Appeals court rules Michigan's 2023 individual income tax cut was temporary

Lansing — A three-judge Court of Appeals panel ruled Thursday that Michigan's individual income tax should remain at 4.25% after a spike in state tax revenue last year triggered a one-year drop to a 4.05% tax rate.

The unanimous decision upholds an interpretation by Attorney General Dana Nessel, who found a formula providing a drop in the income tax when general fund revenue exceeded inflation was only temporary and not permanent, as Republicans and business groups argued. Gov. Gretchen Whitmer's administration adopted Nessel's interpretation and a December Court of Claims opinion in resuming the 4.25% tax rate for 2024.

Two business groups, two Republican lawmakers and several taxpayers challenged the interpretation last year seeking a court order declaring the tax cut permanent. The appellate panel's decision Thursday finding the tax cut temporary rejects that premise and upholds a December ruling from the state Court of Claims on the matter.

The Mackinac Center for Public Policy, the conservative think tank that represented the plaintiffs in the case, said it was considering an appeal to the Michigan Supreme Court.

“The question in this case has always been what is the clearest reading of the statute,” Patrick Wright, vice president for legal affairs at the Mackinac Center, said in a statement Wednesday. “We remain convinced that the best reading of the law requires a permanent tax cut.”

The language of the 2015 law requiring the decreased tax rate when certain revenue benchmarks are hit "supports the view that 4.25% remains the default rate subject to reduction only if the triggering conditions are met," the decision said. And those triggering condition should be reassessed each year with the 4.25% as the starting point.

"The statute contains no language indicating a legislative intent to make the rate reduction under Subsection (1)(c) permanent," Court of Appeals Judges Michael Gadola, Christopher Murray and Michael Kelly wrote. "Defendant’s interpretation would make each reduction permanent and allow compounding reductions that could ultimately result in no income tax."

Gadola is an appointee of former Republican Gov. Rick Snyder, Murray an appointee of former Republican Gov. John Engler and Kelly was elected to the appeals court in 2008.

The court rejected arguments that judges should review lawmaker comments made in 2015 when the law was passed to aid in understanding the cut as permanent. The statute is clear enough without looking at what was said while the bill was debated in 2015, the panel said.

"Because the statute is unambiguous, there is no need to consult legislative history," the panel said.

The one-year tax cut stems from a 2015 law passed by the the Republican-led Legislature that required the state to decrease the income tax rate if tax revenue increased at a speed that exceeded inflation. The law provided a formula for how to determine what amount of decrease should occur based on tax revenue.

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The nonpartisan House Fiscal Agency in an analysis last year opined that the law required a permanent decrease in the tax rate if the benchmark was hit. Republicans agreed the tax cut should be permanent, but Whitmer's administration maintained it was only one year.

Nessel sided with Whitmer last March in an advisory opinion that the Department of Treasury adopted in raising the income tax back up to 4.25% this year.

Snyder, who has rarely spoken out publicly since leaving office at the end of 2018, called Nessel's opinion at the time an "unreasonable overreach" given the state had more than $7 billion in surplus tax revenue a year ago.

The Mackinac Center brought the suit at issue in Wednesday's ruling in an effort to keep the rate at 4.05% through 2024 and beyond. If the tax rate had remained at 4.05% this year, Michigan taxpayers would have held on to about $714 million of their collective income.

Staff writer Craig Mauger contributed.

eleblanc@detroitnews.com