Michigan tax facts, part 2: Who wants what in the long war over taxes

Editor’s Note: 10 things every voter should know about Michigan taxes

To help voters sift fact from fiction in this fall’s statewide election, this ongoing special report tells it like it is on Michigan taxing and spending issues. Below, in Part 2, we explore who wants what in the state’s tax system. Also read: Are Michigan taxes too high, too low, or just right?

BM-Prop5Taxes pic 10-16

State government in Michigan will spend more than $52 billion this year, including both state and federal funds. Is that the right amount? How much is enough? How should that pie be funded and divided?

Wildly divergent answers to those questions drive Michigan politics.

Michael LaFaive of the Mackinac Center for Public Policy, a Midland-based free-market think tank, looks at that number and sees waste, bad schools, misguided investments and “corporate welfare.”

In his perfect world, he'd cut $1.2 billion from that budget for 2014-15. He'd scrap $300 million in corporate subsidies through the Michigan Economic Development Corporation, end more than $400 million in state revenue sharing to cities and end prevailing wages on state projects, a measure he calculates would save $100 million. He'd take savings from those and other cuts and fix Michigan's roads, an annual need estimated at more than $1 billion by transportation experts. And he’d offer a universal tax credit so parents can send their kids to any K-12 public or private school they choose.

“It would force existing schools to sharpen their pencils in a dramatic way,” he said.

Down the road, he'd eliminate one of three major taxes in Michigan – business, sales or income – to further trim the reach of government.

John Austin is Michael LaFaive’s political opposite.

Austin, director of the Lansing-based Michigan Economic Center at the Prima Civitas Foundation and president of the Michigan State Board of Education, sees a state tax-cutting its way to mediocrity.

If Austin could waive a magic wand, Michigan's state budget would be $8 billion higher. Michigan has a constitutional amendment – the Headlee Amendment – dictating that state revenues cannot exceed 9.5 percent of the total personal income of Michigan residents. In 2012, state revenues were $8 billion below the amount allowed by the state constitution.

“The strategy in Michigan for a decade plus of reducing income taxes on people and reducing the business tax has led to huge unmet needs,” Austin said.

He points to Minnesota, which has much higher tax rates than Michigan and spends far more on K-12 schools and universities. In 2012, Minnesota’s per capita income was $46,227. That’s $8,730 more than Michigan. In 2013, Minnesota’s unemployment rate was 5.1 percent. Michigan’s was 8.8 percent.

“The priorities (in Michigan) should be higher education and K-12 education, plus infrastructure and transportation and basic governmental services like police and fire and parks and clean water,” Austin said. “Those are Pure Michigan advantages that are now deteriorating.”

He noted that state spending on higher education fell by 28 percent from 2008 to 2014, leading universities to aggressively raise tuition and potentially put college out of reach for many.

Austin’s prescription: raise business taxes and change the state income tax to a progressive tax where wealthy individuals pay more.

In the real world under Lansing’s capitol dome, idealism rarely gets passed from either the left or the right.

But a real-world version of this ideological fight played out in 2011 when Gov. Rick Snyder did just what he promised in the campaign, eliminating the Michigan Business Tax and replacing it with a 6 percent corporate income tax. He also went beyond that promise – hiking taxes on pensions, homeowners, low-income workers and wage earners of all incomes. It passed against unanimous opposition from Democrats in both the state House and Senate.

It amounts to the most sweeping tax shift in Michigan since the 1994 school finance reform that swapped a cut in property taxes for a hike in the state sales tax from 4 cents to 6 cents.

Analysis by the Senate Fiscal Agency calculated that the business tax shift amounted to a $1.6 billion tax cut for business for fiscal 2012-2013. The House Fiscal Agency calculated that taxes on individuals would climb by $1.4 billion, including a $343 million hike in taxes on pensions, a $261 million tax hike on low-income individuals, $270 million in taxes on homeowners and a $223 million increase in income tax by freezing a scheduled drop in the tax.

