Suit challenges Michigan's plan to end income tax cut after a year

Lansing — A group of business associations, Republican lawmakers and Michigan residents filed suit against the state treasurer Thursday seeking an order to maintain an income tax cut in perpetuity instead of the one-year reprieve currently planned.

The suit, filed by the Midland-based Mackinac Center for Public Policy, argues the state law that allowed for a decrease to the Michigan income tax rate because of high tax revenue meant for the decrease to continue in subsequent years.

The argument runs counter to an opinion by Attorney General Dana Nessel, who said earlier this year that the decrease from 4.25% to 4.05% was meant only to last for a year.

The suit was filed on behalf of state Sen. Ed McBroom, R-Vulcan; Rep. Dale Zorn, R-Onsted; the Associated Builders and Contractors of Michigan; the National Federation of Independent Businesses; and six taxpayers. McBroom and Zorn were among the lawmakers who were in office when the income tax cut trigger was placed into law in 2015.

“When we passed this particular issue, those opposing it were clear they understood it was a permanent drop — they even complained it could lead to a 0% rate eventually," McBroom said. "Now they have created a novel interpretation to suit their present need, and have thrown the people and the Legislature into an uncertain position."

Department of Treasury spokesman Ron Leix said the treasurer has not yet been served a copy of the suit and "does not comment on pending litigation."

The suit argues the judge should rule by December on the matter — rather than wait until the rate goes back up to 4.25% — because the new state budget was built around the presumption that the rate would pop back up and because income taxpayers should have some certainty about what rate to expect next calendar year.

The suit revolves around a 2015 change to the state income tax law that required Michigan officials to decrease the income tax rate if tax revenue increased at a rate that exceeded the rate of inflation. The law provided a formula to determine how much of a decrease should occur.

Since the trigger was placed into the law by the majority-Republican chambers in 2015, this year marks the first year tax revenue increased at a rate faster than inflation.

Republican lawmakers, some of whom were serving in 2015, argued the tax rate should stay at 4.05% and decrease from there should revenue eclipse inflation again.

State Treasurer Rachael Eubanks asked for an opinion on the matter from Nessel, who found that because the triggering event was “impermanent,” the decreased rate also was temporary. The decision conflicted with the opinion of the nonpartisan Senate Fiscal Agency, which contended the rate cut was meant to continue in subsequent years.

"Because that situation is only temporary, it makes sense that, rather than provide a permanent tax reduction based on the (perhaps unusual) economic circumstances of a single fiscal year, the Legislature intended the relief to taxpayers to be only temporary as well," Nessel wrote in her opinion.

Days after the opinion was released, Eubanks announced the income tax rate would drop from 4.25% to 4.05% for one year, amounting to about $650 million in savings for Michigan income tax payers.

In its Thursday filing, the Mackinac Center countered Nessel’s opinion, arguing that the 2015 Legislature anticipated a trigger event would yield enough revenue to sustain an ongoing tax rate decrease.

“It may also have assumed that future legislatures could eliminate programs to reduce spending to account for decreased revenue,” the suit said. “This policy belief is at least as rational as the one posited by the Attorney General.”

Even if there was a lack of clarity in the 2015 law, the suit said, case law requires “that ambiguities in tax statutes are resolved in favor of the taxpayers.”

The Mackinac Center argued its clients have standing — despite the rate not yet ticking back up to 4.25% — because lawmakers are guaranteed a precise revenue estimate for budgeting, the business groups have clients set to be affected by the rate and the residents in the case would be impacted by an uptick in the tax rate.

“The fiscal 2023-24 budget has been passed and priorities were set with what plaintiffs believe to be bad information – that the individual income tax rate will revert to 4.25% for the 2024 tax year,” the suit said, arguing the state could face a $526.7 million shortfall if the court rules the income tax rate cut is ongoing.

The lawsuit added that about 5 million income tax payers will have to decide in about four months whether to challenge the 4.25% tax rate when the 4.05% decrease ends at the end of the calendar year.

“Just 2-3% of taxpayers filing suit would lead to well over 100,000 cases, which is more than all of the circuit court actions filed in a typical year,” the suit said.

eleblanc@detroitnews.com