What’s the Purpose of a Tax?

(Note: This essay is adapted from a letter sent to Mackinac Center supporters earlier this year.)

What’s the purpose of a tax? Your answer to that question can reveal a lot. If you think the purpose of a tax is just to raise the necessary funds to operate the government, you may not be ready to be a legislator.

At the beginning of this year a reporter asked Speaker of the House Andy Dillon to comment on the then-new Michigan Business Tax he had helped birth. Dillon said, "It [the tax] rewarded Michigan businesses for doing the things we want them to do."

Now, I don’t doubt that Speaker Dillon sincerely believes a tax should benefit taxpayers for doing the things state lawmakers want them to do. But what does this say about his view of government’s relationship to the governed?

Devising a tax just to collect needed funds is a task to approach with great humility, at the very least. Devising a tax to both raise money and reward certain behaviors through central planning requires talents that humble people are usually loath to assume they possess. If lawmakers see a need to control people’s behavior, isn’t that what the criminal code is for?

Maybe the reason lawmakers took an entire year to devise their new business tax is because it just isn’t all that easy for 148 legislators to figure out what "things" they want 107,000 job providers to "do." That’s no insult to legislators. It merely illustrates the fact that no one gives legislators superpowers that improve their ability to manage the far-flung affairs of others. Senators and representatives are just about as good at that once in office as they were before they got elected.

Deep down, I think politicians know this. Or at least they are afraid you know this. That’s why you probably won’t hear a campaign promise like this one: "If you elect me, I will reward you for doing the things I want you to do." Yet, that’s essentially what we heard from Speaker Dillon when his new tax went into effect.

I don’t mean to unfairly single out Andy Dillon. Perhaps he’s simply the most forthright legislator who shares his philosophy. Plenty of Republicans and Democrats in our Legislature voted last year to saddle us with a record $1.4 billion tax increase on incomes and businesses. Michigan has the worst economy in the nation by numerous measures, including unemployment rate, jobs lost and the number of United Van Lines trucks hauling Michigan residents to new lives in other states. Still, the Legislature’s minuscule spending cuts were more than dwarfed by the $900 million in net spending increases it approved. Do the math: This year’s state budget spends $900 million more than last year’s. The new tax system takes $1.4 billion more from us. There’s a reward in there somewhere, we’re told.

Such fiscal malpractice in Lansing prompted a groundswell of residents to help the Michigan Taxpayers Alliance try to recall Speaker Dillon from office. Recall supporters produced more than 15,000 signatures to place Dillon on a recall ballot in August. Dillon, whose supporters were found to have hired a convicted felon for "voter education," says MTA did not collect enough valid signatures to trigger the recall election. The Secretary of State indicates Dillon may be right and has set June 5 as a date for a final decision.

No matter what the ruling on June 5, there will almost certainly be a court challenge. Even if the recall ultimately fails, House Speaker Dillon faces new, energetic opposition in his own Democratic Party primary and an emboldened Republican opponent in November. Dillon may pay a hefty political price for his leadership role in last year’s tax hikes.

The tax that Dillon said "rewarded" Michigan businesses is not turning around the economy and it’s not even preventing state budget deficits. State officials predict another deficit this year — as much as $472 million.

If Dillon and his colleagues believe the purpose of a tax is to prevent budget deficits, they should admit that approach has failed. Indeed, there may be no way to close this year’s deficit without spending cuts. Lawmakers should consider the Mackinac Center’s list of 55 ideas to save $1.358 billion. If they do, they’ll find little need to increase taxes at all, which can be its own reward.

Joseph G. Lehman is the Executive Vice President and COO of 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.