Opinion | Is it time to increase taxes in Michigan?

Ronald Fisher is a professor of economics at Michigan State University.

As the governor and Legislature continue to work on a new state government budget, one fundamental question is whether additional resources, especially taxes, are required.  This issue influences decisions not just about road funding, but also funding for K-12 schools, higher education, Medicaid, support for local governments as well as other aspects of state finance. Some fiscal facts can be informative.

The overall effective tax rate in Michigan – all taxes as a percentage of total income – is the lowest it has been in more than 50 years.  The long-run trend of all state and local government taxes together (property, sales, income, business, gasoline, tobacco, and so on) as a percentage of total personal income in the state is shown in the figure.  The chart begins in 1967, when the state government personal income tax first took effect.  In 2016, all state and local taxes represented 9.12 percent of income, the lowest since 1967 (when it was 9.24 percent).

In the first years after adoption of the income tax, taxes grew faster than income.  The level of taxes peaked at 11.7 percent of income in 1972 and then again in 1984.  Since 1984, the overall trend has seen a decrease, with total state and local government taxes not keeping pace with total income in the state.  Simply put, taxpayers in Michigan now have the lowest effective rate of taxation in 50 years.  And that decrease has been particularly substantial in recent years since the end of the Great Recession.  In 2009, total taxes amounted to 10.6 percent of income compared to 9.1 percent in 2016.

Comparing overall taxes to total income is the most telling measure of the level of taxation, partly because all taxes from all levels of government in Michigan (state, county, city, township, school district and so on) are included.  Even more importantly, total income received by people in the state reflects the resources that taxpayers have available and ultimately determines what goods and services citizens demand – including the demand for services provided through government.  If citizens demand more services – better roads, improved schools, safe water systems – then taxes have to rise to pay the cost.

Other tax measures tell a similar story.  The real (inflation adjusted) tax amount per person in 2000 was about $4,400.  By 2016, the total tax amount per person had decreased to about $4,080, a decline of nearly 8 percent.  To put it another way, between 2000 and 2016, total taxes in Michigan did not keep pace with population change and inflation.

Not only has the effective tax rate in Michigan been declining; in addition the overall effective tax rate in Michigan is low compared to other states.  In 2016, 31 states had higher tax rates than in Michigan, including all of the Midwestern states except Indiana.  The effective tax rate in Michigan is less than in Illinois, Minnesota, Iowa, Ohio, Pennsylvania, and Wisconsin for example.  

If the tax rate in Michigan had even been just equal to the national average (9.92 percent as opposed to our current 9.12), governments in the state would have added nearly $3.7 billion of additional revenue in 2016.  This would provide resources not only to fix the roads, but also address financial issues of K-12 schools, old water and sewer systems, outstanding pension obligations, and other crucial public services.  Such a tax rate would be equal to what we had in 2011 – and still less than any prior year back to 1969!

Taxes in Michigan are low compared to historical levels in the state, have been declining relative to income for almost the last decade, and are low relative to other states.  So, if we want quality services, higher taxes seem appropriate and perhaps necessary.  One can disagree about how best to do that – increased gas taxes or a progressive income tax or a higher sales tax or road use fees or some other option.  However, the first law of economics seems to apply: “ain’t no free lunch.”

The views expressed are the author’s alone and do not necessarily represent the views of Michigan State University or its officials.

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Comments

Kevin Grand
Tue, 10/01/2019 - 9:43am

Prof. Fisher presumes that 100 percent of the state budget is spent appropriately.

Big mistake.

Glendon Irving
Tue, 10/01/2019 - 10:50am

You don't have to assume that 100% is spent appropriately to see that 30 years of tax cuts have left without enough money to fix our roads, schools, etc.

Kevin Grand
Tue, 10/01/2019 - 11:13am

The poor roads are due to lax oversight by MDOT.

Throwing more money at it will never fix that problem.

Peter
Tue, 10/01/2019 - 11:40am

Kevin, can you provide any documentation for that assertion, or is this just armchair quarterbacking?

Bones
Tue, 10/01/2019 - 12:02pm

He never has before, don't expect him to change now

Rick
Wed, 10/02/2019 - 10:36am

Yup. Trusting the 'it's lax oversight, poor this, poor that' fairy to come and fix everything.

Who's cutting t...
Tue, 10/01/2019 - 12:47pm

From Bridge Magazine:

Whitmer’s plan to give more money to the busiest roads would represent a major change to how the state shares road dollars. Public Act 51 of 1951, the law that provides counties and cities dedicated percentages of road dollars, has not seen a wholesale reform since it was adopted.

