|Needed now: Tax reform in Michigan|
July 15,2009/The City Pulse
Needed now: Tax reform in Michigan
by Kyle Melinn
Why does it seem like every time an economist hauls out a chart or graph on Michigan’s economy, the lines are always pointing in the wrong direction?
Unemployment levels? Going up. The average Michigan salary compared to every other state? Going down.
The average income for the state’s wealthiest? Going Up. The average income for the state’s middle class? Straight across.
The tax money the state takes in? Going down. Sales tax money. Income tax money. Gas tax money. All of them. Down, down, down from the line representing the state’s projected economic growth in the future … such that it is.
Nobody wants to read this next paragraph. Not after everything Michigan has gone through the last eight years. The domestic auto industry collapsing. State lawmakers and the governor steering the state toward government shutdown. The seemingly perennial budget “crisis” that state leaders scream over.
But here it is:
Michigan needs a graduated income tax. It needs to start taxing services. The massive list of what we give tax breaks for and to whom we give them needs a thorough examination. Taxes on gas, alcohol and tobacco need to be based on the percentage of the price, not a flat rate.
Cutting or completely eliminating the state’s business tax may be a good idea, too.
That’s not my opinion. Since May alone, at least five different policy analysts and economists have made presentations suggesting, by and large, the same thing. The alternative is more police officers being laid off, more prison inmates getting let out sooner, higher college tuition rates, less money for schools, less public support for the poor and rapidly deteriorating roads.
“We need to do something now,” said Sen. Gilda Jacobs, D-Huntington Woods, the lead Democrat on the Senate Finance Committee, who is putting together a sweeping tax reform bill package. “It’s not a matter of raising taxes. That’s not it at all. It’s how do we create a fair tax that is more fair to businesses and individuals.”
The drumbeat for action from those who rely on state government for money is getting louder. Schools, universities, cities, social service organizations, hospitals, doctors, road builders are all pushing for a fix. They have all of these charts and graphs for ammunition from folks like Charlie Ballard from Michigan State University, Timothy Bartick from the Upjohn Institute and Doug Drake from Public Policy Associates.
Taxes and politics
And yet there’s a fear Michigan’s policymakers have been scared into paralysis by the thought of being labeled tax hikers during the critical election of 2010 — the vote that determines which party will be in charge of redrawing the political boundaries for the next 10 years.
How can that be? Michigan’s May unemployment rate of 14.1 percent is less than 3 percentage points from the state’s highest-ever monthly unemployment rate (16.9 percent, November 1983) since the federal government started keeping track of this stuff in 1976. The highest employment rate ever recorded by a state was earlier in 1983 by West Virginia —18.2 percent. Comercia economist David Littman said in May that Michigan’s unemployment rate could hit 20 percent.
Last year, the average Michigan citizen earned $35,299 a year. That’s 34th in the United States. In 2000, the average Michigan citizen earned the 16th highest salary in the country, according to Lou Glazer from Michigan Future.
The bottom half of Michigan’s wage earners make between 2 percent less and 4 percent more today than they did 30 years ago, when their salaries are adjusted for inflation, according to Ballard’s May presentation to the Michigan Parent Teacher Student Association. The state’s wealthiest 5 percent are pulling down more than 40 percent more.
Also 30 years ago, Michigan collected 50 percent of its revenue from the sales tax, according to the Senate Fiscal Agency. It’s dropped to nearly 35 percent today.
“Our current tax system does not allow state funding to grow as fast as personal income tax grows,” said Dave Waymire of the Michigan Fiscal Responsibility Project. “Every year, people will put more money in their pocket and they will pay more in college tuition. We will have more layoffs in state and local governments.”
The connection here is that as Michigan’s broken tax system is causing Gov. Jennifer Granholm to cut spending and disinvest in the things that makes Michigan attractive — its education system, its universities, its local police protection, its roads. As a result, fewer businesses will want to come here. Fewer job providers mean fewer jobs. Fewer jobs means higher unemployment and more people fleeing the state.
“Let’s talk about what we want to be in 20 years — because it will take at least a generation to change — not about how to get back to what we were 20 or 40 years ago,” said economist Douuglas C. Drake at a recent presentation. “Let not waste another generation … (because) right now we’re stuck on yesterday.”
