Phasing out income-tax revenue a dangerous game

income tax forms

Ninety minutes.  That’s all it took last week for the House Tax Policy Committee to hear testimony and send the full House a bill that would gradually phase out the Michigan personal income tax.

The bill, passed 7-to-4 on a straight party-line vote (with a couple abstentions), would cut the tax rate from 4.25% to 3.9% next Jan. 1, and by 0.1% each following year until the tax is eliminated entirely in 2057. State revenue loss in the first full year was estimated at $1.1 billion out of a $9 billion state general fund.

There was no discussion of what would need to be cut -- or where any new money to make up the difference would come from.

That’s what passes for the “careful deliberation” our lawmakers devoted to state tax policy when they considered a measure that would leave a giant hole in the state’s already stretched budget.

“How can we provide meaningful tax relief for our state?” asked State Rep. Lee Chatfield (R-Levering), the bill’s sponsor.  Legislators who voted for the measure refused to say how they’d compensate for the billion-dollar-plus shortfall in the state budget, although some talked about cutting appropriations for state universities and others thought an across-the-board budget cut was the way to go.

Just what “meaningful tax relief” means appears to be a subject for debate. The Michigan League for Public Policy calculates that at Michigan’s annual per personal income of $51,000 per year, the tax cut would amount to $82 per person per year, about $1.57 per week and considerably less than a small cup of java at the local Starbucks.

Nick Khouri, the state treasurer, said it’s hard to support such a big budget cut without any clear idea about how to replace the revenue.  According to the nonpartisan House Fiscal Agency, the $1.1 billion loss of revenue in the first full fiscal year beginning Oct. 1, 2018 would increase every year after that, as the tax continued to be cut by a tenth of a percent until it was entirely gone.

But what about the theory that Michigan citizens are overtaxed?

Michigan’s total state and local income tax rate at 9.4% of personal income ranks 25th among the states, according to the Tax Foundation, and is on the low end of competitive midwestern states.

Michigan State University economist Charles Ballard commented that policy-makers in Michigan were “obsessed with tax cuts,” that so far have lowered our per capita tax burden from 13 percent in 1972 to 9.6 percent in 2011, with a consequent reduction of $10 billion in state revenue.

Rep. Laura Cox (R-Livonia), the House Appropriations Committee chair, raised the idea of taking a whack out of support for state universities. Gov. Rick Snyder’s budget proposal offered no income tax cut and proposed a 3.4 percent increase for the higher education budget, bringing the total to $1.64 billion – still far less than roughly $2 billion the state now spends annually on prisons.

House Higher Education Appropriations Subcommittee chair Rep. Kim LaSata (R-Bainbridge Township), a freshman who has been in office less than two months, also said she was hearing from other house members that they wanted to go after higher education for cuts. She added that cutting support would likely result in increased college tuition, which would make it harder for families to send their children to college and increase their student debt.  (National statistics released by the Federal Reserve last week indicated total U.S. student debt at $1.3 trillion, an all-time high.)

Yet LaSata also indicated she understands that the state’s research universities are important to the state’s economy and its national and international reputation.

University Research Corridor Executive Director Jeff Mason said his research demonstrates how our three research universities (University of Michigan, Michigan State University and Wayne State University) are an increasing factor in the state’s growth.

According to the URC’s annual Economic Impact & Benchmark Report, the research universities have a $17.5 billion impact on the state’s economy.  The report concluded research universities contribute $22 in economic benefits for each dollar the state invests.

But the issues called up by big income tax cuts go far beyond universities. They involve the kind of budget cuts that would result in major damage throughout our economy and the nature of life in Michigan. We might never achieve reliable drinking water in Flint again. We won’t be able to ensure bridges that don’t fall down and roads that don’t cost drivers hundreds of dollars in pothole damage.

Cities will be unable to balance their budgets without laying off police and firefighters.  Michigan school performance will continue to lag behind those in competitive states’ performance.

Like the guy in the TV commercial used to say, “You can pay me now or you can pay me later.”

The costs of big budget cuts to the quality of life to a Michigan that competes with every other state and many other countries around the world would be inescapable – and maybe, irreparable.

Measures aimed at making people temporarily feeling better for less than $2 bucks a week may be politically popular. But when they threaten to do serious long-term damage to our quality of life, they’re nothing more than dangerously irresponsible rhetoric.

