Lawsuit: Michigan’s $714 million income tax cut should be permanent

• Lawsuit contends $714 million income tax cut should be permanent
• The automatic tax cut was triggered by a 2015 law
• Democratic officials declared the cut would apply only to 2023

LANSING — An automatic Michigan income tax cut that Democratic officials declared temporary should be permanent, according to a new lawsuit from conservative groups and Republican lawmakers. 

The suit, filed last week by attorneys from the free-market Mackinac Center for Public Policy, challenges a legal opinion by Democratic Attorney General Dana Nessel and seeks to ensure extended savings for Michigan’s roughly 5 million individual tax filers. 

At issue is a GOP-backed 2015 road funding law that raised fuel taxes on motorists but required the state to cut its income tax rate in any year when revenue growth significantly outpaced inflation, which happened last year. 

In a March opinion, Nessel determined the automatic tax cut should be temporary because the legislative language referenced the “current” rate and was designed to respond to one-time revenue surges, stating the “statute provides temporary relief based on temporary circumstances.”

Related:

• Michigan income tax rate to drop to 4.05 percent, but just for one year
• Michigan is cutting income taxes for 2023. How much will you save?
• Dana Nessel calls income tax cut temporary. Republicans express fury

Michigan Treasurer Rachel Eubanks, the named defendant in the new lawsuit, subsequently announced the state would cut its individual income tax rate from 4.25 percent to 4.05 percent — collectively saving taxpayers an estimated $714 million — but only for the 2023 tax year. 

In 2024, the tax rate will go back up, officials said in March. 

In its lawsuit filed in the Michigan Court of Claims, the Mackinac Center contends 

Eubanks’ decision was based on a faulty analysis by Nessel. The suit contends the attorney general relied on a dictionary definition but ignored alternatives and used a “policy argument” to justify a temporary cut. 

“This is about the law,” Patrick Wright, Mackinac Center’s vice president for legal affairs, said in a statement. 

“A clear reading of the statute shows that lawmakers put in place a permanent income tax rate reduction. The personal income tax rate on all Michigan citizens went down to 4.05% and should stay there absent new legislation.”

A spokesperson for the Michigan Treasury declined comment on the lawsuit, saying the department does not comment on pending litigation. 

The lawsuit faces "significant hurdles," including arguments over whether plaintiffs even have "standing" to sue the state, said Steve Liedel, a Democratic attorney who agrees with Nessel that the “plain language” of the 2015 law called for only a temporary tax cut.

Michigan Gov. Gretchen Whitmer’s administration, including Eubanks, have exclusive authority to administer state laws — not individual lawmakers or outside groups who filed the legal challenge, Liedel told Bridge. 

"I viewed (the lawsuit) more as some political or ideological posturing for some folks to be able to say, 'We're doing something about this' than as a solid legal argument," Liedel said. 

But taxpayers have a right to challenge an erroneous opinion, according to Mackinac Center attorneys, who say the court should weigh in on the tax cut dispute now in order to prevent a slew of future tax assessment challenges that could “overwhelm” the state treasury, courts or tax tribunals.

The could be "chaos" if Michigan’s roughly 4.9 million taxpayers — or even a small fraction —"try to protect their rights all at the same time" when the new tax year starts in January, Wright told Bridge. 

Lawmakers also need to know whether they will need to revise spending plans as a result of an extended tax cut, they argue.

As such, the suit seeks a ruling by Dec. 15 on behalf of the plaintiffs, including individual taxpayers, state Sens. Ed McBroom of Vulcan and Dale Zorn of Ida, the Association Builders and Contractors of Michigan and the National Federation of Independent Businesses. 

"The Constitution that says the Legislature, in its budgeting and appropriations process, is supposed to have accurate numbers and have revenue equal expenditures," Wright said. "You can't do that if you're off by $714 million."