An old story
None of this is new information. In 2006, after the business community successfully drove the Legislature to eliminate the Single Business Tax, talk about updating the state’s tax structure by expanding the state’s 6 percent sales tax to services was frequently mentioned.
In early 2007, Granholm asked former Govs. James Blanchard and William Milliken to head up a small group of wellrespected Republican and Democratic political leaders on how Michigan government raises and spends money.
Called the “Emergency Financial Advisory Panel,” the group’s report concluded that taxes needed to be raised as part of creating a modern tax structure that stopped “disinvesting in education.”
Armed with this information, the state legislature, after months of political posturing and hand-ringing about how to fill a $1.8 billion budget hole, pulled an expanded $600 million service tax out of a hat in the middle of a Saturday night, hours before the state faced a shutdown.
The plan received absolute- ly zero public review. When it passed out of committee early Jacobs Sunday morning, blurry-eyed lobbyists and news reporters were running around the Capitol trying to figure out what was in the bill. After it passed the state House and Senate 18 hours later, the public found out why law makers jammed it through.
The confusing tax included some services, like bowling alleys, but not others, like golf courses. There was no rhyme or reason behind what was included and what was not, leading observers to believe the lawmakers drew up the exemptions based on political favors as opposed to any long-term vision.
Landscaping companies, the Detroit sports teams, movie theaters and anybody else called upon to collect this new tax let out a collective howl. Lansing listened and two months later, the Legislature held another weekend session. This time, lawmakers got rid of the service tax.
Its replacement, a 21 percent surcharge on the Michigan Business Tax, was only a slight upgrade in the business community’s eyes. The hour the surcharge was enacted as an emergency state budget Band-Aid, every business group in town wanted it gone.
So now, two years later, the Michigan legislature is looking at almost an identical situation. They’re looking down the barrel of a $1.7 billion budget deficit. State revenues are not keeping up with a state General Fund budget that’s been cut nearly every year since 2001.
Groups like the Michigan League of Human Services argue the Michigan legislature already has cut too much from its budget and needs tax restructuring to raise more revenue for services to the poor. After all, the state’s Unemployment Agency is predicting that 100,000 Michigan workers will exhaust the unemployment benefits — a vast majority before being able to find work.
“We’re continuing to hemorrhage, and it’s not just the economy. It’s structural,” said Sharon Parks, executive director of the Michigan League of Human Services. “This isn’t anything we’re going to grow ourselves out of.”
Municipalities, universities and K-12 schools are all holding their collective breath for tax changes, too. Local government claims the state has slashed its payments by $3 billion over the last eight years. The governor cut another $162 million last May as part of her executive order, and the Senate is looking at another 12 percent cut in next year’s budget
“We’ve been on the wrong side of cuts for so long that we realize the only way we can be fully funded is by the state raising more revenue,” said Summer Minnick of the Michigan Municipal League.
Universities point out that in the last five years, no state has cut its support of its public universities more than Michigan. In 1973, the state’s 15 public universities received 75 percent of their funding from state government. In 1983 it was 62 percent. In 1993, 59 percent. Last year, 33 percent. One high-up executive at Michigan State University says it is essentially being gradually privatized.
The Senate passed a budget last month that eliminates the Promise Grant scholarship programs, which gives high school seniors and college students who keep up their grades a combined $4,000 scholarship. Even Lt. Gov. John Cherry, who authored a report in 2004 about how the state need to double the number of its college graduates, conceded that the “Promise” scholarships may be turned into a needs-based program.
And K-12 education, arguably cut less than any other budget line item up until now, would be whacked $100 per pupil. Ray Tellman of the Middle Cities School Association told the capital news service MIRS last week that school officials are projecting that the state will see another “Kalkaska” if these types of cuts go through, reminiscing back to 1993 when the small northern Michigan school district ran out of money and promptly shut down operations weeks early.
“When you look at the cuts that are being proposed, I think that some boards can’t do that … so they look at this other option. They go with what they’ve got and see what happens down the road. If they can’t go any further, then they stop rather than decimate their program,” Tellman said.
