Michigan Needs to Jump Start its Economy with Tax Cuts

Having largely failed to take part in the nation’s recent economic recovery, there are now preliminary signs that Michigan’s economy is no longer plunging downward. It could still use some help, however, and a tax cut is just what it needs.

Back in 2000, the state’s unemployment rate averaged just 3.7 percent. As the national economy slowed in 2001 and 2002, Michigan’s unemployment rate worsened to 5.2 percent and then to 6.2 percent. But, instead of following the national trend downward once again as the national economy rebounded, Michigan’s jobless rate rose above 7.0 percent in 2003 and has hovered there for most of the past two years. As of July, Michigan’s unemployment rate remained at 7.0 percent. This is actually worse than in June, when Michigan’s rate was second worst in the nation behind Mississippi. Michigan is one of only two states in the country to suffer net job losses in 2005.

It is probably no coincidence that the deterioration of Michigan’s economy, relative to the nation as a whole, took place at the same time politicians of both parties were busy raising taxes and reneging on promises of tax relief. Previously-scheduled income tax cuts were temporarily frozen; the phase out of the Single Business Tax (from 2.3 percent in 1999 to zero over 23 years) was put on hold; cigarette taxes were raised by 75 cents per pack (a $300 million additional annual burden on smokers); the tax on Detroit’s casinos was hiked from 18 percent to 24 percent; driving fees and penalties went up (at a cost of $115 million annually); and the collection of county property taxes was sped up to the detriment of property owners.

The cumulative effect of this array of tax hikes and additional fees and penalties has been to stifle the state’s prospects for economic recovery. The good news is that a rising national economic tide will eventually lift all boats — even the leaky ones.

The Senate Fiscal Agency’s recent report that June’s tax collections were $140 million above estimates and that overall tax revenue was up 5.3 percent — well above previous projections of 3.0 percent — was a relief to the state’s elected leaders. But in July tax revenue was down "a slight 0.3 percent or $4.7 million from last year’s level." This just underscores how tenuous Michigan’s economic recovery remains. The Great Lakes State cannot be satisfied with a sluggish economy and an unemployment rate that is 40 percent higher than the national average.

The realization that internal structural flaws are to blame for Michigan’s ongoing troubles relative to the rest of the nation is why legislative leaders and Gov. Granholm are busy looking for ways to turn the state’s economy around.

The governor has proposed a much-publicized "revenue neutral" tax shift that provides significant tax relief to manufacturers, but "pays for" that reduction by more than doubling taxes on insurance, tripling taxes on profits, and removing $400 million in credits and deductions against the Single Business Tax. There is at least one alternative to this plan being offered in Lansing, and that involves a series of changes outlined by State Rep. Rick Baxter and Hillsdale College professor Gary Wolfram in a recent Wall Street Journal article.

The Baxter and Wolfram proposal borrows ideas from several bills that are now being considered by the Legislature. These bills would reduce the SBT rate from 1.9 percent to 1.7 percent, establish a refundable 10 percent property tax credit against the SBT, change the SBT formula to be based 100 percent on sales (thereby providing an incentive to locate in Michigan), and eliminate the SBT that businesses pay on their employee health insurance costs.

Although Gov. Granholm denounced Rep. Baxter as "treasonous" for commenting on Michigan’s economic woes and laying out a plan to address them, she should have welcomed his suggestions as a good starting proposal that would only reduce revenues by $275 million per year. The revenues could be made up by adopting any number of proposals outlined in Mackinac Center for Public Policy budget studies.

This small package of tax cuts would nudge Michigan back in the direction of lower taxes and stronger economic growth after years of misguided tax policies. Gov. Granholm and the Legislature must ensure that any growth in state revenues is used to reinforce the state’s nascent recovery, and not to undermine it with additional spending. Lowering taxes, even modestly, would be a sign that "Michigan is Open for Business."

Paul J. Gessing is director of government affairs for the 350,000-member National Taxpayers Union and has written this article for 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.