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Michigan Supreme Court will rule on controversial tax cut

On Behalf of | Jun 4, 2024 | IRS, Tax Controversy, Tax Law

A three-judge panel on the Michigan Appeals Court ruled that the recently triggered income tax cut to 4.05% from 4.25% is not permanent. Last year, the reduction was triggered under a law requiring the tax rate to go down if state revenue rises significantly faster than inflation. This decision has left many Michigan Republican politicians and others calling it a tax hike, but the governor based her upcoming budget on the original higher tax rate.

The Initial Promise

The initial promise of a permanent $714 million personal income tax cut was met with widespread approval from Michigan residents. The prospect of keeping more of their hard-earned money was undoubtedly appealing. However, the recent court ruling has thrown this promise into question.

Arguments For a Permanent Income Tax Cut

Advocates of lower taxes often cite the following reasons for lowering taxes.

  • Stimulates economic growth: Proponents argue that tax cuts increase an individual or family’s disposable income, spur spending, and help grow the economy. They believe that permanent tax cuts can truly stimulate economic growth.
  • Increased investment: Some see tax cuts as a way to encourage companies and individuals to invest their money by increasing the rewards for doing so. The logic is that entrepreneurs will spend more money developing new businesses if they can keep more money from doing so.
  • Right to keep earned wealth: Some argue that in a free country, money belongs to the people who earn it. Those who produce wealth have a right to keep it.

Arguments Against a Permanent Income Tax Cut

Critics of cuts usually cite the following arguments:

  • Benefits the Wealthy: Critics claim that tax cuts often provide disproportionately large benefits to wealthy households and little to lower-income households.
  • Reduces Government Services: Critics also argue that tax cuts reduce necessary government services for the lower-income bracket.
  • Future financial burden: There’s a concern that tax cuts could lead to higher burdens on future generations and reduce future budget discipline by violating the budget rules.
  • Long-term deficit: The government faces a large, long-term deficit, and tax cuts would worsen this problem.
  • Uncertain economic impact: While some believe tax cuts stimulate economic growth, others argue they have little effect on economic growth.

It’s important to note that the impact of tax cuts can vary greatly depending on the specific details of the tax cut and the overall state of the economy. Therefore, it’s crucial to consider all factors when evaluating the potential benefits and drawbacks of a permanent income tax cut.

The high court will issue a ruling

The Michigan Supreme Court heard the case on May 13, 2024, but has yet to hand down a ruling. This ruling has significant implications for Michigan residents. While the tax cut will provide short-term relief, its lack of permanence means that residents cannot rely on it for long-term financial planning. This uncertainty can make it difficult for individuals and families to plan budgets and make financial decisions.

Once the court rules, individuals and families may want to discuss the tax liability with a law firm that handles tax law issues here in Michigan.