Fourteen percent of Michigan' labor force is unemployed. Thousands of others are underemployed or fear for their jobs. Yet a proposal by Gov. Jennifer Granholm for a net tax increase of $554 million in fiscal year 2011 would only exacerbate the problem, causing the loss of nearly 30,000 jobs in the first year alone, according to an economic modeling tool employed by Mackinac Center analysts. Just as bad, real disposable income would fall by $1.9 billion statewide. Wages would drop by more than $1,400 per person.
The tax increase, proposed last February, would raise more than $940 million in new revenues through 2014, according to the House Fiscal Agency. Offsetting provisions to eliminate the hated Michigan Business Tax surcharge and provide modest cuts in the Gross Receipts Tax would limit job losses to "just" 13,500 through 2014, according to the STAMP model (State Tax Analysis Modeling Program) done in conjunction with tax experts at the Beacon Hill Institute in Boston. This is the wrong tack to take with a state that has experienced a lost decade of economic growth. Instead, Michigan's Legislature should repudiate this proposal and immediately cut both state spending and taxes. .
This proposal would be Gov. Granholm's second major tax hike in less than three years. In 2007, she led a successful effort to increase personal and business taxes by $1.4 billion, including (an estimated) $600 million surcharge tacked onto the new and complex Michigan Business Tax, created that year to replace the equally complex Single Business Tax.
This latest tax increase idea would extend the state sales tax to a wide variety of services while lowering the rate from 6 percent rate to 5.5 percent, effective Dec. 1, 2010. Gradually offsetting the resulting $554 net tax hike would be a phased-in elimination of the MBT surcharge over two years (beginning Jan. 1, 2011), and an MBT Gross Receipts Tax rate reduction from 0.8 percent to 0.6 percent, also phased in over two years, but not beginning until Jan. 1, 2012.
To more precisely gauge the economic impact of these changes, the Mackinac Center worked with the tax experts at the Beacon Hill Institute in Boston to build a Michigan-specific economic model. We recognize that models are simplifications of reality and that the farther out you try to predict the more difficult it is to achieve an accurate accounting. Still, they can provide useful insights.
Our modeling results show that in the first year of the tax hike, total investments in the state would decline by $264 million. When the offsetting business tax hikes are fully phased-in beginning in 2014, investment in the state could be expected to increase to $951 million and total real disposable income would rise by $409 million. Despite those improvements, the net impact on per-capita wages would still be negative through 2014, declining by $1,085.
While it is good to see the governor acknowledge that tax cuts are necessary, we question the need to phase them in only after a tax hike is complete. It is not hard to imagine politicians later amending such a law to thwart promised tax cuts once the new tax revenue has begun rolling in. This would be akin to a legislative Wimpy, the fat and clever friend of taxpayer Popeye, promising to "... gladly pay you Tuesday for a hamburger today."
Our projections are consistent with the findings of other scholarly examinations of tax issues that on balance show a negative relationship between economic growth and taxes. For example, a 2006 study by economist Robert Reed examined data from 48 states between 1970 and 1999 and concluded that imposing higher taxes to support general expenditures has "significant, negative effects on economic growth." Specifically, increasing taxes by one percentage point was found to be followed by a 1.37 percent decline in per capita personal income growth.
Both the historical record and the new modeling projections suggest that a tax increase would only compound Michigan's recent economic decline. Ours has been the only state to suffer a negative growth rate in the previous 10 years (1999-2008) as measured by state Gross Domestic Product (negative 2.1 percent). During that period, Michigan's per-capita personal income fell to a level 13.1 percent below the national average and the state has experienced the nation's highest unemployment rate for 49 consecutive months.
In addition, Michigan's existing tax system - compared to other states - is already extracting relatively larger amounts from a declining economic base. In 2009, (according to revised figures from the Census Bureau) 19 states experienced larger tax revenue declines than Michigan as a result of a nationwide recession. This is surprising, because this state lost jobs at about twice the rate of the national average. One would expect that government revenue here would have declined more than most states, not less. Instead, the average state lost tax revenue equal to about $14,880 per lost job, while in Michigan the comparable figure was only $9,947.
The grim reality is that a tax hike at this time could contribute to an economic "death spiral," in which extracting more revenue leads to reduced economic activity, leading in turn to calls from the political establishment for even more tax increases.
There are better alternatives to raising taxes, such as those outlined by Mackinac Center analysts. For example, Center research indicates that state, local and conventional public school employees in Michigan annually receive $5.7 billion more in benefits than comparable private-sector rates. Unlike a tax increase, redressing this imbalance would strengthen rather than weaken the state's economy, and improve the well being of its residents.
While Michigan residents must be tired of the tax debate, history shows us that taxes have helped shape the course of civilization - for better or for worse - throughout recorded time. In fact, Sumerian culture (which dates to 5,000 B.C.) produced clay tablets with the warning: "You can have a Lord, you can have a King, but the man to fear is the tax collector."
Today that fear remains present and justified. Research and experience has shown that, on net balance, taxation is a jobs and opportunity killer. Gov. Granholm's most recent tax proposal is a case in point and should be put down before it kills more jobs and denies more wealth to Michigan residents.
Michael D. LaFaive is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.