LaFaive credits Snyder for pushing through a tax package he believes will make Michigan more competitive, even though individuals saw their taxes rise. He noted that the Tax Foundation, a Washington D.C.-based think tank, ranked Michigan’s corporate tax climate 9th most favorable in the country for 2014. It ranked 48th in 2011, the year before the tax package took effect.

LaFaive conceded that he “can't prove empirically” the business tax cut spurred jobs growth. State unemployment stood at 9.2 percent in January 2012 when the tax shift took effect. The rate in June was 7.5 percent. National unemployment fell even more sharply during that period, from 8.3 percent in January 2012 to 6.1 percent in June.

But he added: “This bodes well for Michigan's growth prospects. A net tax cut for the whole of Michigan is probably better for the state as a whole. A better economy is the best anti-poverty program.”

Norman Hawker, professor of finance and commercial law at Western Michigan University, is skeptical about claims that business tax cuts create jobs.

“If low taxes meant more and better jobs, then Mississippi and not Massachusetts and California would be the place where (high-tech centers like) Silicon Valley would all be locating to. Businesses do not expand to get tax cuts. They expand to meet demand.”

About the same time he signed the tax shift, Snyder approved a 2011-12 K-12 school aid budget that, according to the Senate Fiscal Agency, resulted in about $930 million in funding cuts. But that calculation did not account for one-time appropriations totaling $455 million, including $154 million in added per-pupil funding for “best practices” districts and $155 million to offset retirement costs. It is also worth noting that Michigan lost about $500 million in federal stimulus and education job grant funding from the previous budget.

In January, Snyder said that he raised education spending by $660 per student since he took office. In an analysis for Bridge Magazine, Mitch Bean, former director of the House Fiscal Agency, concluded that $439 of that was due to state spending and $222 due to a decrease in the total number of students.

Snyder also moved to eliminate incentive tax credits for everything from brownfield redevelopment, alternative energy, film, renaissance zones and credits awarded by the now-defunct Michigan Economic Growth Authority. The state instead offers grants, loans and other economic assistance through the Michigan Economic Development Corporation to firms that create jobs or invest in Michigan. Though film tax credits were ended, the Legislature approved $50 million in incentives for the industry for 2014-15.

A 2013 audit of the Michigan Strategic Fund, which authorizes MEDC expenditures, found that the agency failed to accurately track jobs growth and issued misleading data to the legislature for several of its incentive programs. The audit noted that its report to the legislature failed to note the 2012 bankruptcy of one firm – battery maker A123 – that received tax credits and a $10 million grant from the state.

Chris Rizik, CEO of the Ann Arbor-based Renaissance Venture Capital Fund, credits Snyder with ending incentives that have a questionable track record. A 2012 investigation by the New York Times found that state and local governments in the United States handed out more than $80 billion in tax credits and other incentives each year with little evidence they produce jobs.

Now, Michigan businesses are given a choice: keep past-authorized credits but be taxed under the old Michigan Business Tax or waive the credits and be taxed under the 6 percent corporate tax. Rizik believes the more modest, revamped business incentive program is more accountable and likely to be more effective.

“If you get into the position of just writing checks, you end up in a race to the bottom pretty quickly,” Rizik said.

Coming next:
Part 3: Who pays the taxes in Michigan
Part 4: What do your taxes pay for in Michigan

