Michigan has enacted a new law temporarily eliminating the state's 4.25% income tax on tips, overtime pay, and Social Security income. Signed by Governor Gretchen Whitmer, the legislation is part of a bipartisan budget agreement and is projected to provide tax relief to hundreds of thousands of workers and seniors across the state until it expires after the 2028 calendar year.
Key Takeaways
- A new Michigan law exempts tips, overtime pay, and Social Security income from the state's 4.25% income tax.
- The tax exemptions are temporary and scheduled to end after the 2028 tax year unless lawmakers take further action.
- The governor's office estimates the cuts will save up to 500,000 workers an average of $500 annually from the overtime exemption.
- The measure is expected to reduce state revenue by approximately $158 million in the next fiscal year.
- The tax cuts are part of a larger budget deal that includes significant changes to road funding and a new tax on marijuana.
Details of the New Tax Exemptions
Under the new legislation, Michigan will not collect its 4.25% income tax on several specific sources of income for a limited period. The law, a product of bipartisan negotiations, aims to reduce the tax burden on a broad segment of the state's population.
Impact on Tipped and Overtime Workers
The governor's office projects significant savings for workers. The exemption on overtime pay is expected to benefit up to 500,000 workers, with an average annual savings of $500 per person. This change directly affects individuals who work more than the standard 40-hour week.
For tipped employees, the state estimates that as many as 300,000 individuals could see an average tax reduction of $400 per year. However, to achieve a $400 savings at the 4.25% tax rate, a worker would need to report more than $9,400 in annual tips. Data from the National Employment Law Project, using Bureau of Labor Statistics figures, estimated Michigan had 139,000 tipped workers in 2023, suggesting the actual number of beneficiaries may vary.
By the Numbers
- 4.25%: Michigan's state income tax rate.
- $500: Average annual savings for workers receiving overtime pay.
- $400: Average annual savings for tipped workers.
- $9,400: Approximate annual tips needed to realize the full $400 tax savings.
Relief for Social Security Recipients
The law also provides targeted relief for a segment of the state's senior population. An estimated 40,000 seniors are expected to save an average of $500 annually from the exemption on Social Security income.
This new benefit is structured to supplement existing tax deductions. It applies in addition to a pre-existing deduction of $20,000 per taxpayer for all forms of retirement income, which is available to residents older than 67. The focused nature of this exemption means it will primarily benefit seniors whose income levels are affected by the current tax structure on Social Security benefits.
Financial and Political Context
The tax cuts are a central component of a larger, multifaceted state budget agreement. While providing direct financial relief to residents, the law also carries significant fiscal implications for the state and reflects a compromise between political parties.
"By ending taxes on tips, overtime, and Social Security, we’re putting money back in the pockets of hundreds of thousands of Michiganders that they can use to pay the bills and put food on the table," Governor Whitmer stated.
State Revenue and Legislative Horizon
According to an analysis by Michigan's nonpartisan Senate Fiscal Agency, the exemptions will lead to a notable decrease in state revenue. The agency projects that the state will collect approximately $158 million less in the upcoming fiscal year than it would have without the new law.
Crucially, these tax deductions are not permanent. The legislation includes a sunset clause, meaning the exemptions will automatically expire after the 2028 calendar year. To extend them, the Michigan Legislature would need to pass a new law. This temporary structure allows for future evaluation of the law's economic impact.
Bipartisan Support
The tax relief package was a key element in the state's broader budget negotiations. State House Speaker Matt Hall, a Republican, described the tax cuts as a "top priority" for his caucus, highlighting the bipartisan effort required to pass the legislation. The signing event was held in Trenton, a city within a competitive state Senate district, underscoring the political significance of the bill.
Connection to Road Funding and Other Tax Changes
The income tax exemptions were passed as part of a comprehensive plan to address other state priorities, most notably infrastructure. The budget deal incorporates a complex financial strategy designed to increase funding for road repairs.
Key components of this strategy include:
- Gasoline Tax Restructuring: The law eliminates the state sales tax on gasoline. To offset this, the tax paid directly at the pump will increase by 20 cents per gallon, with the new revenue dedicated to roads.
- Corporate Tax Redirection: A portion of corporate income tax revenue that was previously designated for economic development initiatives will now be redirected to infrastructure projects.
- New Marijuana Tax: The law introduces a new 24% wholesale tax on marijuana, creating a new revenue stream for the state.
This approach links personal tax relief with a long-term plan to address Michigan's well-documented infrastructure needs, balancing immediate benefits for taxpayers with strategic state investment.
Background on Tipped Wage Legislation
The new tax law arrives shortly after another significant legislative change affecting tipped workers in Michigan. Earlier this year, state lawmakers reached a deal to modify a planned increase in the minimum wage for tipped employees.
A Michigan Supreme Court ruling had set the stage for the tipped minimum wage, currently $4.01 per hour, to gradually rise until it matched the regular state minimum wage, which is projected to be around $15 per hour by 2031. Many service industry workers and business owners expressed concern that such a large increase would lead customers to tip less, potentially reducing workers' overall income.
In response, the Legislature passed a new law, also signed by Governor Whitmer, that capped the increase. Under the revised structure, the tipped minimum wage will now rise more slowly, reaching $7.50 per hour by 2031, or half of the regular minimum wage. This amount may be adjusted for inflation. The tax exemption on tips provides a different form of financial relief to these workers following the wage agreement.
