President Obama’s 2015 budget rightly seeks to expand the Earned Income Tax Credit to more workers — particularly childless workers. The current EITC rules are unfair to low-wage workers who aren’t raising children, including noncustodial parents. Those workers receive such a small EITC that they can be literally taxed into poverty, or driven deeper into poverty.
By far, the largest share of the EITC goes to those in poverty who work and have children. The EITC is a refundable credit for low-income working families and has been successful at encouraging certain people to take jobs, particularly single mothers. The EITC promotes work and reduces the need for public assistance.
The EITC expansion seeks to incentivize work for three groups whose participation rate in the labor force has declined steadily over the last decade: minority men without a college education, single women working low-wage jobs, and workers with disabilities.
A Michigan minimum wage childless worker employed full time earns around $15,000. That’s 133% of the federal poverty level and, according to Making Ends Meet in Michigan, $6,500 short of the amount required for a single childless worker to meet their most essential needs like housing and transportation.
Under current EITC rules, this worker would be ineligible for the EITC, because they made too much money. Under the president’s proposal they would qualify for an EITC of $470, serving to offset a low-wage income and help with expenses such as car repairs needed to remain in the work force.
The president’s proposal would double the maximum credit for childless workers to about $1,000, increase the income levels at which the EITC phases out to about $18,070 for single childless workers, and $23,570 for childless married taxpayers filing jointly, and make the credit available to workers beginning at age 21 as opposed to age 25, nearly doubling the total number of childless workers receiving the EITC.
The most common occupations among those who would benefit from the proposed expansion of the EITC are low-wage retail and food service workers, three quarters of whom live in households with incomes below 150% of the poverty line. And 470,000 childless workers in Michigan would benefit directly from President Obama’s planned expansion of the EITC.
For those right in the middle, it would be $88 (that’s about $1.70 a week). What will that get you? Perhaps a used dough mixer.
But the top 1% — who would get a full 17% of the benefits from a rollback — would receive, on average, $2,618. That will buy you a trip for two to Paris, where you can see all the sights and enjoy French pastry at a café.
Along with a bite-sized analysis, the League sent a slice of cherry pie to each lawmaker to serve up an important message: An income tax rollback is a sweet deal for those at the very top but the pits for the rest as it would take away the best opportunity in a decade to reinvest in education, safe communities, roads and the other engines of our economy that were neglected as Michigan struggled with a long economic downturn.
The League is fortunate to have access to an analysis using a sophisticated tax model created by the Washington, D.C.-based Institute on Taxation and Economic Policy.
Gov. Rick Snyder’s plan to instead pump up the Homestead Property Tax Credit is a far better alternative and will especially help seniors and those with disabilities. Even better, would be to include an increase in the Earned Income Tax Credit for low-income working families or to forgo the tax reductions and instead use the resources to invest in education that has been so severely cut since the Great Recession began.
Consider this: This November, voters will elect a governor, all 38 state senators and all 110 state representatives.
Clearly, it’s an important year for our state’s future. The Center for Michigan, described by founder Phil Power as a nonpartisan “think and do tank,” wants your input. What issues do you want elected officials to address on the campaign trail – and in the state Capitol once they are elected?
The League is hosting a Community Conversation, one of many held around the state, from 1 to 2:30 p.m. Monday at the Greater Lansing Housing Coalition, 600 W. Maple St. Lansing.
The Center for Michigan is gathering opinions to summarize and share with policymakers. Topics include the size of government, taxes, investing in roads and bridges, the minimum wage, and education and job training. What services should be increased? Decreased? If you were to increase taxes, which ones would you choose? If you were to decrease taxes, which ones would you choose?
It’s an important opportunity to speak up and make sure your priorities are part of the mix.
There are still a few seats available for the Monday conversation. Please join us to make your voice heard. RSVP to firstname.lastname@example.org by noon Monday.
For more information on community conversations, go to www.thecenterformichigan.net.
Gov. Rick Snyder unveils his fourth executive budget Wednesday and worthy of applause is the fact that he has rejected the across-the-board rollback of Michigan’s personal income tax.
The governor indicated in his State of the State address last month that he wants a tax cut but one that is targeted to working families — those “hardworking Michiganders who get up every day and pack their lunch and go to work.”
The good news is that there is a vehicle already in place to deliver exactly what the governor is seeking: the Michigan Earned Income Tax Credit. As a new fact sheet from the League shows, the tax credit is one of Michigan’s most effective tools for supporting working families and reducing poverty.
Using the $100 million the Snyder administration has targeted for tax relief to increase the EITC would help the very workers the governor wants to help, and it would boost the economy. That could lift the EITC from 6% of the federal credit to 11% of the federal credit. For a working mom with four growing boys, like Paula Fekken of Traverse City, that would mean $300 more for car repairs and other necessities to keep her on the job.
