Jan. 23, 2026 | This Week in Government: Tax Foundation: School Income Tax Proposal Would Reduce Jobs, Shrink Economy

A proposal to implement a 5% surcharge on high earners and send that money to schools would increase costs on small businesses, reduce jobs and shrink the state’s economy, an analysis from the Tax Foundation said Wednesday.

Invest In MI Kids is collecting signatures to put a graduated income tax on the ballot. Under the proposal, Michigan residents earning $500,000 per year if filing taxes individually and $1 million per year if filing jointly would pay an additional 5% in income taxes with the additional money going to schools.

The proposal would create a 9.25% income tax for those earners.

In an analysis released on Wednesday, the Tax Foundation said the higher income tax rate would reduce jobs by 43,000, cut wages by 1%, and reduce Michigan’s overall economy by $8.5 billion.

It would also lead to individuals leaving the state, the analysis said.

“As a tax on high earners, only a small share of Michigan’s population would pay the tax directly, as proponents are keen to point out. But the economic ramifications of such a high-rate tax would touch the lives of far more than those subject to the new rate,” the analysis says. “By adopting a 5% surtax and transitioning to a progressive income tax structure with a top rate of 9.25%, Michigan would immediately become an outlier regionally and nationally.”

The paper says because the vast majority of small businesses are pass-through businesses, the individual income tax is the tax that small businesses pay. Therefore, many small businesses would pay the higher rate under the proposal.

Further, the paper argues that a top marginal rate of 9.25% – higher in Detroit, Lansing,=and the 22 other cities with a local income tax – would undermine Michigan’s competitiveness in the region and the country.

“Most states are cutting income tax rates in response to greater economic mobility for both individuals and businesses, with the goal of growing their economies and encouraging in- rather than out-migration,” the paper says. “If Michigan instead chooses to follow the path of states like California, New Jersey, and New York, the result would be fewer jobs, lower pay, a higher cost of living, a smaller economy, and growing brain drain as people leave for better opportunities elsewhere.”

A joint statement from the Michigan Chamber of Commerce, Small Business Association of Michigan, Business Leaders for Michigan, Michigan Manufacturers Association, Grand Rapids Regional Chamber, Home Builders Association of Michigan, and Michigan Realtors said the business community supports investing in the state’s future, including schools.

“But how we fund those priorities and outcomes matters. This independent analysis shows the proposed graduated income tax would not stop with a small group of high earners – it would gravely affect small businesses that employ millions of Michiganders and have significant consequences for jobs, wages, and our state’s competitiveness,” the groups said in the statement. “Major tax changes should be evaluated based on real-world facts and impacts, not slogans.”

Jess Newman, Invest in MI Kids steering committee member, panned the Tax Foundation analysis in a statement, and said Michigan residents are fed up with the status quo.

“Michigan currently has a projected $1.1 billion gap in revenue, and Michigan schools stand to lose nearly $280 million in Federal investments. Millionaires currently have a lower effective tax rate than plumbers, cashiers, and teachers,” Newman said. “And Michigan students are paying the price. Families in our state are fed up with chief executive officers and politicians endlessly repeating the same baseless lines to try to protect Betsy DeVos’s fleet of yachts at the expense of our schools. Invest in MI Kids is a common sense solution that would raise over $1 billion in K-12 education by taxing less than 1% of the wealthiest individuals in Michigan. It’s 2026. No one is falling for the same billionaire-commissioned misinformation that gets trotted out every time the ultra wealthy are worried they might no longer get to pay a smaller share in taxes than everyone else.”

Touting the legal victory for House Republicans during a press conference on Wednesday, House Speaker Matt Hall said the administration needs to have a better accounting of how departments are spending money when it comes to work projects.

“The biggest problem here is the Whitmer administration doesn’t have a clue how much money there was. They’ don’t know what they’ve encumbered. They don’t know what they haven’t encumbered,” he said. “We’re in February, and they should have known this information in November when they gave it to us.”

Last Friday during the Court of Claims hearing for House v. Department of Technology, Management, and Budget et. al, the attorney for the state departments said that about 70% of the $645 million in work project funding disapproved by House Republicans was encumbered before Sept. 15, 2025, and the end of the fiscal year.

That would mean only about $200 million was left unencumbered, which is significantly less than what House Republicans thought it was.

House Republicans were granted a preliminary injunction that prevents departments from spending any of the money left unencumbered after Sept. 15.