About The Author

Phil Power

Former newspaper publisher and University of Michigan Regent Phil Power is a longtime observer of Michigan politics and economics. He is also the founder and chairman of the Center for Michigan, a nonprofit, bipartisan centrist think–and–do tank, designed to cure Michigan’s dysfunctional political culture; the Center publishes Bridge Magazine. The opinions expressed here are Power’s own and do not represent the official views of the Center. He welcomes your comments at ppower@hcn.net.

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Comments

John Tiemstra
Tue, 02/21/2017 - 8:54am

Restoring the middle class means making education more accessible, not less, and means strengthening our infrastructure, so that we have good transportation and clean water, among other things. We have to raise revenue in a way that recognizes ability to pay, as an income tax does, rather than hitting low-income people the hardest, as sales or expenditure taxes do. Why do people not see that the Republicans do not want to help the middle class, but only the rich?

Susan
Tue, 02/21/2017 - 8:58am

If they want to cut taxes, what about either cutting income taxes only for those below a certain income, increasing the personal exemption, or cutting the sales tax? Cutting a flat rate income tax helps those who earn more money more than those who earn less.

John Saari
Tue, 02/21/2017 - 9:13am

Do not eliminate an income unless you don't need it or you have its replacement. Use licenses, registrations, user fees, entrance fees, tariffs, etc for all you gov incomes.

John
Tue, 02/21/2017 - 9:15am

The state is already underfunded to repair the infrastructure in a timely fashion, and the answer is to CUT the budget by millions of dollars. This is insanity.

Anonymous
Tue, 02/21/2017 - 9:24am

Kansas has been down this road and it's quite a disaster .

 

 

Le Roy G. Barnett
Tue, 02/21/2017 - 9:27am

Maybe cutting appropriations for education in Michigan will not do any harm. After all, our state's schools and colleges presently turn out voters who elect politicians that come up with these cockamamie fiscal schemes.

Chuck Fellows
Tue, 02/21/2017 - 9:58am

I always though republicans were business people. Bad assumption.
They don't understand the purpose of government, pursuit of a common good, instead using their position to pursue an ideological end, a perverse and narrow view of civilization.
Hopefully 2018 will begin to reverse this insanity.

Rich
Tue, 02/21/2017 - 10:48am

By pursuit of a common good, do you mean that taxes are OK as long as someone who makes more than you do pays for it? That many budget items are a common good could be debated.

Susan
Tue, 02/21/2017 - 11:24am

We have a process to debate those priorities. The problem I see is that we are proposing tax cuts without having that debate. Study after study places Michigan lower and lower in the investments that will determine our future. Either we are leaving a huge burden for our children, who will have to tax themselves heavily to rebuild what we are losing, or, they will go m elsewhere for the quality of place that will give them the future they desire for themselves and their children

Bernadette
Wed, 02/22/2017 - 10:19am

Well said Susan. Michigan needs a new generation of leaders, who have the capacity to think critically. Both parties preach the "party line" and have become broken records of the same old rhetoric. We need leaders who can think critically instead of promoting old solutions.

There needs to be more women in government who have the capacity to "dialogue new solutions" instead of "decreeing from on high".

Bernadette
Tue, 02/21/2017 - 10:20am

I heard Rep. Laura Cox (R-Livonia) being interviewed and it was obvious the only goal is the republican party line to cut taxes. Cox had no idea of what the long term impact would be and was just a broken record, by saying "We need to get this money back into the pockets of the taxpayers". This state needs some leaders!

Jay
Tue, 02/21/2017 - 10:24am

Walk around any university campus in the state and you see lots of money wasted on things that aren't needed, but sure do look nice. Multicolored signs with fancy lettering and graphics, new buildings with TVs hung in every corner with no one watching them, lounges galore with maybe two or three students in each lounge, and of course, constant upgrades for football stadiums and other athletic facilities. I'm not saying that upgrades and renovations aren't necessary, but there's a difference between maintenance and upkeep versus extravagance. I think university budgets could use some downsizing so the focus is put back in the classroom and not on all these fancy buildings and athletic facilities that rival many professional athletic facilities.

Anonymous
Tue, 02/21/2017 - 10:59am

There's also lots of unnecessary spending on things like boat ramps and docks on lakes that aren't used much, new state office buildings that aren't needed but are sweetheart deals for campaign contributors, and paperwork that gets stuffed in files that never gets looked at. There are many areas for spending reductions for things that aren't necessary.

Robert Kleine
Tue, 02/21/2017 - 1:36pm

Most unnecessary spending has been eliminated. The state General Fund budget is about the same size as in 2000, and adjusted for inflation is down about 30%. The number of state employees is down 20% since 2000 and 40% since the peak in the early 1980s. Michigan is in the bottom 5 in state-local employees per capita and we have the lowest taxes in The Great lakes region.
The items you mention do not come close to adding up to $1.1 billion.

