Proposal to Reduce Michigan State Income Tax Passes House
Michigan may soon join nine other states in lowering income taxes, as the State Senate debates a measure that could reshape the tax landscape starting in 2025. House Bill 4170 amends Michigan's Income Tax Act of 1967 (Section 51) by adjusting the state's individual income tax rates and modifying the allocation of tax revenue. This would lower the state income tax from 4.25% to 4.05% starting Jan. 1, 2025, and allow for further reductions starting in 2026, based on state revenue growth exceeding inflation.
The House voted 65-43 to reduce the income tax rate, with full support from House Republicans. The bill also received support from seven Democrats. Republicans framed the bill as continuing a short, one-year stint in 2023 when the income tax rate was lowered to 4.05% because a statutory formula triggered the decrease due to a post-pandemic surge in surplus tax revenue. Republicans acknowledged that the government would be working with reduced revenue under the plan but say that economic growth would outweigh those impacts. House Bill 4170 faces an uncertain future as it heads to the Democratic-led Senate for further consideration.
Michigan’s income tax rate is flat, meaning that earners of all incomes pay the same percentage of their income to the state. This leads to much higher revenue being generated from high earners. The legislation, if signed into law, would likely decrease state revenues by more than $700 million a year and lead to paltry savings for lower-income residents, according to Democrats. Lower-income earners making about $27,000 a year would get about $11 a year in tax relief under the legislation.
The introduction of the tax cut comes as lawmakers and the governor are scrounging for new revenue for the state's infrastructure, which is facing a $3.9 billion funding shortfall next year. While the tax cut proposal has drawn political attention, other fiscal challenges loom, such as a road funding plan through cuts to the current state budget and a reshuffling of taxes paid at the pump.
States Reducing State Income Tax
Nine other states have cut their state income tax, which took effect Jan. 1, 2025. The changes are part of a recent push to cut taxes at the state level that started during the pandemic when many states found themselves flush with tax revenue. These states include:
| State | 2024 State Income Tax | 2025 State Income Tax |
|---|---|---|
| Indiana | 3.05% | 3% |
| Iowa | 5.7% | 3.8% |
| Louisiana | 4.25% | 3% |
| Mississippi | 4.7% | 4.4% |
| Missouri | 4.8% | 4.7% |
| Nebraska | 5.84% | 5.2% |
| New Mexico | Range of six income state brackets ranging from 1.5% to 5.9% | |
| North Carolina | 4.5% | 4.25% |
| West Virginia | 5.12% | 4.82% |
Other states have similar legislation on governor desks, including Georgia. There are eight states that have no state income tax; Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Wyoming.
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