A new report by the Center on Budget and Policy Priorities documents the benefits from state EITCs: They keep working parents on the job and children out of poverty.
Unfortunately, the income tax rollback is gathering steam in the Legislature with a Senate hearing. The tax cut fever is driven by higher-than-expected revenues, nearly $1 billion over three years. It’s a strong election-year temptation as GOP lawmakers look to defend their records for the damage done to working families and seniors in the Big Tax Shift of 2011.
Yet, as the League testified at the Senate hearing last month the income tax rollback disproportionately benefits upper-income households and threatens Michigan’s fragile recovery. In fact, $3 of every $5 would go to those in the top 20% of income.
Increasing the EITC or spending the higher-than-expected revenue to begin restoring Great Recession cuts to education and other key services would also be better economy-boosting routes than the across-the-board income tax cuts.
Either choice would help the governor reward hard-working folks in Michigan.
While the purely political appeal of a tax cut during an election season is obvious, the League testified, based on a recently released report, that the risks to Michigan’s economy far outweigh any benefits. Low- and moderate-income workers will see little in return while the wealthiest taxpayers would benefit the most. (more…)
A new report by the League demonstrates that across-the-board cuts in the state’s personal income tax would not boost Michigan’s economy, but could affect long-term prosperity by locking in cuts in funding for public schools, community colleges, universities, health care and public safety—the very services that fuel economic growth.
Despite the claims of several legislative leaders advocating for a tax cut, there is no evidence that income tax cuts generate good jobs or economic growth. In fact, a study of 65 years of data by the Congressional Research Service found that top income tax rates have had no discernible impact on economic growth, and states that cut taxes the most during the 1990s and 2000s saw their economies fall behind in job creation, as well as production and income growth. (more…)
You may be hearing a lot about “surplus” revenue as the state budget season kicks off – and more importantly, how to spend it.
Last week, the House Fiscal Agency, Senate Fiscal Agency and Michigan Department of Treasury, put their heads together to give a new prediction. The upshot — nearly $1 billion more than expected. It would have been higher, but Treasury gave a very conservative estimate of $700,000 in unexpected revenue for the three years — the 2013 fiscal year that ended Sept. 30, the 2014 fiscal year that started Oct. 1 and Fiscal Year 2015. (more…)
Over the last decade, Michigan policymakers have addressed the state’s economic and fiscal problems largely through a combination of budget cuts, tax shifts and reliance on one-time revenues–under the mistaken assumption that the state could cut its way to prosperity, and create jobs and economic growth through reduced business taxes. In fact, the path to economic prosperity requires a broader investment strategy, starting with the following 10 steps:
Increase investments in early childhood education and care—beginning prenatally through school entry.
Ensure that all children have access to a high-quality public education and receive a high school diploma.
Make higher education an option for more residents.
Provide access to the health and mental health services needed for healthy children, families and workers.
Provide basic economic security for those who cannot work or find jobs.
Invest in the community services needed to attract and retain business investments and young professionals.
Strengthen the personal income tax to ensure it generates sufficient revenue and is based on the ability to pay.
Make sure businesses are paying their share of taxes for the public services they rely on.
Modernize the sales tax by expanding it to selected services and internet sales.
Annually scrutinize all forms of spending, including tax expenditures or breaks, and reinvest funds into services and infrastructure that have been shown to create economic growth.
A Shared Interest in Economic Growth and Prosperity
Economic prosperity for all Michiganians is a goal that is shared by lawmakers on both sides of the aisle and their constituents. We want Michigan’s economy to grow, giving all residents the opportunity to find jobs that will support themselves and their families. We want our young people to stay in Michigan, rather than leave the state to find economic opportunity.
While the goal is shared, the best path to that prosperity has been disputed. Michigan, like the rest of the country, is trying to recover from the most severe recession in seven decades—one that sharply reduced state revenues and resulted in cuts to public services. State lawmakers responded to that crisis with a range of one-time budgeting strategies, budget cuts, and reliance on federal stimulus funds.
Economic development strategies during this fiscal crisis focused on “competitiveness,” narrowly defined as reductions in state and local taxes—despite the reality that research fails to support claims that lower state and local taxes are always better for state economies. In fact, higher taxes are often associated with better economic performance when they finance the engines of the economy, including high-quality education and better infrastructure.1
The Path to Prosperity
Michigan’s fiscal problems began before the national Great Recession, and its recovery from that recession has been slow. While the drop in auto jobs drove Michigan’s high jobless rate during the last decade, tax and budget policy decisions left state government with few options to soften the economic blows.