“Why do we continue to use a formula that’s 68 years old?” Whitmer asked reporters after she presented her first budget to lawmakers in March.

--Meanwhile most of the GOP responds with cricket noises, except for Sen. Pete Lucido.

Todd
Tue, 10/01/2019 - 3:40pm

Well because way back when,,,it was decided that local authorities should have a say. Not the just the people from the big cities. We all know how they could careless about the people outside of the coast or big cities.

middle of the mit
Tue, 10/01/2019 - 8:34pm

Reading that article is almost like you are saying the State is responsible for shoddy work. Except what the article said is that the State posted that they had done inspections without doing them.

A couple things come to mind; Do they have the employees and funding needed to do this? Also, is the department captured by the roadbuilders?

They are the only ones who benefit when the State doesn't find their shoddy work and that then negates their warranty on said road. Never attribute anything to negligence of the State when there is money to be made or saved off the State, which can then be attributed to Private greed.

John
Wed, 10/02/2019 - 11:36am

Nice!

duane
Tue, 10/01/2019 - 9:33pm

Peter,
I can watch it happen on the state financed roads in my town, I can watch local government get state money to replace all the way to the supporting stone where a top surfacing was all that was needed [poor maintenance methods made it rough riding]. The state grant was justified and supported by MDOT for the complete replacement, the state doesn't do repairs. That is how MDOT spends out money managing the system without regard for value.
Your demand for documentation is a cheap effort at intimidation, we are hear talking about perspectives and offer ideas or concerns and you try to diminish someone's comments by suggesting that unless they have a report they shouldn't be listened to. Now that he has offered a public record on the waste are you going to set quietly and ignore it, did you even read it? Your silence will verify that your demand for documents was only for the purpose of bullying and not for information, and surely not to open your closed mind.

Bones
Tue, 10/01/2019 - 12:10pm

We also need to talk about Michigan's flat income tax. It's regressive nature means that it's impossible to meaningfully tax the wealthy without adding undue burden to the lowest income brackets. As a percentage of family income, the poorest currently pay the most in taxes, while the wealthiest pay the least:
https://itep.org/whopays/michigan/

Until we address the provision within the Michigan constitution outlawing graduated income tax brackets, we are going to be burdened by crumbling infrastructure and underfunded schools.

Arjay
Tue, 10/01/2019 - 1:19pm

Don’t you realize how easy it is for wealthy people to take their income to another state? Most wealthy people, and a lot of just average folks, have homes in at least two states, and the second state is likely one with no income tax. Nothing says a vehicle has to be registered in the state that issued your driver’s license. Just look at population figures. Florida with no income tax is growing at about 400,000 per year. Michigan, on the other hand, is just barely holding on, and compared to the entire US population, is declining in population.

Bones
Tue, 10/01/2019 - 9:42pm

Most average people don't own two houses, but more to the point, the number that do is doubtless small enough to make little difference

Matt
Wed, 10/02/2019 - 7:32am

Income taxes are always sewed where a few people or percentage of the population pay outsized percentages of the taxes. Yes those people have the means and motivation to move,, especially since state taxes are no longer deductible. Not that you would have much experience with this.

Just sayin
Thu, 10/03/2019 - 9:25pm

Then why do so many people live in high tax states like New York and California??? Why do conservatives like FOX News choose to be in NYC?????? Why aren't they located in Grand Rapids with the DeVos Klan???? Why did Betsy move to DC, with all it's high taxes???? The wealthy don't leave until you turn the state into a low tax state like Alabama or Mississippi.

Todd
Tue, 10/01/2019 - 3:43pm

I’m sorry but,,,,,in my old math class 4.6% of income is the same percentage of any given income. I’m sure you meant something else less obvious.

middle of the mit
Tue, 10/01/2019 - 7:53pm

A little lesson in relativity from Chris Rock.

"If you're getting divorced and you are somebody in my position, losing 50% of $10 million dollars, I'm gonna be OK. It hurts but I'll be OK. If your someone with $30,000 you might want to kill yourself after losing 50%"

Tim Kolnitys
Tue, 10/01/2019 - 1:48pm

Michigan has had bad roads and poor schools with a higher effective tax rate. Throwing money at a problem isn't an answer, these issues are much more complicated. "If we want quality services" is not a good justification for raising taxes. Pick a problem, find a solution and how to fund it. Look through the history of funding in Department of Education and Transportation and you will see that more money has not equaled "quality service".

middle of the mit
Tue, 10/01/2019 - 7:45pm

Here come the conservatives telling us that we need to cut spending and taxes so that the big businesses in our communities don't have to pay the same rate as our local established businesses. Draining local communities of much needed funding and putting the burden on those with less money.

