Attorney General Bill Schuette, a leading Republican candidate for governor, says Michigan taxpayers have paid billions more in income taxes because of a Granholm-era rate hike, continued by Gov. Snyder.
August 2018 update: Bill Schuette wins Republican nod for Michigan governor
Attorney General Bill Schuette has made the burden taxes impose on ordinary Michiganders a central issue in his campaign for governor.
On Jan. 23, the day Gov. Rick Snyder — a fellow Republican — delivered his final State of the State address, Schuette released what he called the “State of the Michigan Taxpayer.” It’s a four-point bulletin that highlights what he says are extra costs associated with Democratic Gov. Jennifer Granholm’s decision to raise Michigan’s income tax in 2007, and Snyder’s signing of legislation in 2011 that taxes some pension income.
“Michigan’s family budgets have been hit with billions in new taxes and rising expenses that put their personal goals and aspirations at risk,” Schuette wrote. “Cutting their taxes and helping lower expenses, so they can make the best choices for their families, should be our priority.”
We find Schuette’s tax numbers are mostly accurate, even as his supporting rhetoric is deeply misleading about the tax burden faced by Michigan residents.
“Did you know that Michigan taxpayers have paid about $8 billion extra since the Granholm income tax increase?” Schuette wrote in a campaign email the afternoon of Snyder’s final State of the State. “It was supposed to be temporary but now she's gone, and you are still paying.
“On top of that, the changes made in 2011 raised the Pension Tax, among other things, costing Michigan taxpayers another $900 million per year. … How are Michigan taxpayers supposed to afford to live when they pay the highest auto insurance in the country and taxes are rising as well? To top it off, you are faced with all these rising costs at the same time Michigan's median income is still lower than before the recession ‒ more than $5,000 below the rest of the country.”
In 2007, then-Gov. Granholm and lawmakers were at a budget impasse, at odds over how to close a nearly $2 billion deficit. As a result, Michigan welcomed its new fiscal year Oct. 1, 2007, by briefly shutting down state government, until legislators passed an increase to Michigan’s personal income tax. The tax rate at the time was 3.9 percent; the plan Granholm signed took it to 4.35 percent, though it was supposed to roll back to 3.9 percent within a period of years.
That never happened. Instead, Snyder — who enacted a series of tax changes after taking office in 2011, including eliminating many tax credits and overhauling the state’s business tax — lowered the tax rate from 4.35 percent to 4.25 percent and froze it there. It remains at that level today.
Schuette’s claim that Michigan taxpayers have paid $8 billion more in total income taxes since the tax rate was increased in 2007 is roughly true. The nonpartisan Senate Fiscal Agency, in an analysis of the income tax hike, estimated the increase in the income tax rate would bring in nearly $745 million in new revenue in 2008 and $827 million in 2009. Expanded over a decade, an annual revenue increase of roughly $800 million would bring the total close to $8 billion. Truth Squad calculated how much less taxpayers would have had to pay had the tax rate stayed at 3.9 percent, which amounted to about $7.9 billion.
At the same time, it’s worth noting that even with the Granholm-era increase, Michigan’s income tax rate remains “lower than the rate levied during most of the history of the (state’s) individual income tax, including the 25 years between 1975 and 2000,” according to a 2015 report by the nonpartisan Senate Fiscal Agency. The agency noted the median average rate spanning more than four decades was 4.4 percent.
Which brings us to Schuette’s pension tax claim.
The 2011 Snyder tax changes that replaced Michigan’s business tax with a flat corporate income tax also included some personal income tax changes, including that some retirement income would no longer be tax-exempt. Snyder’s reforms mean that Michigan now relies more heavily on taxes from its people, rather than businesses.
Schuette campaign spokeswoman Bridget Bush pointed to a 2014 Detroit Free Press report as the source of the claim that state taxpayers are paying $900 million more each year as a result of a tax on some pension income and other tax changes.
The pension tax accounts for about $200 million of the $900 million in additional annual tax revenue cited (22 percent), Treasury data show.
Most of the rest comes from the ending or scaling back other credits and deductions: special exemptions for age and unemployment compensation ($50 million); elimination of a child deduction ($50 million); a decrease in a tax credit for homeowners ($270 million); a decrease in the Earned Income Tax Credit ($240 million), and ending other nonrefundable tax credits ($90 million).
