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Michigan tax facts, part 9: What will happen to your taxes in the future?

Editor’s Note: The 10 Things Every Voter Should Know About Michigan Taxes
To help voters make sense of ubiquitous political arguments in this fall’s elections in Michigan, Bridge’s 10-part special report tells it like it is on Michigan taxing and spending issues. Today we conclude with parts nine and 10. Read each five-minute primer published so far:

Part 1: Are Michigan taxes too high, too low or just right?
Part 2: Who wants what in the long war over Michigan taxes?
Part 3: Who pays the taxes in Michigan?
Part 4: What do you taxes pay for in Michigan?
Part 5: Who gets tax breaks in Michigan?
Part 6: How much do taxes matter for business location?
Part 7: Will your city hall and local schools go bankrupt?
Part 8: What would Richard Headlee think today?

Most Michigan households have to plan for the future. But how do you plan for your tax futures? And how do you sift tax fact from tax fiction in all that campaign literature on your doorstep this fall? We asked four authorities with differing perspectives to gaze into their crystal balls and predict the future of taxation in Michigan. Our tax prognosticators are:

Douglas Roberts, state treasurer under former Republican Governor John Engler.
Robert Kleine, state treasurer under former Democratic Governor Jennifer Granholm.
Doug Drake, former head of the state Treasury Department’s Office of Revenue and Tax Analysis.
State Senator Patrick Colbeck (R-Canton), who is seen as a leader in the Tea Party movement.

Here’s what they said…

TRUTH SQUAD: Ten years from now, will Michigan taxpayers be paying more, less or the same taxes as now? What’s your reasoning?

ROBERTS: They will be paying more in taxes. Transportation taxes will be increasing, the income tax will be increasing and before the decade is out the business taxes will increase. Transportation taxes will be increased in the near future as a result of the recent problem with roads. Income taxes will rise, driven by two primary costs, health care and pensions. Pensions include both state and schools. In addition, business taxes will increase because of the political cycle in which the change in party will result in a higher tax rate on businesses.

KLEINE: Taxes as a percentage of personal income are likely to be lower. Since 2000, state and local taxes have declined from about 10.5 percent of personal income to about 9.4 percent of personal income, due in large part to tax cuts, but also to the fact that Michigan taxes grow slower than personal income. Even without tax cuts, revenues as percentage of personal income will be lower in 10 years. State taxes have declined from about 8 percent of personal income in 2000 to about 6.5 percent currently.

DRAKE: More in nominal dollars because of inflation, but almost certainly less than today when measured in terms of relative burden. One way to approximate that is to look at the amount of revenue above or below the Headlee Amendment. This is the amendment that caps Michigan's tax burden at the percentage of total tax burden at the level it was in 1979, defined by its then arch-conservative proponent Richard Headlee, as about the right level for state taxation. He defended his amendment in part by saying that he simply didn't want taxes to grow as a share of income. They haven't, and indeed have fallen.

Using the first four years of the Snyder administration and the last six of the Granholm administration, Michigan has been a total of $59.3 billion under the revenue limit, an average of $5.9 billion a year. Our tax structure has been less and less linked to economic growth because so many exemptions and rate cuts have been enacted in recent years. What tax increases have occurred have generally been ones that shifted burdens from businesses (including businesses that sell outside of Michigan) and to individuals. While fewer new tax cuts may be a possibility in the coming decade, the tax structure itself has become increasingly out of touch with the economy. In addition, more and more of our elected officials, both local and state, are reluctant to increase tax rates and seem to love providing new exemptions, especially under the guise of making Michigan more attractive to business.

COLBECK: More…even if tax rates remain constant. Michigan is growing again. More people are being employed therefore more people are able to pay taxes. There are 26,000 job openings within 30 miles of the 7th State Senate District alone.

TRUTH SQUAD: If your prediction is correct, how will Michigan be different as a result?