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Comments

Jeff Rogers
Thu, 09/11/2014 - 10:39am
The problem here goes back fifty years. When I was a kid in Lansing the state complex was in and around the capital, today it sprawls all of the way from the capital to Martin Luther King Drive and has spilled all over the Lansing area. The real problem with state taxation based on income is that it is volatile. Incomes go up and they go down so over the years Michigan has come up with a couple of wonk taxes namely the SBT and the MBT. They do stupid things like when the MBT came in I was told the gross proceeds from a sale of a security a partnership held was taxable revenue, now wait a minute when the security was bought the money went out the door to purchase it so part or maybe all of receipts from the sale were the recovery of monies used to buy it. This was not in law but an interpretation and granted it was quickly changed because it made no economic sense but still apparently no one writing the rules got it. We must remember the people who think these things up are pie cutters and pie eaters most of them have no clue how to bake the pie and that includes college professors who have pretty easy gig compared to a lot of us. The assertion that business do not move for tax reasons is interesting. Where are I phones manufactured, oh I guess that would be China, where is Cypress semi conductors manufacturing I guess not in California. Certainly companies locate where they need supply but to think there are not tax considerations is a joke. Massachusetts lost all of its original industry, perhaps that is just creative destruction but at some time you run out of replacement industries. The problem here is if you rely solely on front office jobs and research jobs your employment base excludes most of what we used to call the middle class, These folks are increasingly not seen by the tech elitists. Also tax rates do not necessarily determine the quality of education, Bridge just had an article on Tennessee which turned things around without a bundle of money. I have been around Michigan most of my life and the bundles of money keep flowing but there seems to be a disconnect between money and performance thanks the MEA and other lobbying groups. I know some will challenge me on this. If in fact taxes and lets not look only at total tax burden but on the structure of the system neither Texas or Florida would have grown as they have. Texas is not a particularly welcoming environment. But how many companies are now headquartered there? Florida the sunshine state for golden years but is it only sunshine? Much of Florida's influx of seniors comes from those Northeast states with brutal taxes. I think in the end the structure and transparency of the tax system does matter, I also think it matters if the first knee jerk reaction of the pie cutters during a down turn which impacts their pieces of pie is to try and increase their share of the pie while others are hurting. We may well need more revenue but before we get there lets first continually examine what any level of government is doing that they do not have to do, let us examine duplications of activity. The population has not changed that much since I was kid yet we now have sea of brick and mortar in Lansing. Taxes passed as an emergency always seem to stay. In accounting terms all costs of government are fixed, that is they go on without regard to the revenue stream. The folks who people the programs are fixed and they are a constituency. I am also amused by how government talks about transparency in accounting for private business while they have some of the most convoluted information in the world. It sometimes looks like the systems are meant to cloud. For instance there is now much talk about roads(a true function of government, ignored for many things not such a true function). I have asked for an accounting of where weights and measures taxes and fuel taxes have been spent for the past few years. Have not seen it, is that an indication they do not want to tell me? I do not know but it certainly makes me less inclined to buy the pie cutter line. We also made an idiotic mistake a decade or so ago when we started issuing permanent trailer plates. The idea was to speed up and collect revenue sooner. The problem is that many of the trailers are used commercially, the ones that actually cause damage over time are in use for a long time. What we did was forgo future revenue for a one time shot. This is what I mean by structure. Taxes do matter and the structure of the system probably matters more. Outflows from government matter a lot more. The world is has way too many rent seekers, folks who lobby for a benefit from government where none should be granted. The press is generally ignorant of a lot of this stuff or the ones who want to expose it are quashed by higher ups. The people really need to know. There are also functions of government that should not fall on the broad taxpayer base since they benefit a sub sector, the sub sector should bear the burden. Forty years ago in my time in municipal government I concluded the only way to protect all taxpayers was the envelope method of budgeting. You might wonder what I mean, well lets take road taxes for example, all of the revenue from fuel taxes and weights and measure would be put into an envelope and they ONLY be spent on roads since that was how they were sold. This because our elected officials are influenced by a whole group of self interested people all wanting new programs which is a great temptation for diversion of funds. Some of these new programs are not bad ideas, many however are for the benefit of the folks running them wrapped in thin wrapper of public interest. One might say this could happen in my road example but the difference here is the state has essentially told all of us that we are paying for the maintenance and construction roads at the pumps and every time we renew our plates. The self interest comes in the allocation of those monies fro roads but in the management of the spending for which a normal business would be required to have controls, so it becomes a matter of open and honest management as opposed to a political decision as to allocation of the revenues from fuel taxes to something other than roads.