To address its growing fiscal problems, over the last decade Michigan relied heavily on reserved funds, one-time budget fixes and temporary federal funding. Between June of 2001 and December of 2002, the state relied on nearly $3.2 billion in one-time revenues to balance its budget, including a withdrawal of $1.3 billion from its “rainy day” fund. By 2011, the state was still relying on $1.4 billion in temporary revenues, including federal funds, tax amnesty programs, and debt service restructuring, along with budget cuts and reductions in the number of public employees.2
Michigan lawmakers also enacted tax policies that had the net effect of reducing state revenues available for vital public services. Michigan has two major state funds: the General Fund and the School Aid Fund. Over the last 15 years, significant changes were made in the state’s personal income tax—the primary source of revenue for the General Fund, and a major source of revenue for the School Aid Fund—as well as business taxes. These tax changes, along with Michigan’s declining economy and the national Great Recession, resulted in a drop in state General Funds of more than one-third (adjusted for inflation) since Fiscal Year 2000.3
Included in the tax changes were the following:
In 1994, Michigan’s personal income tax rate was decreased from 4.5% to 4.4%.
Beginning in tax year 2000, the personal income tax rate was reduced by one-tenth of a percentage point per year, with the final reduction to 3.9% occurring in 2004.
In 2007, in response to budget deficits, the personal income tax rate was increased to 4.35%, with a scheduled phase-out of 0.1% annually until October 2015, when the rate would have reached 3.9%.
In 2011, as part of a major state tax shift that reduced business taxes by 83%, while increasing personal income taxes by eliminating a range of tax credits and deductions, the personal income tax rate was maintained at 4.35%, with a rate reduction to 4.25% in January of this year. The net effect of the 2011 legislation was a state tax cut of $550 million annually, along with a shift in tax responsibility from businesses to lower- and middle-income families and retirees.4
Experiences in Michigan and other states—supported by the research—show that tax cuts cannot create economic growth or generate sufficient jobs to ensure economic opportunity for all. Studies conducted by economists over the last 40 years largely concluded that interstate differences in tax levels have little, if any, effect on relative rates of state economic growth.5 In fact, the five states that cut taxes the most in the 1990s had slower job growth than other states over the next economic cycle, with average annual growth in employment between 2000 and 2007 of only .3% compared with 1% for other states.6 Overwhelmingly, thriving, high-wage states are those with well-educated workforces, pointing to the need to invest in education and the types of services and quality of life that would attract well-educated workers.7
Michigan cannot afford to lock in the damage to public services that occurred over the last decade, accepting growing school deficits and city bankruptcies, reduced public safety, and crumbling roads and bridges as the “new normal.” To grow Michigan’s economy and ensure opportunity for all residents, state lawmakers must:
Invest in the services and infrastructure needed to create jobs and fuel economic growth, including effective public schools, community colleges and universities; healthcare services needed to ensure healthy children and workers; roads, bridges and public transportation needed to attract businesses; police and firefighters; and the libraries, parks and other community services needed to attract and retain a well-trained workforce.
Modernize and strengthen the state’s revenue system to generate sufficient funding for economic development priorities. While the pay-off of these investments is clear, Michigan has tied its hands by both failing to update its tax system to reflect current economic realities and consumer spending, and by dramatically reducing taxes on businesses.
The Ten Steps to Economic Prosperity
1. Expand investments in early childhood development and care, including supports for families with children ages 0 to 3.
The research is clear: The single best predictor of economic prosperity is a state’s success in educating and preparing its workforce, and the path that holds the greatest promise for education achievement is the investment in young children. Leading economists, including Nobel Laureate James Heckman, have shown the high return on investment in high-quality early learning and care programs–in excess of 14% for the Michigan-based Perry Preschool Program.8
As part of the fiscal year 2014 state budget, Gov. Snyder and lawmakers increased funding for the Michigan Great Start Readiness Program by $65 million. Michigan’s expanded investment in preschool programs for at-risk 4-year-olds is a major step forward, but there is still much to be done to ensure that children are ready for school, including more attention to the first three years of life when the very architecture of children’s brains is being built in ways that affect lifelong learning. Greater investments in prenatal care, high-quality child care, and proven home visiting programs are critical.
The High Scope Research Foundation has documented that children who participate in the GSRP are more ready for school, perform better on MEAP tests four years later, are less likely to be held back a grade, and more often graduate from high school on time. Forty years later, GSRP graduates are more likely to hold jobs, earn more, rely less on public assistance, and are not as likely to be involved in criminal activity.
Each month, an average of 41,411 low-income or high needs Michigan children are in child care settings subsidized by the state, yet the state’s investment in child care has dropped precipitously over the last decade. As a result, Michigan ranks fifth lowest in the nation in its child care eligibility income limit, and ninth lowest in its average monthly reimbursement for center care for preschoolers.9
Michigan’s investments in children ages 0 to 3 are woefully inadequate. In addition to an underfunded child care system, over the last decade, Michigan has reduced funding for child abuse and neglect prevention programs for children ages 0 to 3, limited access to income and food assistance benefits, and provided minimal state funds for evidence-based home visiting programs.
