Progressive Income Tax for Education

A progressive coalition, Invest in MI Kids, has recently launched a ballot initiative in Michigan to amend the state constitution and impose a 5 percent surcharge on incomes above $500,000 for single filers and $1 million for joint filers. According to the measure’s language, all proceeds from the surcharge would be earmarked for educational purposes. Essentially, the proposed surcharge would shift Michigan’s individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
system from a proportional (flat-rate) structure to a progressive (graduated-rate) one with a high top marginal rate.

How Exactly Would the Income TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
in Michigan Be Affected?

Currently, Michigan imposes a flat state-level individual income tax of 4.25 percent. In addition, 24 cities are allowed to (and do) impose local income taxes ranging from 1 percent (a standard rate applicable to most municipalities) to 2.4 percent in Detroit.

The change proposed in the ballot initiative would create a second bracket with a rate of 9.25 percent, applying to incomes above $500,000 for single filers and $1 million for joint filers. This would shift Michigan from having a below-median individual income tax rate to the seventh-highest rate in the nation—behind only high-tax states such as California, Hawaii, New York, New Jersey, Oregon, and Minnesota. In Detroit, the combined top rate of 11.65 percent would be higher than any rate outside of California, New York City, and the Portland, Oregon area.

Michigan would also have the highest top individual income tax rate among the Midwestern states, with the exception of Minnesota. Michigan’s combined top state and local individual income tax rate would be more than 5 percentage points higher than those in Illinois, Indiana, and Ohio, and 4 percentage points higher than Wisconsin’s—an increase that would clearly reduce the state’s tax competitiveness.

Impact on Michigan’s Tax Competitiveness

Currently, Michigan has a relatively competitive tax system and ranks 14th on our State Tax Competitiveness Index. The fact that the state has flat individual and corporate tax structures and does not impose specific wealth and bequest taxes adds to its competitiveness. However, despite this competitive standing, Michigan still ranks fairly poorly on interstate migration rankings. Our analysis of the most recent IRS SOI data demonstrates that the state ranks 32nd and loses about 13,000 residents a year. Census and industry data (the latter coming from U-Haul and United Van Lines) paint an even more pessimistic picture, with Michigan ranking near or within the bottom 10 states for net inbound migration.

High taxes in New York and California lead to out-migration and harm those states’ competitiveness, but they still have many attractions that help countervail the high tax burden. Clearly people are willing to pay a lot to live in New York City or San Francisco—high taxes, for instance, but also high rent and a high cost of living generally. Will people be willing to shoulder a similar tax burden to live in Detroit?

In this environment, it is critical that the state maintain its competitive tax code. Combined with complementary social and economic policies, a simple, stable, and neutral tax structure could help reverse the trend and position Michigan to attract new residents in the coming years.

However, if Michiganders decide to move forward with the dramatic tax increase proposed in the ballot initiative—raising the top state individual income tax rate to 9.25 percent—it would significantly harm the state’s tax competitiveness. Had these changes been implemented this year, Michigan’s ranking on the 2025 State Tax Competitiveness Index would have dropped by seven places, from 14th to 21st overall. The impact on the individual income tax component would have been even more severe, with the state falling from 14th to 34th.

Reasonable Alternative Paths

If Michiganders are interested in increasing the state’s spending on education or other priorities—and believe that current revenues are insufficient to support such an increase (a premise that is debatable, given the state’s balanced budgets in recent years)—there are several ways to do so without significantly affecting residents’ incentives to live and work in Michigan.

One possible approach would be to reform the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.
system. Michigan currently has one of the lowest combined state and local sales tax rates in the nation, at 6 percent. Additionally, the state’s sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.
is relatively narrow, with a sales tax breadth of just 35.5 percent, below the national median. Expanding the sales tax base to include additional final consumption goods and services, along with a moderate rate increase to 6.5 or 7 percent, could easily generate several billion dollars in additional annual revenue. This option would still leave Michigan’s sales tax rate comparable to or lower than those in Indiana, Ohio, and Illinois. Importantly, it would also avoid negatively affecting the incentives of top earners, who might otherwise be encouraged to relocate under the proposed income tax increase. But at a time when most states are cutting taxes, not raising them, Michiganders should be cautious about any tax increase that threatens to undercut economic progress.