Anonymous
Tue, 02/21/2017 - 2:24pm

Is this the Robert Kleine that was the state treasurer under Jennifer Granholm? Tell me how this sweetheart deal for the State Police headquarters managed to be passed when there was supposedly no money and budgets were cut down to the bone? There was money left over somewhere for that deal, wasn't there? And the $1.1 billion figure that you mention, how much of that could be made up with all of those unnecessary expenditures? You say the items I mention don't come close to adding up to $1.1 billion, but it's this kind of unnecessary spending that has contributed to the overall budget issue over the long run. Just as if you choose to spend money on cigarettes when you barely have enough money to pay for your basic living expenses, those cigarettes are looked at as a needed expense, even though they really aren't needed. So Robert Kleine, where did you push to reduce expenses on those unnecessary cigarettes in your time as the state treasurer? You only seem to look at needing more taxes and more money for stuff that's really not needed. That's what got this state in trouble in the first place, and you were part of the problem.

duane
Tue, 02/21/2017 - 6:24pm

I apologize, the new format allowed me to save before entering who was writing.
I wrote the Anonymous comments.

duane
Tue, 02/21/2017 - 6:26pm

Another apology, wrong Anonymous my comments have not been posted yet, still struggling with the new format. My personal limitations are being made more apparent by the new format.

Kenneth Phillips
Tue, 02/21/2017 - 2:16pm

The State gives a big tax cut to businesses and then started taxing pensioners.

Dick Burke
Tue, 02/21/2017 - 3:14pm

Phase out the personal income tax? Are you serious about public policy? Rather, Michigan needs to invest in its infrastructure and in education. It's about the future. Get real!

Anonymous
Tue, 02/21/2017 - 7:39pm

Agree..we need to take care of needed repairs/replace that was neglected or impossible to do during our lean years. And the Rep from Levering who sponsored this bill should think about bringing resources to his area to attract employers for jobs. I think his area needs these desperately.

Staryohotnik
Tue, 02/21/2017 - 4:41pm

Our legislators remind me of a story my grandfather told about the depression era in Gratiot County. A farmer was having trouble making ends meet and lacked the money to buy oats for his team of horses. After trying several schemes that failed (adding straw to the oats, adding sawdust to the oats etc.) he hit on the scheme of training his horses not to eat. Unfortunately, just as he got them fully trained, they died.

Anonymous
Tue, 02/21/2017 - 6:21pm

"Measures aimed at making people temporarily feeling better for less than $2 bucks a week may be politically popular. " Could it be that Mr. Power wants that to be true and can't accept their maybe a different perspective affects message a 'tax-cut' heard by those whose money is being talked about.

Could it be that the people who pay the taxes have to get value for each penny, quarter, $2 dollars they spend and they doubt that anyone in Lansing or those wanting more money for Lansing to spend care at all about getting value for their tax dollars.
If people look around at the results that are being deliver by the different programs, what improvement do they see or hear about? It seems the people who are asking for more money for education only tell us how poor the learning is, or how much worse the infrastructure is, or how someone in government screwed up and they need more money to clear up their problem [Flint water, Detroit].
Could all of the demand/request for more money while never hearing how problems are solved or results improve wear on people who are paying these taxes? This is especially true when the economy turned down and they felt it and they were able to sustain themselves with less and even do a bit more with less, they live with their own accountability everyday. And yet the people that want more of their money never talk about accountability of the government programs, the government never shows any accountability.

What if the message the people whose taxes will be cut by $2 hear is that government will feel what they have had to live with over the past 10 years, and that if no one else cares about accountability at least there will be a defacto form of accountability of government by reducing the moneys available.

The message has to do with the perspective. Those that want more of other peoples money for Lansing to spend see the tax-cut as a trivial $2, while those who are working to get $2 of value out of every $2 dollars they spend hear how Lansing may feel a bit of accountability and just maybe will start looking at results to gain support from the tax payers.

Test yourself, do you think about the Lansing's need for more money or about what we are getting for that money?

I have to admit my employer has focused on results before there was any discussion of money let alone more money. Today I looked for value for my money/personal accountability, I took advantage of sales spending $26.28 and receiving $41. 14 in value. I can pay the $2 in taxes for the next 7 years in this one day of shopping, but do I have confidence that those in Lansing will be making the same effort, getting the value, getting the results, and describing to us how they do it? Don't over trivialize the idea of comparing groceries to infrastructure, having been involve in some of that type of spending the principles are the same and even if the cost is lower by a few percent or the results are improved by a few percent that can mean millions in value and that is serious accountability.

