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THE INVEST IN MI KIDS PROPOSAL - POTENTIAL EFFECTS ON MICHIGAN SMALL BUSINESSES

 


On June 27, 2025, the Michigan Board of State Canvassers approved language for a ballot proposal to amend the Michigan State Constitution Article IX, sections 7 and 11.[1] These amendments, as approved, would add a 5% surcharge to individual filers with taxable income over $500,000 and place the proceeds from said surcharge into a newly created fund titled the “State School Aid Fund.”[2] According to the Invest in MI Kids Coalition’ website and the language added to Section 11 of Article IX, 100% of the money deposited into this fund would be used to “support local classrooms in local school districts, included funding for career and technical education, attracting and retaining high-quality educators, and reducing class sizes.”[3] While, on the surface, this amendment sounds great for improving schooling quality throughout the state, it is important to fully understand the impacts this surcharge may have on certain small businesses and the potential greater effect it may have on the State’s attractiveness for budding businesses.

Potential Impacts on Small Businesses in Michigan

            Currently, Michigan employs a “flat tax rate.” This means that the income tax rate for all individuals in Michigan is the same, regardless of one’s taxable income.[4] That tax rate was 4.25% for the 2024 tax year.[5] The proposed amendments to the Michigan Constitution, however, would create a type of graduated tax system where filers may be susceptible to the new surcharge based on their taxable income. Specifically, individual filers with a taxable income of over $500,000 would be subject to the 5% surcharge on top of the flat 4.25%, increasing their total state income tax rate to 9.25%. This increase, the Michigan Chamber of Commerce notes, would make Michigan’s income tax the 7th highest income tax rate in the country and the highest in the Midwest.[6]

            At first glance, small business owners may be led to believe that this increase would not affect their business because it is an income tax surcharge. This certainly may be true, but the outcome largely depends on the type of legal entity under which a business chooses to operate. For passthrough entities such as sole proprietorships, general partnerships, S Corporations, and Limited Liability Companies, business profits pass through to owners to be recorded as individual income. That means, for select small businesses with business profits over $500,000, business owners may qualify for the additional tax surcharge, even if their take-home pay is nowhere close to the total $500,000.[7] While the Invest in MI Kids Coalition claims that only 2% of all tax filers in Michigan would qualify for their proposed surcharge,[8] it is important for all small business owners to confirm both their existing legal entity structure and Michigan’s calculation for taxable income from passthrough entities to judge the proposed amendment’s effect on them. It may also be favorable for a business to consider a change in entity structure to a non-passthrough entity such as a C Corporation. Because non-passthrough entities are taxed at the corporate tax rate instead of passing through profits to owners as taxable income, these types of entities may be less likely to result in an individual taxable income that qualifies for the proposed surcharge.

The Proposed Amendment’s Impact on Small Business Growth in Michigan

            When businesses are looking for a state to call home, they often look at the state’s current tax environment and whether it would be favorable to their operations. According to the Tax Foundation, states with flat tax rates provide better certainty for businesses that make their economic decisions based on the next dollar of income.[9] Furthermore, even while the proposed amendment is presented as a “millionaire tax” aimed at taxing only the highest earners in order to support a legitimately good cause, it’s not clear that this graduated tax will be the only one. When a similar type of tax structure was proposed in Illinois, opponents to the proposal cited how Connecticut’s departure from a flat tax rate began with a single millionaire tax and led to additional taxes that together resulted in an estimated $10 billion impact to Connecticut’s economy and a loss of 362,000 jobs in the state.[10]

While it is unclear if Michigan will follow a similar path to Connecticut if the amendment is voted into the Constitution, taxes are a rising concern for small businesses across the country. The NFIB’s Small Business Optimism Index, which measures the sentiment and confidence of small businesses in the US, fell 2 points in September 2025, while the Uncertainty Index rose to 100, the fourth-highest reading in 51 years.[11] Among the top stressors for small businesses specifically in Michigan, 18% of respondents cited taxes as the single most important problem.[12] If Michigan were to amend the State Constitution and add the new tax surcharge, it is reasonable to assume that tax anxiety will only grow for many businesses, whether they immediately qualify for the surcharge or not. Furthermore, if Michigan adopts a graduated tax system and becomes less attractive to existing and new businesses looking for a new state to call home, efforts to draw business to Detroit as part of the city’s economic growth strategy may be negatively impacted.

It’s still too early to tell what exact impact the proposed amendment may have on small businesses in Michigan; however, small business owners should keep an eye on the proposal as it moves through the legislative system. As of August 1st, 2025, the proposal is caught in a deadlock as legislators have yet to agree on the exact language of the petition’s summary that will be included on the upcoming 2026 ballot.[13] Until then, the future of Michigan’s tax system and its impact on small businesses remains up in the air.

 By Grant Uebele


[1] https://www.michamber.com/news/proposed-graduated-income-tax-threatens-michigan-job-creators/

[2] https://investinmikids.org/coalition#d4f544ae-7de6-431b-bf2a-b3e866b534b8

[3] Id.

[4] https://www.michigan.gov/taxes/questions/iit/accordion/filing/what-are-the-current-tax-rate-and-exemption-amounts-1

[5] Id.

[6] https://www.michamber.com/news/proposed-graduated-income-tax-threatens-michigan-job-creators/

[7] https://michiganadvance.com/2025/08/01/state-canvassers-deadlock-on-language-for-petition-raising-taxes-on-high-earners-to-fund-schools/

[8] https://investinmikids.org/coalition#d4f544ae-7de6-431b-bf2a-b3e866b534b8

[9] https://taxfoundation.org/data/all/state/flat-tax-state-income-tax-reform/

[10] https://www.illinoispolicy.org/reports/how-connecticuts-tax-on-the-rich-ended-in-middle-class-tax-hikes-lost-jobs-and-more-poverty/

[11] https://www.nfib.com/news/news/michigan-small-business-optimism-declines-in-september/

[12] https://www.nfib.com/news/news/michigan-small-business-optimism-declines-in-september/

[13] https://michiganadvance.com/2025/08/01/state-canvassers-deadlock-on-language-for-petition-raising-taxes-on-high-earners-to-fund-schools/

 

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