Voters may get the chance to authorize or reject a tax hike on high-earning households in Michigan. A group called Invest In MI Kids will be collecting signatures toward an initiated constitutional amendment that would get rid of the constitutional prohibition on graduated income taxes and increase the state’s rate from 4.25% to 9.25% for high-income taxpayers.
The proposal would only apply to a small number of households. The tax hike would fall on taxpayers who earn more than $500,000 if they file a single return and $1 million if they file a joint tax return. This is just 18,300 taxpayers, according to figures from the Internal Revenue Service, or just 0.3% of taxpayers.
High-earning households are responsible for a lot of economic activity. Households earning more than $500,000 account for 35% of all income reported to the state.
A lot of this income is generated by the businesses some of these taxpayers run. They pay 33% of all of the self-employment taxes and claim 90% of the flow-through credits, which can be claimed when Limited Liability Companies, S-corporations and other partnerships pay income taxes directly to the state. This small number of taxpayers pay more than $1.5 billion in income taxes on their businesses, over 15% of what the income tax collects.
In other words, this tax would harm more than just the 0.3% of taxpayers who would be subject to it. The proposed amendment would lay heavy new taxes on a large amount of business activity in the state and have broad-ranging effects on the state economy.
Nor is the tax hike small. Top earners would be subject to 46.25% income tax rates when including federal taxes. This would give the state the 7th-highest tax rate levied by states. And because Michigan also allows local income taxes, high-income taxpayers in Detroit would be subject to a 48.65% income tax rate. It just seems un-American to take half of what someone earns.
One thing about high-earning households is that they have options. Business and personal earnings have complicated connections that can be altered to avoid taxes. High earners are likely to have economic interactions beyond the state already. Living more than half a year in an income-tax-free state would allow high earners to drop their top tax rate from 46.25% – 48.65% to 37%.
There will be some unintended consequences from raising taxes on these households. Whether it’s still worth it depends on whether the money will be well spent. The proposal earmarks the extra money to local public schools.
Schools in Michigan have been getting more taxpayer funding but have not transferred that funding into improved performance. Combined federal, state and local funding for schools increased from $14,800 per student to $23,700 from fiscal year 2018-19 to 2023-24, a 31% increase when adjusted for inflation. The extra spending has not resulted in better outcomes in schools, however. In the most recent National Assessment of Educational Progress, Michigan ranked 44th among the states in fourth grade reading and scored lower than it did in 2019. Spending more money on schools does not result in better schools.
There is a lot that can be done to improve schools and educational opportunities for children. Simply spending more would waste taxpayer money without delivering results.
It’s definitely not worth punishing business owners who employ so many people in the state in order to pursue an education strategy that won’t work.
