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The GOP-led Michigan legislature on Tuesday approved a tax break for its wealthiest residents that the state's treasury department estimates will be worth about $190 million.
The new law, however, doesn't impact state revenue. Instead, it's a workaround to new federal limits on deductions that were built into Donald Trump's 2017 changes to the tax code that was part of the Tax Cut and Jobs Act. In short, the GOP is helping the state's wealthiest residents avoid paying federal taxes.
In the simplest terms, the federal government used to allow the state's business owners — who filed as C corporation, S corporation, LLC, or partnership — to deduct all state and local taxes that they paid on their personal income, which is called flow-through income. But Trump's tax plan changed the rules so the local tax deduction is capped at $10,000 for individual tax returns.
That means anyone who pays more than $10,000 in state and local taxes — in other words, the state's wealthiest residents — will pay more in federal taxes since the cap will potentially limit their itemized deductions.
The state GOP change to the tax code approved on Tuesday by the state House would allow a business to pay a new tax on the flow-through income at the business entity level, and allow the recipients of the flow-through income to claim a credit equal to the tax paid by the business on their individual income tax returns. At the federal level, there's no limit on the state and local tax deduction for businesses, so the taxpayer can once again make unlimited deductions.
There is, however, the chance that the Internal Revenue Service won't permit the state to keep its new workaround in place, and the state's wealthiest residents will simply have to pay more in taxes.
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