Michigan’s problems highlight need for new tax code
The unbalanced state budget. Cuts to school funds. Statewide unemployment of 15 percent. The steady flow of residents leaving the state. A foreclosure rate rivaling only the speculator markets of Nevada, Florida, and the like. Michigan is an exacerbated example of the woes facing the U.S. economy - the poster child of how bad things can get. There is one thing we can do that will have real impact on Michigan's economy and Michiganders' lives. Let's talk tax code.
According to the Tax Foundation, 39.3 percent of Michigan's tax revenue comes from property taxes, putting our state at sixth in the nation for property tax reliance. General sales and selective sales taxes make up another 32 percent, income taxes generate 18.7 percent, corporate taxes 4.7 percent, and licenses and other fees round out the remaining 5.3 percent. The Tax Foundation also ranks states' business tax climate (www.taxfoundation.org/files/bp59.pdf) based upon their corporate, individual income, sales, unemployment insurance, and property tax rates. Michigan ranks high in the individual income and sales tax, but we're tanking on the corporate, unemployment insurance, and property tax indices. Given that Michigan wants to attract new industries to our state, and seeing that corporate taxes make up such a small percentage of our total tax revenue, our ranking of 48th in the corporate tax index is out of line with our goals. It's even plausible that an elimination of corporate taxes would pay for itself through the additional tax revenue generated by job creation. According to Michigan's Unemployment Insurance Agency, our employer unemployment tax “is more closely based on the actual benefit charges to its account, and the size of payroll, than employers in most other states.” If you read the explanation of how the tax is computed, you would be amazed that anyone even bothers to own a business in Michigan. It's not only our tax rates that need to be addressed, it's also the sheer complexity of our tax code. We can relieve the property tax burden by simply extending the burden to everyone. Currently, nonprofits, such as universities, hospitals, and cultural centers, do not pay property taxes. For example, in Ann Arbor, 40 percent of the land is exempt from property taxes. This creates an enormous burden on home and business owners. So much so, that the city is considering an income tax. Even a small property tax on nonprofits would be a boon to both residents and businesses. But what about all those tax credits for the film and battery industries? Those targeted tax credits do not help businesses currently struggling in Michigan and they do not encourage businesses outside of those industries to look at our state. Instead of offering millions in refundable tax credits to specific industries, save that money and lower the burden on all industries. We want to diversify our economy; tethering our fortunes to the auto industry started this mess in the first place. Instead of cherry-picking winners and losers, our tax system should favor all industries, big or small, cutting-edge technology or simply old-fashioned.
Ann Arbor resident Janelle C. Baranowski is a 2005 graduate of the University of Michigan with a degree in history and Eastern European studies. She is a sales associate at Pacific Industrial Development Corp. (PIDC).
Comments
KJMClark
Thu, Nov 5, 2009 : 9:40 p.m.
"I disagree that the price of gas put the Big Three into bankruptcy. The Big Three had many problems before the price of gas made their product lines less attractive to consumers. For example, the legacy costs of healthcare and pensions, labor costs that far exceeded foreign competitiors', a failure to forecast the market for smaller fuel-efficient vehicles, bloated infrastructure (too many dealerships, product lines, plants...), etc." No, they were profitable before oil prices began rising. That was when their profits started to disappear. Please check their profit reports for the late 90s and early 00s. Then do a search for oil prices for the same period. Here's one at Wikipedia: http://en.wikipedia.org/wiki/File:Brent_Spot_monthly.svg. Oil prices began rising in the late 90s, dropped a bit during 2001, then rose in earnest until the peak in early 2008. The Brent crude price rose over that period from under $20 per barrel to over $120 per barrel. Here's a University of Michigan Transportation Research Institute report, from 2006 that helps to spell this out: http://deepblue.lib.umich.edu/bitstream/2027.42/55389/1/99823.pdf. The report is looking at whether automakers should have had better fuel economy mixes in place to deal with fuel price increases. Notice that this was written in 2006, when oil prices were around half the peak they eventually reached - and about the same prices as today. Please read page 5. This starts with, "High Fuel Prices Have Diminished Detroit Automakers Market Share and Profit The relationship between fuel prices and automakers product mix and profits has a long history. The events of 2005 reinforce the conclusion that rising fuel prices have a substantial impact on profitability. The key issue here is that automakers that are highly leveraged in truck-based products (SUVs and pickups) are especially vulnerable to higher fuel prices since these products tend to be less fuel-efficient. When fuel prices were low in the 1990s (1990-1999 average gasoline price: $1.50 per gallon in todays money), being dependent on such vehicles for profits was not a liability. It is a serious liability today." Keep going on page six, which includes, "Financial Health of the Domestic Automakers Have Been Hurt by High Fuel Prices The poor financial health of GM and Ford can be attributed in large part to the effects of high fuel prices and their dependence on truck-based products." Until the price of gas soared in 2007-2008, the domestic automakers were shrinking quickly enough to survive - in the process putting the Michigan economy into a recession. However when oil prices doubled in 2007-2008, that both burst the housing bubble and put GM and Chrysler (then independent again) into a tailspin. Their legacy costs were far less of an issue when they could still profitably sell SUVs and trucks to a willing public. Their loss of SUVs and trucks as profit centers and the resulting loss of market share as gas prices skyrocketed, strongly amplified the effects of their legacy costs. As I noted before, the oil/gas prices were the proximate cause of Michigan's problems. I would urge you to find some support for your argument that our tax code led us to these problems. The problems of our tax code seem to be far more the result of the disaster in the auto industry than its cause. Perhaps you can find something from someone in the industry saying that none of this would have happened if Michigan's tax structure was more friendly to business? Or that something changed in the tax code that brought this on?
