The Case for Keeping Taxes Low

Visiting Dignitary Lecture Series
Mackinac Center for Public Policy
May 18, 2001

Good morning, ladies and gentlemen. Thank you for inviting me here to the Mackinac Center.

As Speaker of the House, I deal with a lot of issues that affect people's lives. Taxation certainly is one of the most important, and that's what I'm going to talk about today.

It's been said that nothing is certain except for death and taxes. In past years here in Michigan, it seems like you could have changed that to "death and rising taxes."

I'm happy to say the Republicans put a stop to that. Along with Governor John Engler, the Republicans cut taxes more than 30 times in the past 10 years.

Those tax cuts have put literally billions of dollars back into the pockets of Michigan taxpayers.

This has helped our economy prosper and enabled us to strengthen our schools, improve our roads, bolster law enforcement and reform welfare, among other things.

But as you know, whether it's the national or state economy you're talking about, the good times cannot last forever.

Economies generally rise and fall in cycles, and right now we're on a slightly downward trend.

Most of you have probably read the accounts of Michigan's fiscal situation. The experts are forecasting tax receipts will be down about $592 million this fiscal year.

The forecast for fiscal year 2001-2002 also has been revised downward - to the tune of $741 million. However, thanks to prudent spending over the past decade, the state has a $1.3 billion "rainy day fund" that will help us through the lean times.

We've known for some time that we could expect diminishing revenues. It did not surprise me that as soon as this became apparent, the tax-and-spend crowd started calling for scrapping the tax cuts.

A review of tax cuts

• In 1999, the Legislature voted to reduce the income tax rate from 4.4 percent to 3.9 percent over a five-year period.

• The rate is now 4.2 percent. That will decline to 4.1 percent on January 1, 2002; 4 percent on January 1, 2003; and 3.9 percent on January 1, 2004.

• The Single Business Tax will be phased out over the next 20 years. This tax has been a millstone around the neck of Michigan business and industry for a quarter century. It has been one of the most burdensome and impractical taxes on the books. If you're a business owner, the Single Business Tax is calculated partly on the value of your payroll. If you raise wages or benefits, that means higher taxes. Therefore, the Single Business Tax is a disincentive for employers to offer their employees higher wages and better benefits.

• The income tax exemption for all children under age 19 has been increased to $600.

• The special exemption for seniors and disabled persons has been doubled from $900 to $1,800.

Tax relief has driven the engine of Michigan's economy. It has stimulated business and industry, providing jobs, prosperity and opportunity for millions.

But there are factors beyond our control, such as rising gasoline prices, higher energy costs, the decline in the stock market, and layoffs at large companies such as DaimlerChrysler. The downturn is nationwide, not just in Michigan.

There's an adage that if you want less of something, tax it. While we do need a certain amount of taxes to pay for the basic functions of government, you reach a point of diminishing returns.

From then on, the higher you raise taxes, the less growth, development and job creation you'll have. The tax-and-spend crowd doesn't seem to recognize that spending cuts are practical and prudent. They would like nothing better than to delay or cancel the income tax cuts and keep spending spiraling upward.

But trying to tax your way into a better economy is like kicking someone while he's down and expecting him to get up quicker.

Businesses and consumer spending are the engines that drive the economy. The economy will rebound sooner and with greater vigor if we let the income tax cuts take full effect, and continue phasing out the Single Business Tax.

Remember what Michigan was like back in the 1980s when the Democrats were in charge? High income taxes, high property taxes, worker's compensation costs that forced many companies to leave the state.

On a larger scale, remember what the U.S. economy was like before President Reagan implemented his landmark income tax cuts in 1981?

High inflation, interest rates and unemployment. A laggard stock market. Slow growth; stagflation and malaise.

Reagan's tax cuts trimmed the top rate down from 70 percent to 35 percent. At the same time, Reagan eliminated many tax shelters that the rich routinely relied on to avoid paying taxes altogether.

This gave them the incentive to invest in the free market and actually pay taxes.

In 1981 federal income tax receipts totaled $347 billion; in 1989 they totaled $549 billion -- a 58 percent increase. That's right: Cutting taxes increased tax revenues.

The average annual growth rate of real gross domestic product from 1981 to 1989 was 3.2 percent, compared with 2.8 percent from 1974 to 1981.

Median household income rose steadily during the 1980s, and the U.S. economy created 17 million jobs. High inflation and interest rates, both of which robbed consumers of purchasing power, were dramatically reduced.

I may be preaching to the choir, but it's obvious that for Michigan in 2001, the answer is spending cuts, not tax increases.

Let me personalize this by discussing household income and budgets. Suppose an individual or family has been hit by tough times.

Many of us have experienced hard times - often lasting just a few months, but sometimes dragging on for years. Perhaps it was being laid off or downsized out of a job. Or maybe it was getting hit by unexpected expenses due to a medical emergency or natural disaster.

Whatever the cause, it's pretty much a no-brainer what the solution is: You look for ways to tighten your belt to make up for the hit your income has taken.

Many of us could name dozens of ways right off the bat that we could trim household expenses. Cut out the cable TV, stop buying Ben & Jerry's ice cream for $4 a pint, reduce your number of magazine subscriptions, don't eat out quite so often.There are many ways you could cut costs if it was necessary, without affecting the bare necessities.

True, it is not unheard of for a mother or father to take on a second job to help make ends meet. But that can take its toll on your marriage and family life, not to mention your physical health. So it's not always the best way to go.

Most of us would look for those spending cuts, and do what it takes to keep spending at or below income. The alternatives are grim. You know what happens when you run up credit card debt and have a hard time paying your bills.

You're wasting literally thousands of dollars on interest when you pay those credit card bills. And if you get behind on your payments, you could get your car repossessed, a foreclosure on your home, and/or a tarnished credit record.

Now, thank goodness, Michigan's government hasn't gone down that road of irresponsibility. Under Republican leadership, the state has done a reasonable job of spending the taxpayers' money wisely and prudently.

If we hadn't, we would not have that $1.3 billion rainy day fund to alleviate our downturn.

But to continue annual spending increases at the same rates we've had the past few years would be highly irresponsible.

I have encouraged my fellow lawmakers on both sides of the aisle to follow several important guidelines while dealing with state budget adjustments in the weeks ahead.

First, the basic foundation grant, an across-the-board, per-pupil amount given to public schools, must be protected so our education system is strong.

Second, the books must be balanced so the state retains its bond rating, which is crucial to local units of government. For those of you who didn't know this, Standard & Poor's recently awarded Michigan with a Triple-A credit rating.

Michigan is one of only 10 states to achieve that rating. And prior to this year, the last time we were rated so high was 1975.

Keeping the best possible bond rating saves the taxpayers money since it means we can pay back loans at lower interest rates.

I have basically urged my fellow lawmakers to approach the budget process with integrity. It is my position that if we balance the books without resorting to gimmicks, it will keep Michigan on the right economic path.

These next few weeks will be crucial. Quite frankly, it isn't going to be easy. There might be a lot of late-night meetings and some spirited exchanges between lawmakers who disagree on our budget priorities.

But I am confident that the Republican caucus will stave off efforts to delay or eliminate the tax cuts we've promised to the hard-working people of Michigan.

I will value your input and comments in the coming weeks, and I encourage you to remain engaged in the legislative process.

Thank you for your attention.