The reality is that the message is what is heard not what is sent, and what is heard depends whether you are looking for accountability or you are looking for money.

duane
Tue, 02/21/2017 - 9:19pm

I apologize, this is my comments.

The Anonymous was place there because of my omission.

Jay
Tue, 02/21/2017 - 9:24pm

Congratulations! You are one of the few people that gets it. That $2 gets flushed down the toilet every day in Lansing and most people don't realize that the $2 is taken out of your pocket in several ways, so it's the same as buying a $2 cup of coffee, dumping it on the ground, buying another $2 cup of coffee, dumping it again, and doing this several times until you've spent $8 to $12 because you kept dumping the coffee rather than drinking it. This is what Lansing does every day with your $2 cup of coffee.

Bernadette
Wed, 02/22/2017 - 10:31am

Dear Anonymous,

I am not sure why you feel so wronged, but your analysis of the situation is simplistic, when in reality the problems of today have been created over many years and are very complex.
I find it interesting you talk about accountability when state government ranks 48th in the country in regards to accountability. I wonder if politicians are afraid to show us what is really going on in Lansing and what corporations are really paying to meet their own needs.

There are deep rooted problems in Michigan including structural racism, suburban sprawl, lack of government transparency, corruption, etc., with more than enough blame to go around. Why don't we try to collaborate on solutions. Could it be you would rather stick with your narrow view?

duane
Wed, 02/22/2017 - 4:09pm

Bernadette,

I am list as Anonymous by an act of omission on my part, I am struggling with the new format.

In my comment I am offering an alternative perspective to what Mr. Power is claiming is the message. I simply offer that the real message is what is heard not what is sent. Where Mr. Power trivializes the tax cut as $2, other may see it as a means to create some form of accountability on Lansing. I think those actually spending the money and those who advocate they get more of other people's money are the one that want to avoid accountability. I also believe that the elected officials and even those avoiding government program accountability lack a practical understanding of how effective accountability works and why and even what the benefits are to those who are implementing the programs should have a built in accountability system. I am surprised Michigan is so highly ranked, but I doubt even all those above Michigan are that effective in their accountability efforts [I say this after being required by law to establish accountability programs and having compliance offices review the activities and the lack of understanding of what works and why it works so effectively].

As for your other concerns about the complex issues facing Michigan today, they are simple when they are broken down into the parts. First you have to define each problem being specific so we all have a common defintion of what we should be addressing. You talk of 'racism' my mother was a 'Hunky' growing up in Dearborn/Detroit there was discrimination then, I have known people who grew up in Boston and their parents were Irish and there was a long history of discrimination toward them. Just like ideological discrimination it is cause be lazy thinking, stereotypes are created for initial mental filing and when those stereotypes are applied when meeting an individual we have discrimination. When you think about and when you have contact with people having similar personal values you find that the stereotype melts away and it is just people relating to people. I have been the butt of such stereotyping for different reasons, but as different as I am after a few minutes of conversation and especially working together on a common problem the stereotype dissolves and once you dissolve that stereotype in one place it starts a dissolution that eventually removes the stereotype [the caveat is that there is an extreme experience by someone that is the stereotype].
You concern about suburban sprawl is misplaced until you try to understand what drives it and how the urban areas to not address it.
As for government [or any organizational] transparency you first have to define what that means. My answer is instituational integrated accountability. Without a spoefici definition of transparency it can range from public involvement [public review] in the daily actions of every member of the government to a process that the organizations themselves review on how practices conform to expectations and why and how they deviate, and a description of expected results to be delivered with regular reporting on how effective the organizations are achieving those results. In the first case it effectively shutdown government in the latter case the organization aligns everyone's effort and make the organization more effective.

As for corruption I have no clue what you are talking about, when I was very young that meant one person taking money inappropriately to do things for another that was inappropriate, today it may mean simply not see the results a person wants. The recent national election is claimed by many as being corrupt though the way it unfolded conformed to all legal practices and protocols. In that case so many knew what they wanted to happen so only heard what they wanted to hear and were disappointed that many others in their state had a different expectations and put effort into making that happen [they voted differently than desired].

