tax structure would be ameliorated if it modeled the federal tax income tax system, with tax brackets based on one’s income.
“It would allow for higher income earners to pay a fair share of their income towards state services, while providing some of those benefits to make sure that families that are receiving low wages or moderate wages [can] pay for things that allow them to keep living such as food, rent or transportation,” she said.
Richards noted the passage of legislation in 2023 that boosted the tax credit for low-wage workers.
“A great win last year was that we saw the quintupling of our state Earned Income Tax Credit. And the fact that it’s refundable allows for that improvement in income outcomes for Michigan’s low to moderate income taxpayers,” she said.
The increase, signed into law by Democratic Gov. Gretchen Whitmer in March, took the EITC from 6% to 30% of the federal level, allowing qualifying Michiganders to claim a credit worth 30% of the federal amount on their taxes retroactive to 2022.
GOP former Gov. Rick Snyder signed legislation in 2011 that cut the state EITC from 20% to 6% as part of his tax plan that included a $2 billion annual business tax cut.
The Legislature returned to session on Wednesday. Richards said one issue she would like to see taken up is providing a tax credit for families with children.
Poll: Strong support for graduated income tax
“Look at the benefit that the child tax credit has at the federal level,” she said. “For example, we saw the expansions that were made under the American Rescue Plan Act where they made the credit fully refundable and they did some expansions of it. We saw the huge benefit that that had on child poverty. I mean, child poverty rates in part due to the expansions of the child tax credit were slashed all over the nation.”
Richards noted that once those provisions expired, child poverty rates bounced back up.
“We know child tax credits, especially those targeted to low to moderate income families, have huge benefits for things like child poverty rates, said Richards. “It has huge benefits for long-term health and educational outcomes for kids and largely does help improve the income inequality that we currently see within the state as well as the regressivity of Michigan’s overall state and local tax code. So a child tax credit is something that we would hope that the legislature would start taking a look at and make sure that it is modeled and targeted to the families that need it the most, and the kids that would benefit most from having some extra dollars to pay for the things that allow them to live and thrive.”
Nationally, the report concluded that the absence of a graduated personal income tax in many states and a heavy reliance on consumption taxes was a major factor in the majority of state and local tax systems being regressive, in that they require a much greater share of income from low- and middle-income families than from wealthy families.
In fact, Michigan is among 41 states in which high-income families are taxed at lower rates than everyone else and among 44 states that worsen income inequality by making incomes more unequal after collecting state and local taxes.
“The wide variety of results seen across states in this study proves that regressive state and local taxation is not inevitable. It is a policy choice,” concludes the report. “It is ultimately up to the public and their elected officials to decide whether they want to continue a status quo where, in most states, the highest-income families face the lowest state and local tax rates.”
To that point, Richards says it remains a long-term goal to make Michigan’s tax structure a fairer one for all residents.
“The League would love to see a change to our constitution to allow for a fair tax structure like a graduated income tax to eliminate that flat-tax rate,” she said. “Because we have a constitutional provision requiring flat income taxes, it would have to go through a ballot initiative. It would have to be voted on by the voters. But it’s a key piece that we think long-term would have a beneficial impact, not only on our state and local tax system, but also provide a way for us to allow for increased investments in things like education and safe drinking water all over the state.”
A 2020 ballot initiative campaign for a graduated income tax was suspended due to the difficulty of collecting signatures during the COVID-19 pandemic.
Disclosure: The Michigan League for Public Policy contributes a regular column to the Advance.
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authored by Jon King
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