Tax policies gone wild

Shortsighted tax policy decisions by Michigan lawmakers have created a budget shortfall of $325 million in the current fiscal year, despite growth in the state’s economy.

Because Michigan must balance its budget every year, cuts will be made in the state’s General Fund, the major source of funds for health and human services, higher education and public safety – before the end of September. The 2016 budget, scheduled to be released by the governor on Feb. 11, has an additional revenue shortfall of $532 million.

This was the consensus of state economic and fiscal experts who met with lawmakers last week to determine how much the state has to spend for the remainder of this year and the upcoming year. They all agreed that although the economy is growing, revenues are not following suit.

At first blush, it is difficult to understand how state revenues can be dropping so quickly in a time of economic growth. One of the justifications for the 80% cut in business taxes approved by the Legislature in 2011 was that lower taxes would attract new businesses, create jobs, and ultimately increase state coffers by spurring economic growth.

So what happened? Why the budget gap?

  • Business tax cuts don’t grow the economy. With the 2011 changes, taxes on businesses were cut by $1.6 billion, placing Michigan 49th in the U.S. for business tax contributions to the state. Michigan businesses are now the source of only 2% of total state revenue, despite the fact that employers rely on many essential state services, including police and fire protection, the roads and bridges needed to transport their products, and a good educational system that can create the workforce they need. A major cause of the state’s current budget problem was the deep cut in business taxes in the face of known outstanding business tax credits that are expected to be a drain on the budget for many years to come. Net business refunds could exceed $680 million in 2015, and rise to more than $800 million in 2016.
  • Tepid economic growth. Michigan suffered a 10-year recession from 2000 to 2010, and while the state economy has strengthened in the last several years along with the rest of the nation, we have not yet regained lost ground. The state has recouped less than two-thirds of the jobs lost during the recession, and too many of those jobs are low-wage. And, while Michigan’s unemployment rate has dropped significantly, much of that decline can be attributed to nearly 90,000 discouraged and other workers leaving the labor force.

The state budget director has made it clear that there will be “real cuts.” We should be clear when we talk to our lawmakers that those cuts are the result of tax policies that have benefited Michigan businesses, but have not led to economic recovery for all of the state’s citizens. Government restructuring and efficiencies, while commendable if they can increase opportunities for families who are struggling to make ends meet, are not going to fill the gap.

– Pat Sorenson

Diving deeper into the river of opportunity

At the League, economic opportunity is our mission so it was heartening to hear Gov. Rick Snyder talk about the ‘river of opportunity’ in his fifth State of the State address Tuesday. There is an assumption in that analogy, however, that deserves a closer look.

The governor spoke about his background growing up in a 900-square-foot home in Battle Creek in a supportive family. He said despite his family’s modest income, he was still able to be part of the river of opportunity. He spoke of the Michiganians who are not part – separated by poverty, absent parents or other barriers — and he talked about his desire to move them into that river of opportunity.

Though it was a welcome tone from the governor, it contained a flawed analogy. The governor  said government is in the background of the lives of those already enjoying opportunity while it plays a prominent role for those in need. Yet, there is no ‘them and us’ when it comes to government services because we all benefit.

Let’s take public education for starters. Free education is not just for kids from families with low incomes. The support of public universities, including $300 million a year to the governor’s alma mater, the University of Michigan, helps many, many children of the affluent. Tax dollars create the public transportation to move the goods that supports the jobs, helping job providers and workers. In short, public dollars are used to keep that river flowing, and enjoyed by the citizens who are benefiting from opportunity.

The governor also called for revamping of services to help those in need. At the Capitol Tuesday, several reporters sought out League President & CEO Gilda Z. Jacobs for comment on the merger of the Departments of Human Services and Community Health into a new Department of Health and Human Services. Jacobs was positive about the potential to really lift barriers for people and also about the leadership of interim Director Nick Lyon. (See the League’s statement.)

What will be important is making sure that there are savings resulting from true efficiencies and that the merger’s goal isn’t just to save dollars. Simply cutting people from services while poverty and unemployment remain high is not the way to measure success.

With revenues coming in below expectations, the pressure will be on to make those cuts. More insight will be offered in the governor’s executive budget recommendation in February. So stay tuned!

 – Judy Putnam

Income Tax Cuts: Financially Irresponsible and No Economic Benefits

Proposals to roll back the personal income tax in Michigan will not create jobs or grow our economy and will disproportionately benefit the wealthiest taxpayers the most. It is also fiscally irresponsible to reduce taxes when the state is facing a budget shortfall due to lower than expected revenues.