Janelle Baranowski
Mon, Nov 2, 2009 : 10:22 a.m.
KJMClark, thank you for your comments. I disagree that the price of gas put the Big Three into bankruptcy. The Big Three had many problems before the price of gas made their product lines less attractive to consumers. For example, the legacy costs of healthcare and pensions, labor costs that far exceeded foreign competitiors', a failure to forecast the market for smaller fuel-efficient vehicles, bloated infrastructure (too many dealerships, product lines, plants...), etc. Our state was already in recession before the US market tanked in late 2008. Much of the blame can be put on tying our fortunes so closely to the auto industry, rather than focusing on diversifying our economy. As the Big Three began their decline, so did Michigan. My argument is that tax reform is needed to encourage all industries to consider investing in our state. In order to avoid this situation in the future, our economy must be diverse enough to weather the decline of an industry. Under our state constitution, Universities are exempt from tax. This could always be changed. However, I primarily mentioned it as a suggestion, not a concrete solution. Personally, I would favor a property tax on the university over a city income tax, but that's just my opinion (probably because I see this as a state-wide issue, versus just an Ann Arbor issue.) I would like to see university (and non-profit) taxes reflect their usage of public utilities. Currently property taxes are collected for varying funds, such as education, municipal services, general funds, etc. It's my stance that non-profits should pay property taxes for the municipal services they use. As you said, it would be redundant for them to pay into the education fund, for example. However, my main argument is that our current tax code sets us up to be reliant on certain industries for our good fortune. I believe that we need to find a way to reform our tax structure to make us attractive to all industries. I do not think we should aim to be "around average" in Tax Foundation rankings as you suggest; I think we should aim to be among the highest ranked. And in order to accomplish that, we need to comprehensively address our tax structure, as there is no silver bullet that would cure our current system. As Basic Bob implied, our current system does not address the long term, it is mostly focused on one-time credits and incentives. I contend that our system should be reformed to reflect long term goals and viability. Thanks again for reading and your comments. Janelle www.some-other-viewpoint.blogspot.com
Basic Bob
Mon, Nov 2, 2009 : 9:34 a.m.
Excellent points. If a manufacturing company is considering either moving to Michigan or just staying here, they will always consider taxes. This is a cost to the business that has no significant effect on productivity or sales, only profitability. The business does not see what they get in return for tax money spent. So when they look at Michigan, they will compare the tax load compared to other locations. An ethical business (the kind we want to attract) will be willing to pay their way, as long as the cost is fair. As far as property tax, there are so many incentives and infrastructure improvements given to new buildings, it is hard to imagine what the actual rate is to existing facilities. If we want long-term success, we should have a long-term plan.
KJMClark
Sun, Nov 1, 2009 : 11:12 p.m.
"The unbalanced state budget. Cuts to school funds. Statewide unemployment of 15 percent. The steady flow of residents leaving the state. A foreclosure rate rivaling only the speculator markets of Nevada, Florida, and the like." Maybe you missed this, but gas prices skyrocketed the past few years, putting Michigan's largest industry mostly into bankruptcy. At the same time, a national housing bubble burst, throwing the country into its worst recession since the Great Depression. Surely this economic calamity is more to blame than our tax ratios for the state's problems, isn't it? Besides, if we want to fix our rankings at the Tax Foundation, it looks to me like we should increase the income and sales taxes, and lower the other taxes, so that our ranking is consistent and around average. However, the legislature keeps considering sales tax changes, and continually concludes that the worst recession since the Great Depression is not a great time to raise taxes. I'm not sure increasing taxes on charities would be a solution. At this time in history, groups like the Salvation Army and St. Vincent DePaul certainly don't need increased taxes. 40% of Ann Arbor's property is off the tax rolls largely because of the University of Michigan, but no one can tax the property of the University, and if we really value education, no one should. It doesn't really make sense to tax public school and university property only to pay them back from taxes for the lost revenue. Apparently some other states are taxing non-profit day-cares, but I'm not sure how many people would vote for that. Finally, the amount of Ann Arbor land off the property tax roles is one of the main reasons the City keeps considering an income tax. A number of University Presidents have pointed out that there's no use getting upset about the University's land ownership. The State Constitution says Ann Arbor can't tax the University's property. However, those same Presidents have pointed out that it would be perfectly legal to have a city income tax, which University employees would pay like everyone else. And notice, that the Tax Foundation says we have low income taxes but high property taxes, and putting in place a city income tax would increase income taxes and lower property taxes, helping to correct the imbalance the Tax Foundation found. This really seems like a better solution.
DonBee
Sun, Nov 1, 2009 : 7:59 p.m.
Janelle - Very well put, thank you. I hope someone who has the ability to really do something is reading. On another not, the labor rules in Michigan also need to be reviewed if we want to attract more business to the state.