The latest dramatic chapter to the budget drama is tax reform.
Business groups are huddling to develop sweeping tax reform changes, including possible cuts to the much-maligned Michigan Business Tax surcharge.
Number crunchers are looking at everything from a graduated income tax to fresh discussion of extending the sales tax to some services.
And bipartisan groups of legislators are sharpening their knives in an attempt to do surgery on some $35 billion in tax breaks Michigan doles out every year. For a thick list of the dozens of annual types of tax breaks — from affordable housing development credits, to tax-free pensions, to business development tax credits, to credits for small beer brewers — click here.
The tax reform options are dizzying, but Tim Bartik, a leading economist at the Upjohn Institute, makes it easy to understand. Bartik, in testimony before the state House this week, outlined five ways to build a better tax system in Michigan:
1. A broader sales tax including services. This would be fairer and grow more proportionately with the growing sectors of the economy. Such a broader sales tax would resemble the so-called “Fair Tax.” However, I don’t think that the rates or broad design proposed by the Fair Tax are feasible, and I believe that the revenues projected are overstated. Therefore, I do not think that the Fair Tax should be seen as a tax that can feasibly substitute for most other state taxes.
2. A more progressive income tax system. More progressivity in the income tax system would help long-run revenue adequacy, and would move the overall Michigan tax system towards being less regressive. A progressive income tax would seem to require a constitutional amendment. However, it may be possible to increase the progressivity of Michigan’s income tax system by increasing the tax rate and introducing additional broader earned income credits and sales tax credits.
3. Elimination of the pension exemption. If this cannot be done, at least the exemption level should be frozen in nominal dollars; that is, not indexing the exemption level to consumer prices. This would reduce the long-run threat of the pension exemption to revenue adequacy. It also is fairer in taxing all incomes regardless of source.
4. A regular review of tax expenditures to keep them within a budget constraint.
5. Focusing on making the business tax system more business friendly by focusing business tax relief on businesses making investments or businesses expanding employment.
13 Comments
The “Graduated Income Tax” concerns me. When we raised taxes on MI businesses, we forced MI business out of our state. If we raise taxes on the business owners, we will also force the owners out of our state and several of them will take their businesses with them. We need to look at reducing spending, not trying to get more blood from a rock. Florida and Tennessee have no state income tax, and they are beautiful states. A tax increase on the wealthy will lure more job providers to those states.
One tax option not considered was:
6. End the recession. What are the changes to business taxes to make business competitive with other states, NAFTA, and the global economy?
MBT ZERO
Business Personal Property Tax ZERO
Sales and use tax on business purchases ZERO
Business school district tax ZERO
Business insurance proceeds tax ZERO
These are not 12 year tax abatements or Renaissance Zone tax adjustments, but are tax changes forever. Business taxes are levied by the state, but business does not pay taxes. Taxes are a cost of doing business. The business must pass taxes through to its prices for goods and services, leave the state, or go out of business. These are the business tax changes proposed by the Michigan Fair Tax.
While it may be necessary to consider tax increases at some point, the primary effort should be to reduce the size and cost of government. We need to recognize we are not the the same State that we once were – population declines, business foreclosures, etc. should cause us to recognize we need a new more efficient model of governance. Simply adding more taxes will just hasten the population departure and exacerbate the budget problems.
The MI Fair Tax is the answer to Michigan’s high cost, lost jobs, lost manufacturing plants and a way to insure revenues to run critical government programs. It modernizes the tax system by appling a sales tax to all purchases of “new” goods. It is progressive by giving a “Prebate” to all families up to the poverty level. (A refund of money you will spend for taxes on items not previously taxed.)
All other plans just increase taxes on Michigan citizens.
The Mifairtax.org is the answer. It protects the poor and creates more jobs. No business taxes more businesses coming to out state and one of the most compassionate things you can do is offer someone a job. I know I am a job creator. The Michigan Fair tax gets illegal immirgrants in the system, drug dealers and tourists in our system paying their fair share instead of nothing. Prebates back to protect our Michigan citizens staples and the prebate which goes through a bank might even give the poor a chance to save money when they see a bank account with a deposit at the end of the month. The big reason is to have less poverty and that is with people working. Our state can not be pro jobs when it taxes businesses so much and this says anti business. Thanks Tommy Brann
Sounds very good now get it done, but don’t forget the residential property taxes which are way out of the picture and they keep adding onto them. Pay more local taxes than the wife and I pay to the Federal and State Income tax.
That is not right in my book.
