Proposal Would Tear Up Michigan Constitution’s Ban On Graduated Income Tax

The prohibition on a graduated income tax that was written into the Michigan Constitution of 1963 would become left in the past if a proposal unveiled last week makes it onto the November ballot and is adopted by the people.

The proposal for a constitutional amendment, dubbed Fair Tax Michigan, comes from a group calling itself Michiganders for the Commonwealth. Its campaign manager, Eli Isaguirre, is a former union political organizer and Democratic Party legislative candidate who is now on the staff of U.S. Rep. Haley Stevens, D-Birmingham. A progressive group called Detroit Action is also involved.

The measure calls for rate hikes that would have state government take an additional $1.5 billion annually from residents, with the entire amount coming from individual tax filers whose earnings exceed $175,000, or joint filers with an income of $350,000. (The measure would also require rates to be lowered for those who earn less, and compensating for this would add more to the amount levied on high earners.)

If approved by a majority of voters in November, the amendment would require the Legislature to enact the new tax rates by June 2021. If legislators fail to do that, the amendment calls for the governor to implement the proposal by executive order.

Various reports suggest the organizers envision something like a doubling of the state income tax rate paid by high-income earners. The current flat rate is 4.25% on all earners.

Although the proposed amendment leaves it to lawmakers to set the new rates, a 2017 state Department of Treasury report showed that the 62,000 income tax filers who earned more than $400,000 paid about $1.8 billion in state income tax. The total paid by all taxpayers that year was $8.8 billion.

The high earners paid, on average, about $29,000 in state income tax, according to these figures. Adding $1.5 billion to that burden, as required by the amendment, would increase their average tax by more than $24,000 annually, taking it to around $53,000. And that’s before calculating the additional amount needed to make up for income tax cuts the amendment provides to those below the $175,000/$350,000 threshold.

Michigan is one of nine states with a flat rate income tax. Nine others have either no state income tax at all or have one and levy it only on dividends and interest, according to the Tax Foundation.

There are concerns that the measure would create incentives for economically successful Michiganders to move to one of those no- or low-tax states. One economist has used IRS data to estimate that such tax migration is already responsible for $22.9 billion in annual adjusted gross income leaving the state. Michigan falls in the middle of the pack (28th) nationally for per capita income tax collections.

The most recent version of the Michigan Constitution, enacted by voters in 1963, prohibits a graduated income tax. The proposed amendment would abolish that prohibition, along with 17 other sections of the constitution that would be altered or abrogated.

Three previous attempts to win approval for a graduated tax (all in the 1960s and 70s) were rejected overwhelmingly by Michigan voters.

Veteran Michigan political analyst Bill Ballenger said the odds favoring a graduated tax might be higher today because of a public perception that a so-called wealth gap between the rich and the working and middle classes has grown. But qualifying for the ballot — which requires collecting more than 425,000 voter signatures by July — is a massive undertaking, Ballenger said.

And if the proposal’s advocates manage to do that, they can expect a spirited and well-funded opposition campaign from advocates for free enterprise and entrepreneurism, he said.