I am more than willing to collaborate on a solving problems, but first don't have answer before you define the problem, then define the problem, let us work together to find the root cause of the problem [too many time people attack the symptom and never address the cause so the never change results], then we can recruit others to offer ideas for addressing/mitigating the causes, and let's establish expectation on what the results we want to achieve. Pick a problem and let's start a conversation here on Bridge.

If you have any questions to see if you want to try this with me, please ask.

Kevin Grand
Tue, 02/21/2017 - 7:48pm

Figuring out how to pay for the elimination of the Michigan income tax is easy.

From this point on, all appropriations introduced in the Michigan Legislature must specify exactly where in the Michigan Constitution the authority exists for that money to be spent.

No authorization. No spending.

This really isn't a difficult proposition whatsoever.

And remember, Michigan survived for nearly 150-years of its history WITHOUT a direct income tax on its citizens.

We can just as easily do it again.

Richard Cole
Wed, 02/22/2017 - 1:39pm

For years now, I have objected to the characterization of the element running the legislature in Lansing as the Tea Party. Tea parties, if nothing else, provide crumpets. I think the more accurate characterization of the gang running the legislature is the "Dirt Road Lobby." I don't believe they will be satisfied until all essential public services from roads to police and fire to drinking water and education at all levels are privatized -- no "profitized" is a better word. For those among us who believe that the state has a basic obligation to provide quality services to all of its residents -- services most of us could not afford to buy in the open market -- we should fasten our seat belts and prepare for the Dirt Road Lobby to change the state's name to Michissippi.

Mark
Thu, 02/23/2017 - 7:01am

Unfortunately, Governor Snyder's answer to everything is increased taxes and fees for individuals. Michigan is a very unfriendly Tax State for many. Let's explore the demographic of Seniors, married or single, and never had children and own their home. 56% of my property taxes goes to support schools, and ~20% of my income tax goes towards the school aid fund. Plus, the sales tax I pay that supports the school aid fund. There needs to be a time when we stop paying for schools for those of us that never had children. Snyder now taxes the pensions, opposes any income tax break, raised auto registration fees, and has increased the state budget ~$7B since he has been in office.

We NEED TAX RELIEF NOW. ....then the Governor wonders why Michigan's population is dwindling.

Ben Washburn
Thu, 02/23/2017 - 5:30pm

Phil:
Generally, I like your comments. But, in this article, I'm having trouble making the numbers add-up. What appears to be roughly a 10% cutback in the state income tax has to be a lot more than $82 on the average. When I divide $1.1 Billion into $82, I get that there are 14,634,146 taxpayers in this State. Unless I have made a really big mistake, that doesn't make sense???

John S.
Thu, 02/23/2017 - 9:23pm

Some Republicans in the House apparently came to their senses and helped to vote down the legislation. It doesn't appear as if privatization has worked out all that well in Michigan under the Snyder administration. It's an ongoing joke: inedible prison food; denial of valid unemployment compensation claims; a SOS office that can't get state IDs to residents within 30 days; a nuclear option to close under-performing public schools but without a clue where to send children to better ones. What other foul ups are out there? On the plus side, residents may be less reluctant to pay income taxes if they think that they'll see a government that actually works.

Peggy Clough
Sat, 02/25/2017 - 4:52pm

I think a tax cut is ridiculous at this time. We have failing bridges, roads, water systems with billion dollar sink holes and it keeps getting worse. With tourism a major industry in Michigan we are being literally penny wise and long term extremely foolish. The Infrastructure Commission reported that we should be spending billions of dollars a year on infrastructure and we don't have that much in the budget to spend so we should be considering ways to raise taxes for these very necessary if unsexy expenditures. Giving me 1.50 per week extra to spend makes no difference at all especially if I have to spend a couple hundred dollars on tire and wheel repair! People WILL STOP COMING TO MICHIGAN for vacation or to live if they can't count on having reliable clean water, good roads and safe bridges.

Chulita R
Sun, 02/26/2017 - 9:55am

Perhaps if the State and Federal politicians/bureaucrats cut their salaries, pensions and "life-time" medical benefits; and put the tax money, excise tax on gas, and lottery money that has been collected for the past 60 yrs. back in to the schools and infrastructures instead of lining their wallets then the economy, public schools and opportunities in America would be much better. The government's methods of operation are antiquated and no longer work and thus causing America to crumble inside and out!

John Otterbacher
Sun, 02/26/2017 - 7:54pm

More profiles in courage from the "government is the enemy" crowd.
No specifics on what they would cut.

ArtZ
Tue, 02/28/2017 - 11:41am

Offset with increased sales, gas,
diesel, electric vehicles, solar power and franchise fees.