The fact that the total was far less than what House Republicans thought it was is inconsequential, Hall, R-Richland Township, said.

“We need better financial practices,” he said. “The reason we needed a preliminary injunction is because, it’s pretty clear to me, they’re trying to shove as much of this money out of the door.”

Hall said that even $1 saved for the state would be worth it.

“And I think we can all agree it’s much more than $1,” Hall said. “So, whether it’s $100 million, or $600 million, whatever we can get from last year … I think it’s going to be better for the state.”

Hall went on to say that this was especially important in light of the January Consensus Estimating Revenue Conference, which projected lower revenue for the state in coming years.

Gov. Gretchen Whitmer is spending the week in Davos, Switzerland, her office announced Monday, and she participated in a panel on Tuesday at the World Economic Forum with further speaking engagements scheduled later this week.

Whitmer said the trip to the World Economic Forum is functioning as a trade mission to promote Michigan’s economic assets on the world stage.

“I’m excited to tell Michigan’s story this week and build relationships directly with global leaders at the World Economic Forum. On issues like innovation, workforce talent, and manufacturing, we are building a bright future and making a difference for Michiganders,” she said in a statement. “We’re creating opportunity and helping workers get the skills they need for good-paying jobs. We’re building vibrant communities with bustling main streets and downtowns. I’ll keep working with anyone to grow our economy, strengthen our defense and manufacturing industries, and help more families ‘make it’ in Michigan.”

Michigan Economic Development Corporation Chief Executive Officer Quentin Messer is also on the trip, which will include meetings with international investors, senior executives, and industry leaders aimed at “expanding company footprints in Michigan, attracting new foreign direct investment, and reinforcing Michigan’s position as a trusted partner in global defense and security supply chains.”

“These investment missions allow us to present our ‘Make It in Michigan’ economic development strategy to business decision-makers in critical markets and global government leaders who are actively considering places like Michigan to expand, innovate and invest,” Messer said in a statement. “With the continued federal policy focus on accelerating foreign direct investment into the US, Team Michigan’s presence in Switzerland and at WEF is about turning relationships into results for Michigan employers, workers, and communities.”

Whitmer participated in her first panel of the forum on Tuesday, which was a discussion on electric vehicle dominance alongside former General Motors Chief Economist Elaine Buckberg and business leaders from China and Brazil.

On Wednesday, Whitmer will join Kentucky Gov. Andy Beshear and Oklahoma Gov. Kevin Stitt in a forum of American governors. Later that day, she’s scheduled to have a press conference alongside American Federation of Teachers President Randi Weingarten, business leaders, and Beshear. Whitmer and the rest of the group are slated to “pledge to enable one million young people to acquire the skills needed to power the future of advanced manufacturing and supply chains by 2035.”

During the Tuesday panel, Whitmer said frequent policy changes at the federal level in the U.S. have made it more difficult for auto manufacturers to sustain the type of electric vehicle markets that are growing in Europe and Asia. When policies on incentives or tax subsidies for EVs can be rolled back or significantly altered with each new Congress or presidential administration, she said, manufacturers have a harder time maintaining consistency in their own contributions to the market.

“I think the back-and-forth policies at the national level have made it more difficult for industry to go all-in and ramp up the way that that some of the Chinese companies have been able to, and I think that’s something that we’re working to overcome,” she said. “But alas, I am the governor of Michigan, not the president of the United States, and so I think that that’s something we’re trying to de-risk but has been something that set us apart and made it harder in the states.”

Whitmer’s appearance on the panel at WEF comes just days after her address to the Detroit Auto Show on a chaotic year in U.S. trade policy, where she sharply criticized the way President Donald Trump has wielded tariffs during his first year back in office.

Whitmer echoed her statements from last week’s speech in Detroit when asked whether Trump’s tariffs have had the unintended indirect effect of benefiting China’s electric vehicle industry.

“There is no question that the chaotic policies that we’ve been seeing coming out of Washington DC have created a lot of hardship, not just in the auto industry, but for consumers in the United States, and obviously for relationships globally,” she said, stopping short of saying whether she believes the policies have had a positive effect on China while stifling American automakers. “I think there’s a lot of downsides to the way that they’ve been implemented in the last 12 months.”

The panelists discussed consumer culture narratives surrounding EVs and how a combination of buying trends and lackluster policy tools put the U.S. behind most of the rest of the world in electric vehicle production and sales. Buckberg said Americans’ driving habits and propensity for purchasing larger vehicles than much of the world has meant EV alternatives to the country’s most beloved cars are significantly more expensive than gas-powered standards – but new tech developments could see that price gap shrink in the coming years.