Where is Matt to tell us that the sales tax should be extended to food and clothing, things they do in the former confederacy, which would be an even greater burden on the poor? How are you supposed to adjust your food budget for an added tax when you already purchase the cheapest brands?

According to conservatives the only thing that can be fixed by throwing money at is the economy, and you have to throw money and lots of it to those who already have wealth. And they get interest rates you would die for if you weren't already dying paying 10x what they do TO THEM for that same money! You also have to lower wages and regulations, otherwise those same companies will leave the State or country, leaving us with what? What we have now?

Where is the trickle down? The rurals you conservatives love so much have lost a lot of our tax base because there are less people coming up here to vacation because they can no longer afford to.

Why didn't the gang at Fox News leave the liberal hell hole of Manhattan where taxes have to be ungodly and go to Kansas during the "Brownback experiment"?

Why didn't most companies do that??

Matt
Wed, 10/02/2019 - 7:45am

Yah I'm back.... from two of lowest tax states in the country ,S Dakota and Wyoming where the roads are in fact fantastic! Yes sales tax should hit every purchase made including food as it is in most states. (in case you don't buy any, clothing is in fact, taxable in Michigan). Where did you get they had a sales tax in the confederacy??

Jacob
Wed, 10/02/2019 - 9:31am

Population of Wyoming and South Dakota: 1.8 million. Michigan: just under 10 million. The states and taxes aren't fairly comparable just based on population and density.

Matt
Wed, 10/02/2019 - 10:21am

Fewer roads over much bigger areas, much less tax revenue, way more tourists and much harder winters. It's a wash.

middle of the mit
Wed, 10/02/2019 - 9:14pm

If our roads are bad you have to blame the builder. If I build you something and it fails, are you going to blame the State? I would love that! Lets me off the hook for shoddy work.

Apparently clothing is now taxed in MI https://blog.taxjar.com/sales-tax-on-clothing/

It used to be that essentials like food and clothing were tax exempt because it puts an unneeded and extra burden on the poor. I didn't say that they had a sales tax in the confederacy although I am sure they had some kind of tax, Wars don't pay for themselves and they aren't cheap. I was referring to how the former confederacy, which are the Republican states in the South fund their Government. I would think you would want to move there. You keep telling us businesses will do it, yet you glossed right over the big question!

Why didn't FOX NEWS leave the liberal tax hole of Manhattan and all those nasty libs for rural America?

duane
Tue, 10/01/2019 - 9:15pm

Professor Fisher is another academic that validates the perception of those who live and work in ‘ivory towers’ being detached from reality.
The good professor’s only rationale or justification for increasing taxes is regression to the mean, he believes that what was the highest average rate of taxes should always be the tax rate for Michigan residents, so we are under taxed.
The failing of his reasoning is he ignores the public and its concerns, he ignores what we are getting for our money, he ignores the judgement of Michigan residents, he ignores the spending, he ignores value, he places the judgement of bureaucrats above those that earned the money, that have families to support, and that have futures to plan for. Professor Fisher only see tax rates and government spending he has no interest in why the tax rates are declining, he distains people voting against tax increases because they have found that it is the only leverage [even though many of the politicians and government agencies seldom listen] to get some value for their tax dollars.
My best guess is that the Professor likes to think in terms of formulas and controllables so he can use such formulas to explain and justify his point of view, that may work in the classroom or when sitting around a table talking with other academics. Michigan residents live in a world outside the wall of academia and even government in Lansing, we deal with the reality of uncontrollables, of delivery, of responsibility, of accountability [we have no tenure], of performance. Since those in Lansing or academia don’t listen to what we say, we have to express ourselves in the most practical way available, by trying to limit the money [no new taxes until sufficient added value for added money].

Bob Dunn
Wed, 10/02/2019 - 9:50am

The professor is looking at the data. Duane, you don't like the results of what the data shows. It is like getting on a scale and not liking the results. One either has to do something to change or make an excuse to do nothing. If one chooses the latter one will not improve. The same for the data the professor points out. The choice is ours.

Matt
Wed, 10/02/2019 - 10:24am

He's cherry picking data making Mi seem low. Just Google it!

duane
Wed, 10/02/2019 - 7:34pm

Bob,
All the Professor talks about is money and nothing about what it should be buying. Your justification suggests you believe the same, give more money and more money and we should be grateful for what ever we get for all that money, blind trust.
I am saying the public has long given up on that blind trust in educational professionals, and the only way to express that change in expectations is to make it harder and harder for the professionals to spend more money without accountability.
Why are you so resistant to educational professional accountability, why are you so resistant to establishing performance expectations?

