• The state won’t levy its 4.25% tax on income from tips, overtime and social security under new law signed by Gov. Gretchen Whitmer
  • The exemption will end after the 2028 calendar year unless lawmakers extend it
  • Tax cuts were part of a bipartisan deal on the state’s budget and a road funding increase

Michigan will not collect income taxes on tips, overtime pay and social security for the next three years under legislation signed by Gov. Gretchen Whitmer on Wednesday. 

Michigan’s 4.25% income tax will not be charged on tips paid to “up to 300,000” workers and save them an average of $400 a year, Whitmer’s office said in a statement, while the overtime exemptions would “save up to 500,000 workers an average of $500.”

The National Employment Law Project estimated the state had 139,000 tipped workers in 2023 using Bureau of Labor Statistics data. For workers to save $400 on their taxes, they’d have to earn and report more than $9,400 in tips a year.

The impact of the Social Security exemption was projected by Whitmer’s office to be less far-reaching, saving 40,000 seniors $500 a year. That’s because the eligibility for the exemption is stacked on top of a $20,000-per-taxpayer deduction on all retirement income available to taxpayers older than 67.

“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,” Whitmer said in a statement provided to Bridge Michigan Thursday.

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The three tax deductions are set to expire after the 2028 calendar year, according to the text of the new law. Lawmakers would have to amend the legislation or pass a new law to make the deductions permanent.

The move mirrors a similar measure — and a campaign promise — in President Donald Trump’s tax-and-spend plan. Trump’s One Big Beautiful Bill Act, or OBBBA, does not end taxes on Social Security income, however.

State House Speaker Matt Hall, a Republican from Richland Township, called the tax cuts a “top priority” for his caucus. 

Whitmer signed the legislation at a dinner in Trenton, a downriver city that’s located in a competitive state Senate district currently held by state Sen. Darrin Camilleri, a Democrat. He said in a statement the budget “delivers real progress for working and middle-class families.”

Nonpartisan analysts in Michigan’s Senate estimated the individual income tax exemptions will make the state miss out on about $158 million in revenue it otherwise would have collected next year.

The bill also avoided some business tax cuts present in the OBBBA that would have reduced state government revenue by hundreds of millions of dollars, according to fiscal analysts.

The new law also includes parts of a complex money shuffle designed to devote more state funding to road repairs. Those changes include eliminating the sales tax on gasoline but increasing the gas tax paid at the pump by 20 cents per gallon, redirecting corporate income tax revenue previously earmarked for economic development and levying a new 24% wholesale tax on marijuana.

The tax deduction is not the first change tipped workers have experienced this year. The Legislature secured a late-night deal earlier this year to cap what would have been a drastic increase in Michigan’s minimum tipped wage. 

A Michigan Supreme Court ruling would have increased the tipped wage from $4.01 per hour this year to about $15 an hour in 2031, the same as the regular minimum wage. Many tipped workers feared they’d actually lose money because customers would tip less knowing they made that much money.

Under the changes Whitmer signed into law, the tipped wage is now slated to increase to just $7.50 by 2031, half of the regular minimum wage, though the amount could be higher after adjusting for inflation.

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