Commentary

Rick Haglund: A big tax cut this election year comes with big tradeoffs for Michigan

July 6, 2022 6:16 am

Michigan Capitol | Susan J. Demas

High gas prices, bulging state coffers and election-year politics are likely to accelerate efforts by both political parties to cut state taxes. 

While Gov. Gretchen Whitmer and the Legislature haven’t agreed on tax cuts, they did strike a deal last week on a $76 billion state budget, and there is $7 billion in unallocated cash that will undoubtedly be targeted for tax reduction.

But whether some of the ideas being floated are smart or even necessary for Michigan to compete economically with other states, as their backers contend, is questionable.

The Republican-controlled Legislature already has made failed attempts to slash taxes by $2.5 billion, which Whitmer vetoed

Gov. Gretchen Whitmer gives the keynote address at the 2022 Mackinac Policy Conference on June 2, 2022 | Allison R. Donahue

Whitmer, a Democrat who is up for reelection in November, is pushing her own tax-reduction plan. She has called for a one-time $500 tax rebate for working families to offset the impact of inflation, rolling back the unpopular tax on certain retirement income and tripling the size of the state Earned Income Tax Credit.

The five Republican GOP candidates seeking to unseat Whitmer have proposed cutting state taxes that would gut state government and make it more difficult to, among other things, improve Michigan as an attractive place to live, and develop the more skilled and educated workers businesses desperately need.

Tudor Dixon, Kevin Rinke, Ryan Kelley and Garrett Soldano all want to eliminate the personal income tax, which this year will generate about $13.5 billion in revenue and supports most of the state’s General Fund spending. 

In a candidate debate last month on Mackinac Island, sponsored by the Detroit Regional Chamber, Ralph Rebandt said he would eliminate the General Fund. 

None of the candidates have detailed how they would replace the lost income tax revenue or trim expenditures to support the massive tax cut. Rinke, a Bloomfield Township businessman, said he’d leave it up to the Legislature to figure it out, but wants the personal income tax eliminated by Jan. 1, 2024.

The prospect of ditching the personal income tax might not be as outlandish as it seems. Dixon has received endorsements from the politically powerful DeVos family and the Michigan Chamber of Commerce, a forceful lobbying voice in Lansing.

Should Dixon win the GOP nomination for governor next month, she could attract more support from business leaders and others pushing for big tax cuts. At the least, it would likely prompt Whitmer to sweeten her own tax-cut proposal.

GOP gubernatorial candidates the Bureau of Elections said had enough signatures (clockwise): Garrett Soldano, Kevin Rinke, Ryan Kelley, Tudor Dixon and Ralph Rebandt,

Some say eliminating the personal income tax would make Michigan more competitive with Tennessee and the seven other states that don’t have one.

Ford Motor Co. recently chose Tennessee as the site of its massive, $5.6 billion BlueOval City electric vehicle complex, which will include battery and vehicle assembly plants that will employ about 6,000 workers.

But Tennessee and other states that don’t levy a personal income tax generally have a higher sales tax rate that captures more services than Michigan’s sales tax. Those states also allow for local sales taxes, which are generally prohibited in Michigan.

And political rhetoric aside, Michigan is a low-tax state. Michigan has the fifth-lowest state-and-local tax burden in the country, according to the Tax Foundation, a prominent, conservative-leaning think tank.

“Contrary to what many may think, Michiganders actually have it relatively good when it comes to their tax burdens,” said Bob Schneider, senior research associate at the nonpartisan Citizens Research Council (CRC) of Michigan.

Michigan’s state tax burden — state tax collections as a percentage of personal income — has been falling for more than 20 years, from 7.6% in 2000 to 6.4% last year, according to the CRC.

“In short, while it may not feel like it, state government takes a smaller bite out of the average Michigander’s paycheck than it did 20 years ago,” Schneider said.

While elected officials are calling for tax cuts to help families deal with the impacts of escalating gasoline and grocery prices, Schneider makes the intriguing argument that state tax cuts don’t stimulate the overall economy.

That’s because Michigan is required by law to balance its budget. Revenue returned to taxpayers increases disposable income, much of which gets spent and increases economic activity.

But the economic boost consumer spending provides is offset by the loss of state revenue, which causes a reduction in spending for public services, including education, public safety and health and human services.

Contrary to what many may think, Michiganders actually have it relatively good when it comes to their tax burdens.

– Bob Schneider, senior research associate at the Citizens Research Council of Michigan

“This public sector spending brings the same economic ripple effect as the tax cuts,” Schneider said. 

In short, it’s a wash.

Michigan’s budget surplus, estimated in May at $6 billion for the current fiscal year, will likely result in tax cuts. Schneider said he’s not necessarily opposed to that outcome. 

“To be clear, state taxes should be no higher than they need to be,” he said.

But he and other experts say the budget surplus is likely a short-term phenomenon. The state could soon return to dealing with its historic budget challenges, particularly if the Federal Reserve’s inflation-fighting interest rate hikes plunges the economy into a recession.

A deep tax cut, like the $2.5 billion one Whitmer vetoed, would likely make it even more difficult to balance the budget and keep the state on a competitive footing.

Tax cuts require tradeoffs in spending priorities. Schneider said any new effort to trim taxes must “recognize Michigan’s recent revenue history and be transparent about budget tradeoffs that are required.”

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Rick Haglund
Rick Haglund

Rick Haglund writes the "Micheconomy" column for the Michigan Advance. He's a former reporter and business columnist for Booth Newspapers, now the MLive Media Group, with extensive experience covering Michigan’s economy and the auto industry. He now works as a freelance writer based in Southeast Michigan.

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