Matt
Wed, 10/02/2019 - 8:02am

It seem that methods and stats are being cherry picked to deliberately make Michigan taxes appear lower than they are. Just doing some simple Google searches put Michigan almost exactly in the middle in terms of overall tax burden. Here's one of several found there: http://worldpopulationreview.com/states/tax-burden-by-state/
The point should be that some states are well run with low taxes and some well run with high taxes. You can always pick what you like and move!!!

Rick
Wed, 10/02/2019 - 10:41am

You're free to move then. I'd recommend Mississippi, Kansas, Alabama, Oklahoma, etc. Paradise. Poor healthcare, education, etc. so you'd be fine.

Matt
Wed, 10/02/2019 - 1:05pm

But If I move who's going to pay the taxes to take care of the likes of you, MOM and Bones?

Patricia Nelson
Wed, 10/02/2019 - 9:05am

We need to follow the majority of other states in adopting a progressive income taxes.
No, this is not 'class warfare'. People who do well deserve credit and they should feel a responsibility to give back to the society which supports their success.

Matt
Wed, 10/02/2019 - 10:48am

And they do! If you make twice what I do, you pay twice the tax!

duane
Thu, 10/03/2019 - 12:49am

Patricia,
Why do you feel the state should have more money? Do you believe the results we are getting from the state's spending is solving problems, are being spent as effectively as possible, that they are ever improving the value for the money they spend, are they ensuring the programs that are spending the money accountable, do they have established performance measures for those programs and the spending and are they regularly reporting those metrics?
Do you believe that those who are spending the tax dollars you want to give more of other people's money to should be held accountable, should have performance metrics to report to the taxpayers?

John
Wed, 10/02/2019 - 11:46am

Three points. 1. An opinion by a professor at a Michigan university would be considered a bias opinion when it comes to state tax revenue. 2. Michigan’s fastest growing tax burden, 6% annually, is welfare spending. Currently over thirty percent of state spending. The progressives always have a plan to spend more of someone’s dollars but no plans for ballooning costs. 3. Current road spending is making a significant improvement to our roads.

kevin ford
Wed, 10/02/2019 - 1:37pm

I do not want to pay more taxes. That being said I have lived in Michigan, Ohio, and Indiana and Illinois. All the other states except Michigan have higher taxes and better services. Ohio public schools were much better and the Indiana Schools were good too. I have lived in places in Michigan with good high-performing school districts, like Novi, Northville, Plymouth Canton and the schools in Ohio and Indiana were better. Roads in Ohio were better maintained and the parks were good too. Bottom line is you get what you pay for and we in Michigan do not get what our residents need.

Taxes in Washtenaw
Thu, 10/03/2019 - 7:55am

One thing your article failed to consider are the property taxes and the special assessments. Property taxes in Washtenaw county run at about 2% of property values. If there was a cap on the taxes in the state including ALL sources of taxes I'm fine with taxes going to some fixed rate. Otherwise every other state I've lived in has had much lower taxes, better schools, and better roads.

Wolfman
Thu, 10/03/2019 - 10:28am

2011 Republicans cut the business tax by $1.8 billion then on the same day raise fees and a new pension tax costing me $120 a month. If you raise taxes think of who has benefited from republican rule and most retirees are taxed enough!

Jerry
Thu, 10/03/2019 - 7:21pm

I’ve live in Michigan for over 45 years we been tax on in just about everything in the past and no they want more? We had a increase in registrations we had a increase in gas we voted for lottery to pay road and school tax they just past a pot bill taxes for roads and schools casinos were let in for road and schools! Where’s all this money at ? It’s not being used on roads and they keep saying schools need more so evidently it’s not going to schools either! So where the heck all this money going? Our state government needs a audit!!

Carl
Thu, 10/03/2019 - 9:05pm

So, your anguish is that the state is becoming less of a burden on your citizens? The yoke is becoming lighter, this has to stop? This, unless your goal is repression and enslavement, is actually a good thing. This trend needs to continue.

Bridget Jones
Fri, 10/04/2019 - 9:13pm

How about you fuck off.
How about Lansing learns to actually live within their means?
How about we start a revolution.

water2Wine
Sun, 10/06/2019 - 12:33am

Let the rich pay them. Let every single GOP overpaid legislator pay those highest taxes for the rest of the State!!!!