Legislature Should Be Bold on Tax Cuts

The Michigan House has advanced legislation to gradually roll back the state’s personal income tax rate to 3.9 percent from its current 4.35 percent. That would be a good start, but a slight blip upwards in the state unemployment rate reported last week suggests this is no time for being timid or complacent.

The full Legislature should go ahead and institute this cut, and then double-down by cutting the corporate income tax, eliminating the property taxes firms now pay on business tools and equipment (“personal property tax”), and replacing the foregone revenue with spending cuts only.

Voters’ memories are short and Lansing’s political class exploits this. In 2007, the Legislature approved an 11.5 percent personal income tax hike, but promised that the higher rates would be phased out starting in 2011. Not surprisingly, a tax hike sold as a way to solve the government’s spending problems did not, and when a new governor took office in 2011 he faced a huge gap between revenue realities and previous lawmakers’ spending intentions (the so-called “deficit”). 

Sadly, in addition to many positive reforms, this new governor and a new Republican majority in the Legislature chose to lower the income tax to 4.25 percent starting next year and just leave it there, breaking that 2007 promise that the tax hike would be “temporary.”

The measure approved this week by the Tax Policy Committee would partially restore that promise. “Partially” because it lowers the rate even more gradually, returning to the original 3.9 percent rate only in 2018.

Cynics might suggest that establishment politicians are no more sincere about the new gradual rate decline than they were about the last one, and are just posturing before hitting the campaign trail. Sincere or not, Michigan’s economy would be in much better position to thrive if the “personal property” and corporate income taxes cited above were eliminated. This would annually save job providers $1.3 billion and $839 million starting in fiscal 2013, respectively, and remove two huge disincentives to starting or expanding a business in Michigan.

Enacting a tax cut of this magnitude is very possible. In the past the Mackinac Center has identified reasonable spending reform ideas that total $2 billion, and shown how getting government employee benefits in balance with private-sector averages would save more than $5 billion annually.

It’s simply a matter of priorities — taxpayers vs. costly government programs and excessive benefits paid to members of government employee unions.

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