While the broad numbers are correct, Schuette’s portrayal of the tax burden faced by Michigan families lacks some critical context. As Bridge Magazine has noted, Michigan is ranked near the bottom when it comes to total taxes paid. Michigan ranked 34th nationally in 2013 for its personal income tax burden, both per capita and as a percentage of personal income, according to the nonpartisan Citizens Research Council of Michigan.
Collections that year totaled $866 per capita — 81 percent of the U.S. average — and $22 for every $1,000 of personal income, about 92 percent of the average nationally, the organization noted.
The nonpartisan Tax Foundation ranks Michigan’s state income tax as 14th best in the nation, while the sales tax (6 percent) is 11th best. (A handful of states have no income tax and just a few others have a lower rate than Michigan.)
In addition, Michigan taxpayers effectively pay less taxes than our current tax rate implies. In 2015, as the personal income tax rate stayed at 4.25 percent, the overall effective tax rate was just 2.39 percent, according to Treasury data. That’s after deductions and other exemptions are taken.
In fact, residents’ effective tax rate declined throughout the 2000s until 2008, the first year after the Granholm-era income tax increase, and rose again in 2012 after Snyder’s tax changes, according to Treasury. Still, the effective tax rate for the most recent year available, 2015 (2.39 percent), remains below the rate in 2007 (1.99 percent) or even 2001 (2.59 percent).
On auto insurance: Michigan’s auto insurance rates are among the highest in the nation, if not the highest, in part because of its unlimited lifetime medical benefits unique to the state’s no-fault law.
On household income: Schuette’s claim that Michigan’s household income lags the nation is confirmed. Our median household income of $52,492 is $5,125 below the national median of $57,617, according to American Community Survey estimates from 2016.
The rating: MOSTLY ACCURATE
Schuette’s tax rhetoric is a fine example of how data can be technically accurate, yet misleading. The $8 billion and $900 million figures he cites are accurate, but he resorts to hyperbole on the tax burden shouldered by Michigan residents.
The state’s tax reforms in 2011 shifted the tax burden from businesses to individuals, in part by ending many deductions and exemptions, including on some retirement income. That has led to substantive debate on whether business now pays its fair share of taxes. But even with the Snyder-era changes, Michigan taxpayers effectively pay less than 4.25 percent of their income in taxes, and 30-plus states have higher individual tax burdens than Michigan.
Michigan has not recovered all jobs lost during the 2000s, and household income continues to lag the nation. Many Michiganders continue to feel left behind in the state’s economic recovery. Those are real impacts that can’t be overstated. But the bigger picture suggests Michigan taxpayers, on average, are not as overburdened as Schuette portrays.
Troubling too is Schuette’s claim that the pension tax, “among other things, (cost) Michigan taxpayers another $900 million a year.” As Truth Squad shows, those “other things” comprise nearly 80 percent of the rising taxes cited by Schuette. That is misleading on the impact of the pension bill.
Schuette’s “State of the Michigan Taxpayer” falls short in another important respect. He fails to say how the state’s strained budget would make up lost revenue from a major income tax cut — especially as residents clamor for government to fix roads, repair worn infrastructure and improve struggling schools.
Going forward this important election year, here are two Truth Squad cautions for consumers of political campaign rhetoric:
- Context: Be wary of tax claims that rely on big numbers without also revealing what those numbers mean to individual taxpayers.
- Accountability: When candidates call for tax cuts — or, alternatively, major spending programs such as, say, free college tuition (we’re looking at you, Dems!) — demand that they also disclose how those promises will be paid for.
TRUTH SQUAD RATINGS
Truth Squad assigns five ratings to the political statements we review, in descending levels of accuracy:
ACCURATE ‒ No factual inaccuracies in the statement and no important information is missing
MOSTLY ACCURATE ‒ While the statement is largely accurate, it omits or exaggerates facts, or needs some clarification
HALF ACCURATE ‒ Truths are interspersed with mistruths, or the speaker left out significant facts that render his/her remarks misleading in important respects
MOSTLY INACCURATE ‒ The major point or points made are untrue or misleading, even while some aspects of the claim may be accurate
FALSE ‒ The statement is false, or based on false underlying facts