Tax Cuts Won’t Grow the Economy

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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. Despite claims that income tax cuts create economic growth, there is no evidence that they generate the good jobs our state needs.

State economists are now predicting that Michigan revenues will be higher than originally predicted, creating a “surplus” of approximately $970 million over a three-year period. In response, some leaders in the Michigan Legislature are advocating a rollback of the state’s personal income tax. Their primary sales pitch is that it will improve Michigan’s economy—despite clear evidence from other states and a large body of research that show income tax cuts do not produce the often-promised economic benefits.

The surplus myth

Higher-than-expected revenues (over what was estimated in May of 2013) come after years of budget cuts resulting from changes in the national and Michigan economy, along with tax policies that reduced state revenues available for vital public services. The state has a lot of ground to make up, so calling the revenue situation a “surplus” is misleading.

In fact, adjusted for inflation, between Fiscal Years 2000 and 2012, spending from the state General Fund fell by 25%, with deep cuts in education, public health, and funding for local governments and other public services. The personal income tax is a major source of revenue for state programs, accounting for 66% of the state’s General Fund and 30% of all state funding.1

If the state’s personal income tax had been reduced from 4.25% to 3.9% in Fiscal Year 2013, the result would have been a loss of approximately $680 million in state revenue at a time when public services are already underfunded.2 If phased in by 2015, the annual loss of state revenue could be as high as $1 billion3—approximately what the state currently spends on community colleges, state police and the judiciary combined.

The drawback of across-the-board income tax cuts

Income tax cuts don’t create jobs and economic growth. Decades of research, as well as evidence from other states, show that income tax cuts will not create the good jobs our state needs, and will undermine our future by making it harder to invest in what does build a strong economy.

  • The Congressional Research Service studied 65 years of federal tax and economic data and concluded that top income tax rates have had no discernible impact on economic growth.4
  • Studies of the impact of state personal income tax levels on economic growth are particularly likely to find no economic benefit from lower taxes.

— The nine states with the highest income tax rates have on average seen considerably more economic growth per capita over the last decade than the nine states without a personal income tax.5
— The five states that cut taxes the most during the 1990s had weaker job and personal income growth than other states.6
— Of the nine states that cuts taxes during the 2000s before the national recession, six saw their economies fall behind the rest of the country on three important measures—job creation, production growth, and income growth. The remaining three states were major oil and natural gas producers whose economies benefited from rising oil prices.

Income tax cuts disproportionately benefit the wealthiest taxpayers. Supporters of a personal income tax cut try to justify it as a way to help low- and moderate-income families who were negatively affected by the tax shift of 2011, which cut business taxes by 83% and increased taxes on many low-income workers and retirees, including a 70% cut in the Earned Income Tax Credit for low-wage workers.

In fact, most of the benefits of a cut in the state’s personal income tax from its current level of 4.25% to 3.9% would flow to Michigan’s wealthiest taxpayers, at a time when inequality and poverty are already high.

  • 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).7
  • 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.8

 

Income tax cuts lock in deep and harmful cuts in education and other public services. Over the last decade—even before the Great Recession—Michigan budget and tax policies resulted in deep cuts in the public services and structures that are the foundation of economic opportunity and growth. To gamble on a personal income tax cut—despite the evidence that tax cuts do little to boost the economy—puts basic public services at risk, and undermines Michigan’s fledgling economic recovery.

Reinvesting in public education is at the top of Michigan’s to-do list. Overwhelmingly, high-wage states are states with well-educated workforces, in part because a pool of well-educated workers attracts high-wage employers.9

There are many ways to improve workforce skills in Michigan, including increasing access to postsecondary education, reducing high-school drop-out rates, moving people without high school degrees through GED and associate degree programs, increasing the quality of K-12 education, and offering preschool and family support programs for parents of young children.10

Unfortunately, the reality in Michigan is that:

  • Fifty-five school districts across the state are grappling with deficits. In the decade between 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 State funding for K-12 education fell by over 20% between Fiscal Years 2004 and 2013 when inflation is taken account.

Michigan lags behind other states in education spending. A national report found that the state is spending $572 per student less than it did in 2008, a 9% cut (adjusted for inflation), putting it behind 33 other states that cut less, or invested more, in education.12

  • Postsecondary education has become even more unaffordable. Rising tuition and cuts in needs-based scholarships have made it harder for many to continue their educations after high school.

State support for public universities fell by nearly 37% between Fiscal Years 2004 and 2013 when inflation is factored in. State support for community colleges also fell by 11%.

Further, over the past decade, tuition rates at Michigan’s public universities doubled, yet Michigan policymakers cut need-based scholarships by 20%, while other states increased their scholarships by 84%. Only 14% of Michigan students are offered need-based scholarships, ranking Michigan 40th nationwide.13

  • Communities are struggling to provide the basic services that families and businesses need. To attract the highly educated workforce needed in the 21st century economy, businesses must consider the quality of local services and amenities, including police and fire protection, transportation, public schools, libraries, parks, the arts and recreational opportunities.

While the current year budget includes a 4.8% increase in state revenue sharing payments to local governments, over the last 12 years, those payments have been cut by more than $6 billion, forcing local governments to reduce services.14

 

 

 

 

 

Sources:

1 Cleary, M.A., State of Michigan Revenue: State Source and Distribution, House Fiscal Agency (October 2013).
2 Analysis by the Institute on Taxation and Economic Policy for the Michigan League for Public Policy (September 6, 2013).
3 Projections by Mitch Bean, Great Lakes Economic Consulting, and former Director of the Michigan House Fiscal Agency, as quoted in Michigan Lawmakers Split on Plans for Budget Surplus, Detroit News (January 7, 2014).
4 Hungerford, T.L., Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 (Updated), Congressional Research Service (December 12, 2012).
5 States with “High Rate” Income Taxes are Still Outperforming Non-Tax States, Institute on Taxation and Economic Policy (February 2013).
6 Leachman, M., Mazerov, M., Palacios, V., and Mai, C., State Personal Income Tax Cuts: A Poor Strategy for Economic Growth, Center on Budget and Policy Priorities (March 21, 2013).
7 Analysis by the Institute on Taxation and Economic Policy, op. cit.
8 Ibid.
9  Berger, N. and Fisher, P., A Well-Educated Workforce is Key to State Prosperity, Economic Analysis and Research Network (August 22, 2013).
10 Ibid.
11 K-12 Schools Minimum Foundation Allowance, Senate Fiscal Agency (updated September 18, 2012).
12 Leachman, M., and Mai, C., Most States Funding Schools Less Than Before the Recession, Center on Budget and Policy Priorities (September 12, 2013).
13 Ruark, P. Keeping it Affordable in Michigan: Disinvestment in Financial Aid Grants Hurts Students and Their Families, Michigan League for Public Policy (November 2012).
14 Letter to the Michigan Legislature from David Lossing, President, Michigan Municipal League (May 21, 2013).