Michigan Capitol, by Allie Osmar Siarto, licensed under CC
After a ballot initiative seeking to impose higher taxes failed to get the required support, Michigan Senate Democrats are now taking the matter into their own hands by proposing a new top tax rate of 9.25%.
State Senator Stephanie Chang and State Representative Tonya Myers Phillips have introduced the so-called Fair Share “Surcharge” (FSS), a proposal to impose a new tax on higher-income Michiganders. The tax would apply to households with annual income exceeding $500,000 and married couples with taxable income above $1 million. Like similar proposals in other states, the surcharge is based on the flawed assumption that high-income taxpayers will simply absorb higher taxes rather than relocate to lower-tax states where they can keep more of what they earn.
The push for a new top tax rate is backed by a coalition of left-wing advocacy organizations, including Invest in Michigan Kids (IMIK), the Michigan League for Public Policy, Detroit Action, 482Forward, Rising Voices, MI United, AFT Michigan, the Michigan PTA, and the Michigan Education Justice Coalition. Despite Michigan operating on an approximately $85 billion annual budget, these groups are lobbying for even higher taxes rather than advocating for greater accountability and more efficient use of existing taxpayer dollars.
Rather than target high-earners, lawmakers should pursue broad-based tax relief that benefits all Michiganders rather than punishing them with empty “investment” and “entrepreneurship” promises. With the top tax rate being raised to 9.25%, Michigan would become a massive outlier in the region; Indiana and Ohio, Michigan’s neighbor states, are cutting tax rates, with flat income tax rates of 2.95 and 2.75% respectively. Michigan would become the second highest in the region, only behind Minnesota with a top rate of 9.85%.
States with traditionally high tax rates suffer population and income loss from wealthy residents’ migration, even without targeted efforts to single-out high-earners. According to The Mercatus Center, California, a state with an income tax rate of around 13.3%, lost 1.2 million residents, about 3% of its total population, 237 thousand of which were high-income residents. As a result, California lost $94 billion overall, $60 billion of which was due to those same high-income residents leaving. Higher tax rates have a consistent record of causing significant losses of revenue.
Michigan has already experienced the consequences of outmigration. The state has lost nearly 47,000 residents, including nearly 4900 high-income earners. While high-income earners are only a small portion of those who have left, they accounted for an estimated $2.5 billion of the roughly $5 billion in lost income, more than half of the total. Creating a new top tax rate would only accelerate this trend, driving away even more taxpayers who disproportionately contribute to the state’s tax base.
High income taxes hurt more than just “Millionaires” when they come into effect. Many more people are affected, such as small business owners filing through the individual income tax code, manufacturers, and family-owned businesses. Raising tax rates on job creators discourages investment and economic growth while encouraging them to move to lower-tax states. It also causes greater revenue volatility by creating an increased dependance on a small number of taxpayers.
Michigan simply cannot afford to make themselves less competitive. States across the Midwest and country at large are cutting tax rates to attract residents and investment. Raising Michigan’s income tax rate would move the state in the opposite direction, making it harder to remain competitive and put the state at an even greater disadvantage.
Michigan lawmakers should reject breaking the states’ flat tax and implementing a higher income tax rate. Punishing the states high-income earners with even higher taxes is a recipe for slowed economic growth, greater revenue volatility, and continued and expanded outmigration. Rather than making Michigan less competitive, lawmakers should focus on creating an economic environment conducive to attracting investment, entrepreneurship, and giving businesses and families a reason to stay.