“In the U.S., we’re really spread out in our suburbs; we do more road trips because we have relatively poor rail, the use case is different. People want bigger vehicles, bigger ranges, and that just means closing that price gap between EVs and (internal combustion engine vehicles) is hard, but I think it’s the technology,” Buckberg said, noting new battery technology that’s hitting the market this year. “That’s what will be game changing … that technology change makes EVs a more perfect substitute for the internal combustion engine vehicle.”

Once prices and policy in the U.S. catch up with its automaking counterparts around the world, the experts said, the country could truly be competitive with China when it comes to EV production and use – if consumer attitudes shift alongside the industry.

When asked if she drives an EV, Whitmer laughed.

“I haven’t driven in eight years,” she said. “(But) yes, (an EV or a hybrid is) going to be the next car that I buy when I’m back to being a private citizen next year.”

Michigan’s U.S. senators have asked the federal government to allow previously approved federal funding to be spent on a long-planned project to prevent invasive carp from entering the Great Lakes.

In a letter sent last Thursday to the U.S. Office of Management and Budget Director Russell Vought, U.S. Sen. Gary Peters, D-Bloomfield Township, and U.S. Sen. Elissa Slotkin, D-Holly, urged for the Brandon Road Interbasin Project to continue.

The senators, along with other senators from Great Lakes states, said in the letter that the project has been in the works for years with state and federal partners and should proceed.

Senators expressed concern over what has been called an administrative pause to further review the project. Federal funding has been agreed to for the more than $1 billion project as well as more than $100 million in state funding split between Michigan and Illinois based on a 2024 agreement to proceed with the project.

“It has been thoroughly reviewed by Congress, the Army Corps of Engineers, and local partners, and its funding has been authorized and appropriated by Congress,” the senators wrote. “The current review is unnecessary and could cause delayed that put the Great Lakes’ ecosystem and fishing industry at risk.”

The project is intended to install carp deterrents at the Brandon Road Lock and Dam in Joliet, Illinois. The area is a major entry point for invasive species to enter the Great Lakes.

“The current pause and review could increase the cost and slow the final completion date of BRIP, increasing the likelihood that invasive carp could enter the Great Lakes,” the senators wrote. “If invasive carp were to become established in the Great Lakes, they would outcompete existing fish populations, permanently damage ecosystems, and significantly impair the $7 billion Great Lakes economy.”

The introduction of artificial intelligence in the workplace is going to “cure the illness of being unproductive,” one economics expert said at the Consensus Revenue Estimating Conference on Friday.

The only thing stopping rises in GDP and increases in work output, said Justin Wolfers, professor of economics and public policy at the University of Michigan, is the adoption of AI technology without focusing on its shortcomings and the unstable regulatory environment.

The improvement in productivity if companies adopted AI use widely could increase by around 56%, while typically, productivity gains are only improving 1% per year nationally, Wolfers said.

In case studies in the workplace, AI use made tasks 56% faster to complete and professional writing assignments were completed 40% faster. Some studies, according to Wolfers, have found 80% of U.S. workers could have more than 10% of their tasks affected, while 50% of U.S. workers could have more than 50% of their tasks affected.

Other case studies have found that the use of AI for 20% of all tasks could result in a 1.2% reduction in labor costs and a 0.66% in production costs, Wolfers said.

While studies range across formulas of how many tasks companies could utilize with AI, the average productivity growth in a company is around 3.1% and the effects on U.S. gross domestic product in 10 years’ time is 12%.

Wolfers said if AI follows other technological advances, it will take time to see the benefits play out.

“I think people are talking as if this is something that plays out in a very short period of time,” Wolfers said. “History suggests that’s a little bit optimistic, but there are reasons to be optimistic about this.”

However, there are still policy issues that remain around AI including chip shortages in manufacturing, energy bottlenecks due to the high energy burden data centers, and the lack of regulation slowing the adoption of AI.

Only 10% of businesses across the country have adopted AI, and 14% intend to. Michigan is slower than the national average, with 7.9% adopting AI use, and 12.4% intending to.

When it comes to Michigan’s largest industries, manufacturing and health care, Wolfers said health care is one of the only industries moving quickly towards AI integration, and modern manufacturing is seeing automation moves, changing the face of the workforce to one of more skilled labor.