2. Ensure that all children have access to a high-quality public education and receive a high school diploma.
Strong and effective public schools are the foundation for economic development in Michigan, ensuring a well-educated workforce and economic opportunity for all residents. In fact, a recent report by the Economic Policy Institute concluded that providing access to a high-quality education will likely do more to strengthen the overall state economy than anything else a state government can do.10
Despite broad public support for schools, state support has dropped, and debate rages about how to best improve educational outcomes. Between Fiscal Years 2003 and 2013, the minimum per pupil foundation allowance for K-12 public schools increased by only 4%, in the face of a 21% increase in inflation.11 The result has been deep budget cuts in Michigan schools, with 55 school districts across the state grappling with budget deficits, and school closures.12
One of the most concerning failures is persistently high dropout rates, particularly for African American, Hispanic, low-income and homeless youths. The prospects for Michigan residents without high school diplomas are bleak, and their failure to graduate has both personal and societal costs. A Michigan study of the personal and social consequences of dropping out of school found that dropouts face increasing labor market difficulties, including steep declines in the employment rates, real wages and annual earnings. In addition, dropouts are less likely to marry, form independent households, and be able to support their children.13 The implications for state government and taxpayers are significant. High school dropouts are more likely to live in poverty, turn to public assistance and become incarcerated. Further, because of their bleak job prospects and wages, they cannot bolster the economy through their contributions to the state’s personal, sales and incomes tax revenues.14
Statewide, for the class of 2012, of a total cohort of 129,689 students, 98,881 (76.2%) graduated on time, 12,884 (10.7%) dropped out, and 15,203 (11.7%) were not able to complete on schedule, but were still engaged in their high school education.
If the students who dropped out of the Class of 2011 in Michigan had graduated, the state’s economy would likely benefit from over $5 billion in additional income over the course of their lifetimes.15
In Michigan, the chances of dropping out of high school vary by race, ethnicity and economic status, with the highest dropout rates found among African American (19%), Hispanic (18%), and homeless students (18%).16
3. Make higher education an option for more residents.
In Michigan’s new knowledge-based economy, a college degree is key to economic prosperity. Unfortunately, average wages are lower in Michigan than the national average, along with the proportion of adults with a 4-year degree.17
There are many barriers to higher education in Michigan, including rapidly rising costs and cuts in needs-based scholarships. State support for public university operations has been reduced by $350 million (22%) since Fiscal year 2002, and is still $155 million (11%) below Fiscal Year 2011 levels.18 State support for community college operations has remained roughly flat since Fiscal Year 2001, while total college enrollments have increased by approximately 50%.19
Further, over the past decade, tuition rates at Michigan’s public universities doubled, yet Michigan policymakers cut need-based grants by 20%, while other states increased their need-based scholarships by 84%.20 Only 14% of Michigan students are offered needs-based scholarships, ranking Michigan 40th nationwide.
Failure to make higher education more accessible will stymie the state’s efforts to expand the economy and build the talent needed to draw business investments. Nationwide, young adults with less education face high unemployment and underemployment rates, particularly for certain racial and ethnic minority populations. According to the Economic Policy Institute, unemployment rates for young high school graduates jumped from 17.5% in 2007 to 32.7% in 2010, dwarfing the increases in prior recessions. Since that time (April 2011-March 2012) unemployment rates for high school graduates have declined only slightly to an average of 31.1%.21
Unemployment rates for African American and Hispanic high school graduates ages 17-20 have also skyrocketed, rising nearly 50% for African American graduates, and more than doubling for Hispanic students.22
In Michigan’s three largest metropolitan areas, the employment rate for adults ages 25-64 with a four-year degree or more exceeds 80%, compared with 38%-48% for persons without a high school diploma.23
Young high school graduates who do find jobs are earning less. Between 2000 and 2011, the real (inflation-adjusted) wages of young graduates nationwide declined by 11.1%.24
Because of cuts in funding for higher education, two-thirds of college students nationwide now graduate with an average student loan debt of nearly $27,000—up 41% since 1989. This debt results in a lifetime wealth loss of nearly $208,000 from lower retirement savings and home equity.25
4. Provide access to the health and mental health services needed for healthy children, families and workers.
Access to healthcare is an important and often overlooked contributor to the economic vitality of a community and state. A healthy workforce is a critical foundation for economic productivity, and helps to improve the state’s competitive advantage.
The Medicaid program is designed to meet the needs of low-income people who often have poorer health statuses and greater healthcare needs that could make it difficult for them to sustain employment. In approving the Medicaid expansion called for in the Affordable Care Act, the Michigan Legislature has taken a major step forward in improving the health of Michigan’s workforce.