All of these cuts are on top of the poor no longer getting their dental, podiatric and chiropractic services taken care of. Roughly 137 road projects worth $780 million are being tabled as of 2011 because Michigan’s outdated gas tax won’t be enough to attract federal money.
EPIC/MRA released polling this month that shows the public doesn’t have an appetite for more cuts unless they’re to the Legislature. But, comparatively that’s not paying your home phone bill when there’s no money to pay the mortgage. Eliminating the entire Legislature would save a little more than $100 million. The hole is $1.7 billion.
Add to the cacophony the voice of business groups who want the Michigan Business Tax surcharge and most every other business tax eliminated as a jobrecruitment tool and the argument for sweeping tax reform in Michigan is nearly universal.
“Everyone agrees that the status quo is not working,” said Rep. Kate Ebli, D-Frenchtown Twp., chairwoman of the House Finance Committee, who is chairing an intensive tax reform workgroup over the summer. “This is a crisis that we’re in right now.”
Detroit Renaissance, a business advocacy group for Southeast Michigan, has spent the better part of the year working with conservative economist Patrick Anderson to concoct a tax reform package that, ideally, the entire business community can rally around. The Detroit Chamber of Commerce and the Michigan Chamber of Commerce are among the groups that have participated in some meetings.
Time for a change?
A graduated income tax and an expanded sales tax on service were among the options being considered until the business groups said “absolutely not” to the graduated income tax and their polling didn’t show overwhelming public support for it.
Their survey came back with 48 percent opposed to breaking up the state income tax into brackets based on income like the federal income tax (while 47 percent support it). The numbers run in conflict with those issued by EPIC/MRA pollster Bernie Porn that show 54 percent support a graduated income tax in place of the state’s 4.35 percent flat income tax. The same poll says 38 percent oppose the idea.
On their face, the numbers don’t look so bad. With more and more families struggling to get by, the idea of asking the rich to pay a little extra would seem to have some curb appeal. But to change Michigan’s flat income tax would take a constitutional amendment and voters have historically said no to that.
In 1968, 1972 and 1976, voters canned a graduated income tax similar to what is done in 36 of the 43 states with income taxes. The largest amount of support the idea received was 31.3 percent in 1972. Even when voters were given a choice between a higher income tax and a higher sales tax as part of the 1994 “Proposal A” question, voters picked the sales tax.
“People are arguing that the time is right. We should soak the rich and so on, and maybe they’re right,” said Inside Michigan Politics editor Bill Ballenger. “Maybe it can be packaged and sold to the public, but the history on this is terrible.”
The public may be choking on the graduated income tax, but an increasing number of economists believe it’s the right medicine for what ails Michigan. Senior economist Timothy Bartik of the Upjohn Institute recently told Ebli’s House Tax Policy Committee that adding a “progressivity” to the income tax “would help longrun revenue adequacy, and would move the overall Michigan tax system toward being less regressive.”
So who’s calling for a graduated income tax in the Legislature and the governor’s office?
Nobody. No bills exist in the Legislature creating a graduated income tax or expanded sales tax on services. Since November, the governor’s own transportation task force has been calling on an end to Michigan’s 19-cent gas tax in exchange for a percentage based tax that will raise enough money to keep the federal match dollars coming in and Michigan’s roads fix.
A bill to make that happen has not materialized.
Waymire said he fears both Democrats and Republican don’t want to be pinned with the tax-hiker moniker so they’re perennially batting around the issue as they did back in 2002 when Engler wanted to raise the diesel tax to pay for the roads. Nobody wants to be on the wrong side of raising taxes.
Putting tax reform in the 2010 budget “seems like a loser all the way around,” one analyst told MIRS. Another called it a “public relations nightmare.”
And, yet, is that not what we elected state legislators to do? Solve problems, not posture for two years until an election comes up? If there’s always going to be “another election,’ at what point does anything get done?
Is there a point to being in power when the power isn’t being used?
(Kyle Melinn is a City Pulse columnist and news editor of MIRS, the capital news service. Email him at melinn@ lansingcitypulse.com.)