ROBERTS: Michigan will be slightly better off in all sorts of measures. Income will be slightly better relative to the rest of the country. Unemployment will be better off relative to the rest of the country. Detroit will be better off but only by small amounts. In addition, Michigan will be older and will have costs associated with being older, health care and pensions. The greatest concern I have deals with international trade. It appears that the United States is embracing more protectionism and isolationism that would hurt Michigan over the next 10 years.

KLEINE: Without new revenue Michigan’s roads, education system, local communities, and quality of life will continue to deteriorate. Another concern is that we have an aging population that will be poorer as time goes on. This is due in part to the move away from defined benefit pensions. In addition, those with defined contribution plans are not saving enough. This will contribute to lower revenue growth due to lower resources to spend and lower state revenues – and increased demand for government services.

DRAKE: Our roads will be worse. Our college tuitions will be higher. We'll pay more “fees” for local government services and some state services, and we may have to accept slower response times for police and fire services. Our K-12 schools (including charters) will struggle even more than they are now to pay competitive wages and to continually update curricula to meet a changing economy.

COLBECK: There will be a temptation to grow the size of government to match the increased revenues. This will result in much more dependence upon government and less freedom for those who choose not to depend upon government.

TRUTH SQUAD: You have told us what you think will happen. Now, tell us what should happen? Why?

ROBERTS: I have four things that I believe should happen. These four things are based two assumptions: That we are experiencing increased temperatures or climate and that over the next 10 years we will experience substantial increases in interest rates. The first thing I would recommend is a major investment in high speed rail, specifically from New Buffalo through Traverse City to Mackinac City. The reason is to promote tourism within the state. You could either use transportation taxes or business taxes to pay for it. I would expand the proposition that K-12 education is provided free regardless of income to a K-14 system. That means the first two years of college are free. You can sign a contract in which you would pledge 1 percent of your income for 25 years for each year of college that you use. Third, Michigan should open the borders between Michigan and Canada, and I mean truly free trade and open borders. Michigan sits right next to a huge economic opportunity. My final issue assumes that interest rates are going to double, maybe triple over the next 10 years. Michigan should address the pension problem that we have by borrowing large sums of money – I mean billions of dollars – at a taxable rate and putting bond proceeds into the pension system and fully fund the pension system. As interest rates rise, it will literally pay for itself, maybe more.

KLEINE: We need to raise taxes by about 1 percent of personal income - about $4 billion over the next decade, which would still leave taxes below the 2000 level and keep taxes from declining as a share of personal income. Specifically, the gas tax (and/or registration fees) should be increased by about $1 billion and the gas tax should be tied to the wholesale price. Second, some of the tax cuts for business should be reversed. Taxing all businesses rather than just corporations (as was done from 1975 to 2011) would raise about $700 million. Third, increasing the income tax from 4.25 percent (one of lowest rates in the nation), to 4.6 percent, the level it was before 1994, would raise about $800 million. Finally, extending the sales tax to selected services could raise as much as $1 billion. Raising additional revenue to improve our infrastructure, our education system, our communities’ finances, and our quality of life would strengthen our economy much more than tax cuts.

DRAKE: Michigan needs to pursue an investment strategy instead of our current path of dis-investment. Michigan has historically gotten a relatively low return on federal tax dollars, largely because we have few federal installations, both military and civilian, and relatively small defense contractors. When we cut our state and local taxes, our businesses and individuals who itemize federal tax deductions end up paying more in federal taxes due to those lower deductions, and the dollars go out of our economy. Spending on state and local services, with state and local tax dollars means that more of those dollars stay in Michigan and recirculate in the state economy. Looking back at some of our strongest growth periods in the 1960s and 1970s, our tax burdens were relatively higher than they are today. That makes me think our strategy of tax cutting is the wrong one.

COLBECK: It is my hope that the increase in tax revenue will result in opportunities to reduce tax rates or even eliminate certain taxes altogether. We need to engage in a principled fight against the temptation to grow government to match revenue. If we succumb to this temptation, America will cease to be “America.” America will cease to be the “land of the free and the home of the brave.” Instead, we will become the “land of the free loaders and home of the risk averse.”

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