A healthier workforce benefits both low-wage workers and their employers, and access to medical, mental health and preventive services is the key to improving workforce health and productivity. In addition, with employer-sponsored coverage continuing to decline, the expansion of Medicaid to those with incomes up to 133% of poverty can fill a growing void.26
Expanding Medicaid to 133% of the federal poverty line ($15,282 per year for a single person, $25,975 for a family of 3) will provide physical and mental health care coverage to an estimated 320,000 low-income Michiganians, and reduce the number of uninsured adults by 46%.27
Approximately 1.9 million Michigan residents (19%) now rely on Medicaid for health and mental health services.
Michigan has reduced spending for mental health services for low-income persons not eligible for Medicaid. It is estimated that half of the people seeking mental health treatment in Michigan are not eligible for Medicaid, and because Michigan does not provide mental health parity, many cannot afford services in the private sector. Between Fiscal Years 2008 and 2013, state funding for non-Medicaid mental health services decreased by 9%, resulting in waiting lists, a need to focus only on crisis services, and the elimination of programs such as school-based prevention.28
5. Provide basic economic security for those who cannot work or find jobs.
During economic downturns, many families find themselves facing layoffs or reduced work hours, a fact that is particularly true for families with the lowest educational and skill levels, or those with chronic health issues. State and federal programs that provide for such basic needs as food, clothing and shelter during times of high unemployment are a critical base for ensuring economic stability.
Without a basic safety net, families can lose their grounding in the economy altogether, experiencing homelessness, hunger, energy crises, or lack of access to transportation or other supports needed to seek work and hold jobs. Sadly, the impact of this complete destitution on children—including the likelihood of succeeding in school—can affect the next generation of families and workers.
In 1996, national welfare reforms resulted in the Temporary Assistance for Needy Families block grant to states, along with stronger work requirements for persons receiving basic income assistance, and time limits on assistance. Federal and state safety net policies are now more focused on the laudable goals of encouraging work and helping low-income working families, but are less effective at providing the basic supports children and families need when parents cannot work or find jobs.
During the national recession and into the recovery (December 2007 to December 2011), Family Independence Program caseloads fell by 17% in Michigan, while the number of unemployed rose by 20%.29
In March 2013, the number of Michigan households receiving FIP fell to its lowest level in 45 years—since February 1968—when it was 45,930.30
Falling caseloads, and declines in total TANF spending for FIP cannot be explained solely by improvements in the economy. According to the House Fiscal Agency, gross TANF spending for FIP has declined by $210.1 million or 54%, with the most significant policy change causing this decline being the adoption of more stringent state and federal lifetime limits for FIP which began Oct. 1, 2012.31
The maximum FIP benefit is $492 per month, representing less than one-third of the federal poverty line. Between 1996 and 2012, FIP benefits, adjusted for inflation, fell nearly 27%.32
After years of steady growth, the number of families receiving federally funded food assistance has begun to drop,in part because of a state policy decision to impose an asset test. Between Fiscal Years 2011 and 2013 (through March of 2013), caseloads fell from 967,566 to 912,755—a decline of 6%.33
Between December 2009 and 2011, TANF income assistance caseloads in five states, including Michigan fell by a total of approximately 84,000 families—more than the net national caseload decline over that period. 34
6. Invest in the community services needed to attract and retain business investments and young professionals.
In order to attract the highly educated workforce needed in the 21st century economy, businesses must consider the quality of local services and amenities, including public schools, libraries, parks, the arts and recreational opportunities. In addition, corporations rely on strong public services in order to conduct their business, including police and fire protection, and public transportation.
One of the significant ways that state government has supported counties, cities, villages and townships has been through state revenue sharing payments, which have been cut dramatically in the last decade. While the budget for the upcoming fiscal year includes a 4.8% increase in revenue sharing payments to local governments, it does not begin to offset the losses suffered. Over the last 12 years, local revenue sharing has been cut by more than $6 billion, with funds used to plug holes in the state budget and pay for state tax reductions. The result has been cuts in desperately needed services, including local police and fire protection, road and bridge maintenance, and supports for seniors.35
If Michigan’s statutory local revenue sharing allocation had been fully implemented, payments to local governments in Fiscal Year 2011 would have been approximately $914 million, instead of the $416 million that was actually provided.36
Fewer than one-third of the local governments that received statutory payments in the early 2000s receive them today, and funding to cities, villages and townships, which peaked at $684 million in Fiscal Year 2001, dropped to $225 million in Fiscal Year 2013—a 67% cut.37
State cuts in revenue sharing have cost Detroit nearly $200 million, helping to push the city into bankruptcy.38
Modernize the Revenue System
7. Strengthen the personal income tax to ensure it generates sufficient revenue and is based on the ability to pay.
The state income tax is a fundamental pillar of the state’s revenue system, generating approximately $7.9 billion in Fiscal Year 2013. Revenue from the income tax represents 63% of the state’s General Fund of $9.3 billion, and 18% of the School Aid Fund.39
Michigan is one of only seven states with flat rate taxes for personal income.40 With the credits and deductions allowed under Michigan law for lower-income earners, Michigan’s personal income tax is moderately progressive overall, but certainly not as progressive as states that have adopted graduated income taxes that impose a higher tax rate on the highest-income earners.