The Michigan FairTax is far and away the preferable choice for Michigan, but not, of course, if you listen to the “Lansing elite.” Simply put, by taxing retail consumption, ownership of the family paycheck is restored to the family, paying for government only when families benefit through purchases. No more, double taxation – used goods are exempt. No more, hidden taxes paid by Michigan families in higher prices, thanks to an end to taxing corporate income. The Michigan FairTax is uniformly applied, UN-taxing every legal resident’s spending to the poverty level, while ending a tax code via use of an ingeniously simple monthly tax prebate check to legal residents.
Thanks to the prebate, the Michigan FairTax is automatically progressive without need of legislators’ meddling to favor one segment of society over another. The more you purchase, above the poverty level for your family’s size, the greater your effective tax rate.
And if you don’t have an income tax code, you send a good many Lansing lobbyists to other states where they can make a buck at the peoples’ expense. Can you imagine the influx of business, jobs, and families if we enact the Michigan FairTax? It will be huge, and most likely will not end until the region and the country eventually implements a FairTax.
Missouri has now passed a FairTax proposal through their state House, as has South Carolina. The first state to successfully implement the FairTax, wins big. Michigan FairTax would like you to schedule a date for a presentation to your family, friends, associates. It’s up to us citizens to take action. Taking action will enable the MFTA to stage a successful ballot drive next year, and give us the chance to tell Lansing – it’s over. Implement the FairTax, and get out of our way!
With Fair Tax being mentioned so much I think it is informative to read the FACTCHECK investigation into it.
http://www.factcheck.org/taxes/unspinning_the_fairtax.html
“We reiterate, however, that those earning between $15,000 (or perhaps as much as about $24,000 – see our addition to the “Who Really Pays” portion of our article above) and $200,000 per year – virtually all middle-class Americans – would pay a higher share of the tax burden under this proposal. Those earning more would see their share drop, as even AFT economists admit.”
After admitting the positives, Mr. Bartik makes statements about the MI FairTax assumptions not being feasible without giving any reasons as to why! Perhaps his assumptions are wrong? It’s not about the rate, it’s about the method!
The MI FairTax is the way to go!
If we follow Bartik’s “findings” we should all be prepared to invest in any company that provides out-bound moving services. They will be booming–and it won’t be the poor who are moving, it is those with education, wealth, income and prospects–those who shoulder the load in MI.
Atlas-shrugged Mr. Bartik. Atlas shrugged.
TN is only 8 hours away and is filled with Michigan transplants already
Some quick responses:
On comment number 1, by Jon: Most states with an income tax have modestly graduated rates. This includes above-average growth states such as Georgia and North Carolina. Also, it should be pointed out that a progressive state income tax would merely try to offset the regressive nature of sales and property taxes. At best, we might get a state and local tax system that overall is proportional to income.
On comment number 2, by Neil Karl: The fact that the business community lobbies against business taxes suggests that the business community does not believe that 100% of the business tax is shifted forwards to consumers or shifted backwards to workers. It is also not so easy to figure out how one could realistically make up for forgoing 100% of the revenue lost from eliminating the Michigan Business Tax. The question is whether some business tax reform option can have some of the same incentive effects for business expansion while not giving up as much revenue.
On comment number 3, by Tom: The long-term structural budget deficit of Michigan, documented by the Citizens Research Council in a 2008 publication you can easily find online, is so severe that the state will have to take dramatic actions both to cut spending and raise revenue. The question is how to do so in the most efficient way possible that will best promote long-run growth.
On the various comments posted on the Fair Tax: It seems to me that the burden of proof should be on the Fair Tax proponents to show that the proposed 9.75% rate will raise the needed revenue. Many researchers looking at the national Fair Tax have concluded that the national proponents of this tax have overstated the revenue raised from the proposed rates. A realistic revenue calculation needs to reflect: political realities of what tax bases are likely to be taxed or exempted; tax evasion possibilities. There are lengthy debates on this topic that can easily be found online, for example from William Gale of the Brookings Institution. The Fair Tax proponents dispute his claims. On the whole, I think Gale has the better of the argument.
Yes, Jim, I was concerned about the FactCheck article until I actually got there and read it! FactCheck’s credibility dropped in my eyes, as I read misleading, or just plain false, representations about the FairTax proposal.
FairTax.org’s David Polyanski wrote an Open Letter to FactCheck.org which they ignored. Read it for yourself to determine whether you feel, with us, that “Unspinning the FairTax” was, in Fact, spun with a decidedly anti-FairTax bias!
I firmly believe we need some adults in Lansing who are able to reduce spending. If I lose my job I have to reduce my spending. When legislators lose their income (i.e. Tax revenues) They think they can just raise their income by taking ours. That is an immature outlook as it is not sustainable. We and our jobs will just continue to leave.
I will vote no on any tax changes unless there are real meaningful reductions in our states spending habits.