Thu, 09/11/2014 - 10:55am
I love it when Michael LaFaive of the Mackinac Center quotes the Tax Foundation to back up his economic pronouncements. The Mackinac Center and Tax Foundation are both part of the Koch brothers underground political empire (the chairman of the Tax Foundation is a Koch employee, and the Mackinac Center is part of the Koch's State Policy Network). It would be more convincing if he cited sources not tied directly to America's most lovable billionaire brothers to back up his theories.
Barry Visel
Thu, 09/11/2014 - 12:56pm
Before this tax series is over I hope you address Michigan's Tax Expenditure budget...the $30 billion tax dollars we don't collect due to credits, deductions and incentives. The link to this section of the Michigan Budget is here: http://www.michigan.gov/documents/treasury/ExecutiveBudgetAppendixOnTaxC... I keep bringing this topic up but no one seems to care. If you don't address this in a series on Michigan taxes, I'll be at a loss as to what Bridge is trying to accomplish with this series.
Charles Richards
Thu, 09/11/2014 - 4:02pm
I would not want to take classes from Professor Hawker. He says,"“If low taxes meant more and better jobs, then Mississippi and not Massachusetts and California would be the place where (high-tech centers like) Silicon Valley would all be locating to. Businesses do not expand to get tax cuts. They expand to meet demand.” First, lower taxes do mean "more and better jobs" when all else is equal; something Professor Hawker neglected to mention. And while it is true that businesses "expand to meet demand", they only expand when the marginal cost of doing so is less than the marginal revenue. And taxes are part of those marginal costs. The difference between lower and higher taxes might make the difference in whether or not to expand. Professor Hawker shows a distressing lack of understanding of the world's complexity. My compliments to Mr. Roelofs for understanding what happened in 2011 concerning education funding. He says, "About the same time he signed the tax shift, Snyder approved a 2011-12 K-12 school aid budget that, according to the Senate Fiscal Agency, resulted in about $930 million in funding cuts. But that calculation did not account for one-time appropriations totaling $455 million, including $154 million in added per-pupil funding for “best practices” districts and $155 million to offset retirement costs. It is also worth noting that Michigan lost about $500 million in federal stimulus and education job grant funding from the previous budget." As Paul Egan noted in the February 2, 2014 Detroit Free Press, that "In fact, Snyder’s first budget ultimately increased the state share of education funding by about $134 million, from $10.7 billion in 2011 to $10.8 billion in 2012. . Bridge Magazine's Truth Squad has maintained that Snyder cut funding in his first year. Mr. Egan also said, "Those revised numbers reduced the cut to about $393 million, an amount that could be blamed entirely on the feds." So, it would be fair to say that Snyder did not replace the missing federal money, but not to say that he cut state funding. That is a distinction that the Schauer campaign and the Truth Squad failed to make.
Duane
Thu, 09/11/2014 - 7:02pm
The disappointing thing is everyone is so willing to focus on history and prepetuate the problems it has created rather then learn from history and change the focus. Why doesn't anyone want to talk about what is the results we want rather then on spending other people's money? The world has changed so how we address problems/issues should be changed. There are a lot of coin phrases about changing how to think about problems and consultants are making a lot of money working with businesses getting the people in those businesses to change how they think about the problems, so why don't we take that same step. To change how you think start by deciding what the results are you want, capture so everyone is working on the same results. Next we start identifying what are the root causes of the problem, capture those causes so everone is looking at the same causes. The third step is to develop ideas of how to address the problems, eliminating or mitigating them. This step has nothing about how to pay for them it is all about what will overcome the causes. The greatest barrier to overcome in changing how we think is overcoming what we think of as accepted wisdom, including those who are entrenched by experience in how things are done today. One effective way to overcome that is to bring people with diverse experiences/knowledge/approaches together to be a signficant part of the discussion. I would encourage a discussion that would include an 'expert' or two and a dozen non-'experts' (the general public). I would offer this could be tested with Bridge readers and a staff person or two. Let's become ready, aim, fire, not (like this article discusses) fire, ready, aim. I would like to hear why this approach won't work or shouldn't be tried.
Thu, 09/18/2014 - 10:16am
Fascinating reporting... I'm grateful for the forum and information provided therein!