Further, with the 2011 tax shift, credits and deductions intended to reduce the income tax burden on low-income families were lost, the most significant being the Michigan Earned Income Tax Credit and the Homestead Property Tax Credit.
The reduction in the state EITC—from 20% of the federal EITC to 6%–has reduced the progressivity of Michigan’s personal income tax. With that tax policy change, Michigan’s lowest-income families are now paying a higher effective tax rate (for all state and local taxes) than any other income group.41
8. Make sure businesses are paying their share of taxes for the public services they rely on.
A number of states, like Michigan, have cut business taxes deeply, selling the cuts as a quick path to economic and job growth. In Fiscal Year 2007, taxes on Michigan businesses generated $1.9 billion or 22% of the state’s General Fund. In Fiscal Year 2013, business taxes are expected to generate approximately $352 million, or less than 4% of state General Fund revenue.42
Unfortunately, business tax cuts are unlikely to produce what they claim, and can actually thwart growth by reducing state revenues to the point that the state cannot invest in schools, roads, and public services that are fundamental to the economy in the long run.
Corporate income tax cuts are unlikely to have a positive impact on a state’s rate of economic growth or the pace at which it generates private sector jobs. Business tax cuts generally produce no net short-term economic stimulus because Michigan, like most states, is required to balance its budget each year, so it must offset revenue losses from corporate tax cuts by cutting services or increasing household taxes.43
To balance the state budget in an economic downturn while reducing business taxes, Michigan both cut services deeply and increased taxes on low- and moderate-income individual taxpayers. The budget cuts could adversely affect long-term growth in the state by weakening the public services businesses need and rely on–including high-quality educational systems, good police and fire protection, and access to well-maintained roads and transportation. Budget cuts and tax increases also affect Michigan’s economy by taking money out of the hands of consumers.
Tax changes passed by the Michigan Legislature in 2011 made Michigan’s overall tax system significantly more regressive by cutting business taxes by 83%, while increasing taxes for individual taxpayers by 23%.
As a result of the 2011 tax shift, approximately two?thirds of all businesses no longer have to file a state business tax return, and most businesses are enjoying a net tax reduction.
9. Modernize the sales tax by expanding it to selected services and internet sales.
Michigan’s sales and use taxes generated approximately $8.3 billion in Fiscal Year 2013. Michigan’s 6% sales tax rate ranks it (along with four other states) 11th lowest among the 45 states with a sales tax.44 In the current fiscal year, most Michigan sales tax revenue is dedicated to the School Aid Fund (73%), the General Fund (16%) and local government revenue sharing (10%).45
Even with a 1974 Constitutional amendment to eliminate sales and use taxes on food and prescription drugs, Michigan’s sales tax is regressive because low-income residents pay substantially more in sales tax as a share of their income than do higher-income taxpayers. In fact, sales taxes make up 60% of low-income families’ total tax bill, and the bottom 20% of earners in the state pay 6.7% of their family incomes on sales and excise taxes, compared with less than 1% for the top 1% of earners.46
Since Michigan’s sales and use taxes were adopted in the 1930s, consumer spending habits have changed dramatically, shifting from the purchase of goods, which are taxed in Michigan, to services, which largely are not. In addition, the growth of Internet sales has resulted in lost revenues, and placed “main street” businesses at a competitive disadvantage.
Michigan manufacturing employment fell by 37% between 1990 and 2011, compared with 32% nationally. Knowledge-based services (healthcare, social assistance, information, finance and insurance, professional services and management of companies) grew by 30% during that same time.47
In 2007, Michigan taxed only 26 services, fewer than 38 states and the District of Columbia.48 The estimated loss of sales tax revenue due to the exemption of most services was $10 billion in Fiscal Year 2010.49
The total amount of revenue loss from catalog, e-commerce and remote sales is expected to grow to $451 million in the current fiscal year.50
10. Annually scrutinize all forms of spending, including tax expenditures or breaks, and reinvest funds into services and infrastructure that have been shown to create economic growth.
Tax expenditures are often described as “silent spending,” and include tax deductions, deferrals, exclusions and credits given to individuals or businesses. Tax expenditures are considered a form of spending because they allocate funds for specific public purposes, but are not debated and approved during the annual budget process. They have a significant impact on state revenues because they reduce or eliminate revenues that would have otherwise been collected and available for needed public services. Currently there is no formal process in place to evaluate the effectiveness of tax expenditures in Michigan. Unlike direct appropriations that are part of the annual budget process, most tax expenditures are put in place and never reviewed.
A 1991 state task force reviewing the impact of tax expenditures recommended the following to ensure that tax expenditures are effective and achieving their intended purpose:
Include a tax expenditure report as part of every Executive Budget.
