State revenue grew faster than the rate of inflation last year, but not enough to trigger an income tax rollback under a state law. That will leave Michigan’s income tax rate at 4.25% in 2026.
The determination was made by State Treasurer Rachel Eubanks and the directors of the nonpartisan House and Senate fiscal agencies based on a complex formula in a 2015 state law. State Treasury Deputy Public Information Officer Ron Leix said that revenue growth was tempered by other factors, such as an increase in the Earned Income Tax Credit for lower income households and rolling back the state income tax on retirement income.
“The general fund did grow faster than inflation for this period, which requires the application of this formula that determines if a rate reduction is warranted,” he said. “And after crunching the numbers and going through that process, they found that no rate reduction is required.”
The last time there was a rate cut was in 2023 when the state treasury was boosted by COVID-era windfalls. The Michigan Supreme Court upheld a ruling that the reduction to 4.05% was a one-time rollback before the earlier rate was restored.
The stable income tax rate is only one factor in state revenue. For example, if federal reductions in Medicaid funding come to pass, that would have a big impact on state spending decisions.
Michigan House Republicans have made a run at restoring the lower state income tax rate, but Senate Democrats have different plans.
The state treasurer and directors of the legislative fiscal agencies will meet later this month to agree to specific revenue projections to craft the new state budget.
