(The Center Square) – Michigan’s 2025 proposed budget bets that the state won’t lose a $700 million lawsuit that could “upend” the budget.
The lawsuit challenges the Michigan Department of Treasury’s decision to raise the personal income tax rate back to 4.25% in 2024.
The rate was lowered to 4.05% last year triggered by a 2015 law.
Losing the lawsuit would make Gov. Gretchen Whitmer’s $81 billion fiscal plan recommendation unbalanced.
“If the courts were to provide a favorable ruling for the people of our great state by protecting families and small businesses from a tax increase, the budget you presented would be out of balance,” Republican Sens. Aric Nesbitt of Porter Township and Jon Bumstead of North Muskegon wrote in a Feb. 20 letter to Whitmer.
Michigan Republicans asked Democrats to make a contingency plan for possible revenue loss from the lawsuit filed by the Mackinac Center for Public Policy.
The Citizen’s Research Council of Michigan said that the lawsuit outcome could “upend” the budget.
The lawsuit is still pending before the Michigan Court of Appeals and will be decided by March 11. A further appeal would be due to the Michigan Supreme Court by March 25.
The trigger automatically lowers taxes when state revenue outpaces inflation by a set amount but the state interpreted the tax cut as effective for one year, not permanently.
The decision could return $714 million to taxpayers or the government.
Whitmer and Attorney General Dana Nessel say the rate should be temporary while the lawsuit says the rate cut should be extended.
So far, the Court of Claims has affirmed the state. If higher courts affirm the rate cut, then state General Fund revenue would decline by $530 million in FY2024 and by $760 million in the years after, which would mean the budget isn’t balanced.
Enacting Whitmer’s entire 2025 budget would leave $19 million on the state’s balance sheet.
Whitmer wants at least five new taxpayer-funded programs including kindergarten for all; two years of community college for high school graduates a $5,000 tax credit for caregivers caring for a sick relative; a $2,000 electric vehicle tax credit for union-made vehicles; and a $60 million innovation fund.
“Together, let’s lower costs for working families, deliver the Michigan Guarantee to offer every Michigan child a free public education from pre-K through community college, save family caregivers thousands on their taxes, and power our economic and workforce development to build and lead the future,” Whitmer said in a statement.
The budget proposal also relies on $670 million redirected from the teacher’s pension fund, which the letter said was more than $30 billion in debt.