Conduct a fiscal impact analysis of all tax expenditure bills,and include a sunset on tax expenditures to ensure that they are evaluated.
Create a formal process for the review of all tax expenditures,including a joint subcommittee of the taxation and appropriations committees.
Establish criteria for evaluating tax expenditures.
More than two decades later, only the first recommendation has been adopted, and tax expenditures are now included in annual Executive Budgets. Still missing is a formal process for evaluating whether or not tax expenditures are serving an important public purpose or are simply unnecessary and costly giveaways.
The Treasury Department forecasts that tax expenditures from state business and individual income taxes, sales and use taxes, and transportation taxes alone will be $21.6 billion in 2014, $1 billion more than the $20.6 billion the state is expected to collect in revenues from those taxes. Over 70% of those tax breaks will be for goods and services that are currently exempt from state sales and use taxes.51
The 2011 tax shift legislation repealed many of the credits allowed in the former Michigan Business Tax, as well as the EITC and other personal income tax credits, so tax expenditures are expected to fall by 8.6% between fiscal years 2012 and 2013.52
1. Michael Mazerov, Academic Research Lacks Consensus on the Impact of State Tax Cuts on Economic Growth: A Reply to the Tax Foundation, Center on Budget and Policy Priorities (June 17, 2013).
2. Mitchell E. Bean, A Problem 10 Years in the Making, House Fiscal Agency (April 6, 2011).
3. Kyle I. Jen, State Budget Update, House Fiscal Agency presentation prepared for Rep. Genetski (June 21, 2013).
4. Outline of the Michigan Tax System, Citizens Research Council of Michigan (March 2012).
5. Michael Leachman, Michael Mazerov, Vincent Palacios, and Chris Mai, State Personal Income Tax Cuts: A Poor Strategy for Economic Growth, Center on Budget and Policy Priorities (March 21, 2013).
7. Noah Berger and Peter Fisher, A Well-Educated Workforce is Key to State Prosperity, Economic Analysis and Research Network (August 22, 2013).
8. James J. Heckman, Ph.D., The Case for Investing in Disadvantaged Young Children, Big Ideas for Children: Investing in our Nation’s Future, First Focus (September 15, 2008).
9. Child Development and Care, Presentation to the House Appropriations Subcommittees on School Aid and Education Committee, Michigan Department of Education (August 6, 2013).
10. Noah Berger and Peter Fisher, A Well-Educated Workforce is Key to State Prosperity, Economic Policy Institute (August 20, 2013).
11. K-12 Schools Minimum Foundation Allowance, Senate Fiscal Agency (updated September 18, 2012).
12. Michigan Public Schools with Deficits for Fiscal Year Ending June 30, 2012 and Projections for Fiscal Year 2013, Michigan Department of Education (May 30, 2013). Also Kathleen Gray, Record 55 School Districts in Michigan Facing Deficits, Detroit Free Press (August 13, 2013).
13. Andrew Sum, et al. An Assessment of the Labor Market, Income, Social, Health, Civic, Incarceration, and Fiscal Consequences of Dropping Out of High School: Findings for Michigan Adults in the 21st Century, Center for Labor Market Studies, Northeastern University (January 2008).
15. The High Cost of High School Dropouts: What the Nation Pays for Inadequate High Schools, Issue Brief, Alliance for Excellent Education (November 2011).
16. Patricia Sorenson, The FY 2014 Budget: Gains for Some Children & Families but Deep Disparities Persist, Michigan League for Public Policy (July 2013), utilizing data from the Michigan Department of Education.
17. Lou Glazer and Don Grimes, Michigan’s Transition to a Knowledge-Based Economy: Fifth Annual Progress Report, Michigan Future, Inc. (October 2012).
18. Kyle I. Jen, State Budget Update, House Fiscal Agency presentation prepared for Rep. Genetski (June 21, 2013). Reflects only operational funding, omitting funds contributed by the state to prefund retiree health benefits through payments to MPSERS.
20. Peter Ruark, Keeping It Affordable in Michigan: Disinvestment in Financial Aid Grants Hurts Students and Their Families, Michigan League for Public Policy (November 2012).
21. Heidi Shierholz, Natalie Sabadish, and Hilary Wething, The Class of 2012: Labor Market for Young Graduates Remains Grim, Economic Policy Institute (May 3, 2012). Data are for high school graduates ages 17-20 who are not enrolled in further schooling.
23. Lou Glazer, Michigan Employment by Education Attainment II, Michigan Future, Inc. (June 17, 2013).
24. Heidi Shierholz, Natalie Sabadish, and Hilary Wething, The Class of 2012: Labor Market for Young Graduates Remains Grim, Economic Policy Institute (May 3, 2012).