In fact, most of the benefits of a cut in the state’s personal income tax from 4.25% to 3.9% would flow to Michigan’s wealthiest taxpayers, according to an analysis by the Institute of Taxation and Economic Policy, a Washington, D.C.-based research group that uses a sophisticated model of the tax system.

At a time when inequality and poverty are already high, the rollback would offer:

  • low-income taxpayers (average income of $10,600) enough to buy a bakery-made cherry pie ($12 on average for the bottom 20% of earners).
  • middle-income taxpayers (average income of $45,700) enough to buy a used dough mixer ($88 on average for the middle 20%).
  • those at the very top of the income scale (average income of $971,600) enough for a round trip for two to Paris, where they could visit all of the sights and have enough left over to enjoy French pastry at a café ($2,618 on average for the top 1%).

In addition, nearly one in four (23%) of Michigan households would receive no tax cut at all—including more than half of the state’s poorest taxpayers (the bottom 20% of earners who make $18,000 a year or less).

By contrast, three of every five dollars in tax cuts (60%) would flow to Michigan’s wealthiest 20% of taxpayers who earn $89,000 a year or more, with the top 1% of earners—those making $362,000 and up—alone taking home a sizeable 17% of the tax cut benefits.

Across-the-board income tax cuts will not boost Michigan’s economy but would contribute to rising income inequality, and further drain resources from public schools, community colleges, universities, health care and public safety—the very services that fuel economic growth.

Rolling back the personal income tax rate will not boost the economy and will only add to rising income inequality. Plus, as the state faces a revenue shortfall in the current fiscal year, and potentially the following fiscal year, reducing state revenue would lead to cuts to schools, communities and other public services that drive economic growth.

 

Taxing Internet sales as a matter of fairness

Nowadays, with a growing number of people shopping online, it makes sense to collect sales taxes on the items purchased – if the item was bought at a store nearby, we would have to pay the sales tax.

So, what’s the difference? The difference is that over the past year an estimated $482.4 million worth of sales and use taxes from remote sales will go uncollected by the state. The majority (60%) of that is due to e-commerce. (more…)

Oh Michigan!

From the First Tuesday newsletter
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‘O’ stands for October — and it also stands for Opportunity.

With just a few short weeks before the Nov. 4 election, now is your best chance as a concerned Michigan citizen to make a difference. (more…)

Holy smoke Batman! We can reduce poverty

Like Batman and Robin, raising the state Earned Income Tax Credit and minimum wage are best when working together, a new report concludes.

The two strategies are better than one, according to State Income Taxes and Minimum Wages Work Best Together, by the Center on Budget and Policy Priorities. (more…)

Flood waters: a taxing problem

From the League’s First Tuesday newsletter
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My family and I were unfortunate enough to experience the recent flooding in Southeast Michigan. Despite the fact that we lost appliances, some precious photos and an assortment of stuff we had accumulated over the past 37 years, we will be OK. We had insurance and were able to get a company to clean and sanitize our basement very quickly. And we will not need to go into our retirement funds to make our losses whole. (more…)

A stronger Michigan economy is within reach

Yes we can grow Michigan’s economy, create good jobs and expand opportunities for all Michiganians with the right public policy decisions. A new report by Erica Williams at the Center on Budget and Policy Priorities outlines how policymakers can make that happen.

Williams explains that states need to invest adequately in education, healthcare, transportation and workforce development. And in order to do that, they need to make decisions about how to raise and spend revenues with an eye toward the future. (more…)

Camp’s costly change of heart

U.S. House Ways and Means Committee Chairman Dave Camp, R-Mich., is having a very expensive change of heart in seeking to make a corporate tax cut called ‘bonus depreciation’ permanent.

Camp’s previous plan for tax reform recommended ending bonus depreciation. A recently released report by the Center on Budget and Policy Priorities details Chairman Camp’s policy reversal.

Bonus depreciation lets businesses take tax deductions for certain new purchases such as machinery and equipment upfront. The goal is to spur investment and economic growth during recessionary cycles. (more…)

State budget must offer economic opportunity

Join us in urging state lawmakers to support the investments in children and families that are needed to reduce poverty, help low-wage workers, restore funding for public schools and universities, and ensure that communities have the revenues needed to provide the basic services that residents and employers need to thrive and help the economy grow.

Joint House/Senate conference committees are beginning to meet today to resolve differences between the House and Senate versions of the Fiscal Year 2015 budget. After conferees sign a negotiated conference report, the budgets are sent to the full House and Senate, where they can be approved or rejected, but not amended. (more…)

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