|Let's graduate Michigan's income tax|
Detroit News CommentaryMay 22, 2009
Michigan would be better off with a graduated income tax. Depending on where the levels are set, the state would significantly reduce severe public education funding shortfalls as well as the business tax burden. A graduated income tax is as important to Michigan's economic recovery as retaining college graduates to fuel our knowledge-based economy.
A majority of Michigan taxpayers will benefit from a graduated income tax. At 4.35 percent, Michigan's flat tax rate is among the lowest top tax rates in the nation. If the state used a graduated model ranging from 2.9 percent for the lowest wage earners to 5.9 percent for the wealthiest, 85 percent of taxpayers would receive a tax cut, and only 15 percent would receive a tax increase. Singles with incomes above $39,000 and couples with combined incomes above $78,000 would pay the top tax rate of 6 percent.
Following Kansas, Michigan could implement a 6.4 percent top rate and boost the state's tax revenue by at least $2 billion, while providing tax relief to middle- and low-income residents.
Good news for high-income earners: They will get back much of the state tax increase through federal offsets. High-income earners who itemize their federal income tax returns can deduct their state income taxes. They will increase their federal tax refunds and keep at least $500 million in Michigan every year.
Adopting a graduated tax in Michigan requires a ballot measure to amend the state Constitution. Michigan voters rejected the graduated tax three times -- in 1968, 1972 and 1976. Since 1976, however, Michigan (along with the rest of the nation) has experienced significantly unequal growth in incomes. Incomes for the bottom half of Michigan households have been virtually flat, while incomes for the top 5 percent of households have skyrocketed.
A recent survey conducted by Michigan State University's Institute for Public Policy and Social Research found that 57 percent of Michigan voters now favor moving to a graduated tax. In line with public opinion, the governor has proposed a deal to Republican and business leaders: Support a graduated income tax in exchange for eliminating an unpopular surcharge on the state's main business tax.
But Senate Majority Leader Mike Bishop immediately slammed the idea as "anti-taxpayer" and promoting "class warfare." Such rhetoric seems to have more in common with the extremist anti-tax tea partiers who recently protested on the steps of the State House.
Michigan today is taking fewer pennies out of each dollar earned by Michigan families than it did in the late 1990s -- even after the tax increases of 2007. According to the Michigan Fiscal Responsibility Project, if Michigan's "tax bite" were the same as in 2000, revenues would be up $5 billion.
Michigan has cut its General Fund budget by more than $3 billion in just seven years, leaving it 25 percent smaller today than it was in 2002, the last year of the Engler administration. People are correct to say the state's overall budget has increased, but virtually all of that increase has been driven by Medicaid spending and financed by federal tax dollars.
The graduated tax is only one piece of the solution to Michigan's structural budget crisis. The bipartisan panel that produced Michigan's Defining Moment report emphasized the need for a three-pronged approach -- revenue increases, spending cuts and reforms in public services delivery. There is no "silver bullet."'
Opponents of a graduated income tax in Michigan are banking on convincing voters that they will be raising taxes on themselves. We know better. So do the 36 other states in the union that levy a graduated income tax. It's time for Michigan's income tax to put on its cap and gown and graduate.
Jessica Rosenberg recently graduated with a master's degree from the University of Michigan's Gerald R. Ford School of Public Policy.