25. Robert Hiltonsmith, At What Cost? How Student Debt Reduces Lifetime Wealth, Demos (August 2013).
26. Jan Hudson, Affordable Care Act Medicaid Expansion: A Win for the State and Its Low-income Residents, Michigan League for Public Policy (September 2012).
28. Jan Hudson, Shoring Up Mental Health Services, Michigan League for Public Policy (January 28, 2013), and Margaret Alston, Susan Frey and Steve Stauff, Mental Health Spending, Community Health Background Briefing, House Fiscal Agency (December 2012).
29. LaDonna Pavetti, Ife Finch, and Liz Schott, TANF Emerging from the Downturn a Weaker Safety net, Center on Budget and Policy Priorities (March 1, 2013).
30. Michigan Department of Human Services Information Packet, DHS Budget and Grant Management Division (June 2013). Excludes Extended Benefit FIP (EFIP).
31. Kevin Koorstra, Temporary Assistance for Needy Families (TANF), Fiscal Focus, House Fiscal Agency (November 2012).
32. Ife Finch and Liz Schott, The Value of TANF Cash Benefits Continued to Erode in 2012, Center on Budget and Policy Priorities (March 28, 2013).
33. Michigan Department of Human Services Information Packet, DHS Budget and Grant Management Division (June 2013).
34. LaDonna Pavetti, Ife Finch, and Liz Schott, TANF Emerging from the Downturn a Weaker Safety net, Center on Budget and Policy Priorities (March 1, 2013).
35. Letter to the Michigan Legislature from David Lossing, President, Michigan Municipal League (May 21, 2013).
36. Revenue Sharing Keeps Our Economic Engines Running, Michigan Municipal League (February 2011).
37. Using State Shared Revenues to Incentivize Local Government Behavior, State Budget Notes, Citizens Research Council of Michigan (July 2012).
38. Robert Kleine, How the State of Michigan Helped Bankrupt Detroit, Detroit Free Press (August 4, 2013).
39. State of Michigan Revenue Source and Distribution, House Fiscal Agency (March 2012).
40. “The ITEP Guide to Fair State and Local Taxes,” Institute on Taxation and Economic Policy, 2011.
41. Data provided to the Michigan League for Public Policy by the Institute on Taxation and Economic Policy. ITEP data reflects permanent law in Michigan enacted through January 2, 2013 at 2010 income levels. Includes total state and local taxes as a share of personal income, post-federal deduction offset.
42. State of Michigan Revenue Source and Distribution, House Fiscal Agency (June 2006 and March 2012).
43. Michael Mazerov, Cutting State Corporate Income Taxes is Unlikely to Create Many Jobs, Center on Budget and Policy Priorities (September 14, 2010).
44. “Michigan’s Sales and Use Taxes, 2010,” Michigan Department of Treasury, August 2011.
45. “State of Michigan Revenue Source and Distribution,” House Fiscal Agency, July 2012.
46. Fact Sheet: The Michigan EITC and Taxes Paid by Working Families, Michigan League for Human Services, February 2011, data from the Institute on Taxation and Economic Policy; and data provided to the Michigan League for Public Policy by the Institute on Taxation and Economic Policy. ITEP data reflects permanent law in Michigan enacted through January 2, 2013 at 2010 income levels.
47. Lou Glazer, From Factories to Knowledge-based II, Michigan Future, Inc. (July 29, 2013).
48. Eric Scorsone and David Zin, The Michigan Economy and State Revenue: A 10-Year History (1999-2009), Senate Fiscal Agency (April 2010). Data based on data from a Federation of Tax Administrators survey.
49. Michigan’s Sales and Use Taxes, 2010, Michigan Department of Treasury (August 2011).
51. Rick Haglund, State Government ‘Spends’ $30 Billion More This Year than You Think, Bridge Magazine, Center for Michigan (June 25, 2013).
52. Michigan Department of Treasury Executive Budget Appendix on Tax Credits, Deductions and Exemptions, fiscal years 2005 through 2012-2013, and State Spending from State Resources Appropriation History, Senate Fiscal Agency, Updated August 31, 2012.
The latest U.S. Census Bureau data confirms what we all suspected. While there have been improvements in the economy, it has not been enough to float all boats, and state poverty rates, especially for children, remain 25% to 30% above pre-recession levels.
Certainly there have been cuts in state and local services in Michigan that affected low-income families with children, thwarting their opportunities to share in the American dream by earning enough through hard work to move into the middle class. Deep cuts in basic income assistance have forced more children into extreme poverty, exposing them to homelessness and hunger, and creating barriers to academic success. A failure to invest in child care for low-income families has resulted in fewer parents having the care they need to secure and retain jobs that support their children. (more…)
Since 2008, Michigan has cut 9% in per-pupil funding, adjusted for inflation, putting it behind 33 other states that cut less or invested more in education. The report found that states have not restored the education spending cuts made during the Great Recession. (more…)