Column: Fixing Michigan’s upside-down tax system: The case for a graduated income tax

November 21, 2019 6:23 am

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At the Michigan League for Public Policy, we are committed to working on public policies that help Michiganders put food on the table, gain access to quality health care and have affordable housing. 

In order to fund these policies, we need a robust tax system that produces needed revenue to make these investments while ensuring that folks with low incomes are not taxed disproportionately. 

Michigan’s tax system is upside-down, meaning that people with lower incomes pay a greater percentage of their income in taxes than those with higher incomes. Flipping our tax system from a flat tax to a graduated income tax would fundamentally switch this dynamic — the rich would pay a higher proportion of their income in taxes, while giving relief to those at the bottom and middle of the income spectrum.

I realize that my passion for taxation is not shared by everyone, so it is very possible that you’re not leaping out of your seat and rushing to learn more. Please bear with me, though; I think that you’ll find my arguments for adopting a graduated income tax compelling, if not invigorating.

The League has just released this policy brief talking about the benefits of a graduated income tax for Michigan and its residents.  

A graduated income tax is more equitable with regard to race. 

Policies and practices such as employment discrimination, limited access to credit and multigenerational barriers to quality education have advanced structural and institutionalized racism since the founding of this country. 

Because of the legacy of racist policies and practices, there is an intersection between race, income and wealth. People of color are more likely to earn less and are much less wealthy on average than their White counterparts. Because of this, a graduated income tax is a useful tool in decreasing the racial disparities in wealth and income.

A graduated income tax would provide revenue for vital services. 

Michigan’s government has been woefully underfunded in the past two decades. A study released by Michigan State University this year found that we need $3.6 billion in additional revenue to adequately fund our school system. 

In addition to schools, our infrastructure needs are growing and our counties, cities, villages and townships are being short-changed by the Legislature. The need for additional revenue is clear.

Graduated income tax structures are fair. 

Michigan is one of nine states with a flat income tax — every working person in Michigan pays 4.25 percent of their income in taxes, regardless of their economic circumstances. This leads to an unfair tax code. In Michigan, the lowest 20% of earners pay 10.4% of their income in state and local taxes, while the top 1% only pays 6.2% of their income in these taxes.

When combined with other state taxes, such as the sales and gas tax, individuals at the bottom end of the income scale end up paying a higher percentage of their income on state and local taxes than those at the top.

A graduated income tax would inject money into local economies. 

Households at the top of the income spectrum are often able to save more of the money they make, while working families with lower incomes are putting most of their paychecks toward everyday needs.

In other words, earners who make less money tend to spend more of each dollar they earn at local businesses. As such, reducing taxes for working families with low and middle incomes, while raising taxes on the rich, will increase economic activity. This economic activity will allow businesses to hire more employees and will spur entrepreneurship.

How do we get there? 

The Michigan Constitution prohibits the adoption of a graduated income tax. To adopt a fairer and more racially equitable tax system, the constitution must be amended by the Michigan Legislature or by a vote of the people. 

Legislation to implement a graduated income tax has already been introduced this session and an overwhelming 70% of Michiganders support this structure, while only 20% say they would reject such a proposal.

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Brandon Betz
Brandon Betz

Brandon Betz joined the Michigan League for Public Policy in September 2019. He is the League’s tax policy analyst. He was elected to the Lansing City Council in November 2019.