Raising the state income tax rate is a better way to balance budget
Joel Levitt
The governor has recommended limiting the tax on non-subchapter S corporations to a 6 percent tax on income and taxing all other business income at the general income tax rate. And, he recommends reducing the general income tax rate to 4.25 percent from 4.35 percent.
These recommendations would create a $1.8 billion shortfall, which the governor would offset by changing certain income tax credits and by imposing a diversity of spending cuts. He proposes to change those who are eligible for the homestead property tax credit to those with taxable incomes of less than $70,000 from the present $82,650. He proposes to tax all non-Social Security pension income. The governor proposes to eliminate many credits and deductions related to the individual income tax. These include :
• The deduction of voluntary contributions.
• The Farmland Preservation Credit.
• The stillbirth credit. • The Earned Income Tax Credit.
• The Energy Efficient Qualified Home Improvement Credit.
• The Historic Preservation Tax Credit.
• The Michigan Home Heating Credit.
• The Michigan College Tuition and Fees Credit.
• The Michigan Qualified Adoption Expenses Credit.
• The Michigan Venture Capital Deduction.
It should be noted that each of these credits and deductions were enacted to serve important needs of Michigan citizens, and that eliminating many of them will burden most those who are least able to pay.
The idea that underlies the governor’s proposals is that reducing taxes will nurture Michigan businesses and attract more businesses, with the effect of increasing employment and state revenues. In our society, the task of business is to make a profit, and certainly taxes reduce profits.
However, there are other important factors that affect business success.
Businesses must have competent and healthy employees. This requires a good professional education system for employees and their children, good nutrition and housing, a pollution-free environment and adequate numbers of competent medical personnel and hospitals.
Businesses must have a peaceful environment in which to operate. This requires that most citizens believe that they are being treated fairly, and it requires adequate numbers of good professional police and courts.
Businesses must have adequate utilities and fire protection. If they are to get their products to market, businesses must have good roads and rail.
And, if they are to enjoy consumer trust and thus sales, businesses must have competent product quality and safety assurance agencies and market regulation.
So, while low but adequate taxes are attractive, they are just a start. Meeting the other needs of business costs money, lots of money, and requires a large number of skilled public employees, who are sufficiently rewarded that they stay.
In the long term replacing all Michigan taxes with a graduated income tax may be the best course, but we are confronted by a near term crisis. Dealing effectively with this crisis will require lots of thought from each of us. In the meantime, there is a much simpler course of action than that proposed by the governor. Restructure Michigan business taxes as the governor proposes, raise the income tax rate 1.5 percentage points to 5.85 percent, and leave everything else as it is. Under present law, total 2012 Michigan projected revenue is $41.4 billion. The income tax revenue is 14 percent of this amount, i.e., $5.796 billion. So, since the current income tax rate is 4.35 percent, the income tax revenue per percent assessment is $1.332 billion. Therefore, a 1.5 percentage point increase will raise $2 billion in revenue. In summary, our state needs money and it will take a lot of work to figure out how to best raise it. In the meantime, we should be guided by the physician’s credo: “First, do no harm!”
Editor’s note: Joel Levitt cited the Michigan Economic Development Corporation; Fiscal Years 2012 and 2013 Executive Budget Recommendation; the website www.taxcreditsforworkingfamilies.org/state/michigan/; the Michigan Department of the Treasury; and the website usgovernmentrevenue.com as sources for information and statistics included in his guest column.
For nearly 50 years, Joel Levitt was an applied physicist, mostly at the Ford Research Labs and at the U-M. Since retiring, he has focused on economics, on Israeli/Palestinian peace and on art photography. He presently serves as a Washtenaw County Democratic Party delegate and as president-elect of a local photographic group, the WCC Digitizers.
Comments
JSA
Mon, Mar 7, 2011 : 5:41 p.m.
Good work Mr. Levitt. If it moves, even a little, tax it. Give me a break.
Jay Thomas
Sun, Mar 6, 2011 : 9:45 p.m.
People that make a nice salary will get stuck with the tax while the monied can just spend most of their time in Florida and not pay a state income tax. Businesses that become successful later on move their HQ (like Comerica) to Texas, a state without an income tax. Even our local Ambiq Micro. The successful are not held hostage the way ordinary folks are (which is why a state income tax drives business from MI). Most Ann Arborites would probably be in favor of this proposal. Meanwhile, a city income tax (.5-1%) is not something most would support, even though a majority of UofM and a2 city government employees don't actually live in the city anymore, and it would collect some money from them to pay for the city roads they use everyday. Another example of NIMBY.
mw
Sun, Mar 6, 2011 : 9:45 p.m.
Ask yourself -- are businesses and people generally moving from low-tax to high-tax states because the extra services are worth the extra cost? Or are businesses and people generally moving to low-tax states because of lower costs? Would Michigan be better off try to move in the direction of New York and New Jersey (high tax) or Tennessee and Kentucky (low tax)? It seems pretty clear that the high-tax/high-service model is just not attracting new 'customers', and probably the main reason is that the high-taxes don't seem to provide a high-level of service any more, they just result in large numbers of well-compensated government employees who don't provide noticeably better services than the low tax states. Michigan, for example, spends a lot on K-12 schools, but the statewide results aren't particularly impressive.
L. C. Burgundy
Sun, Mar 6, 2011 : 5:48 p.m.
In the meantime, there is a much simpler course of action than that proposed by the governor. Restructure Michigan business taxes as the governor proposes, raise the income tax rate 1.5 percentage points to 5.85 percent, and leave everything else as it is. --- Wow, a 35% tax hike. How original. And it did wonders to balance the state budget when we tried a tax hike in 2007-2008! Static tax analyses such as this are always so short-sighted, and fail to acknowledge that most tax hikes do not get close to clearing the amount of tax increase as a static analysis would suggest. When you tax income more, incomes gets more depressed and there is less to tax. Diminishing returns kick in big time especially when a hike as big as this is suggested. Interestingly enough, Mr. Levitt seems to want to continue to exempt pension income, giving an even bigger special interest benefit/loophole to union and government employees than they already get. And given this: --- For nearly 50 years, Joel Levitt was an applied physicist, mostly at the Ford Research Labs and at the U-M. Since retiring, he has focused on economics, on Israeli/Palestinian peace and on art photography. He presently serves as a Washtenaw County Democratic Party delegate and as president-elect of a local photographic group, the WCC Digitizers. --- So how much of your pension actually goes to the state in the form of taxes, Mr. Levitt? Feel free to send as much of your income to the state as you want, Mr. Levitt, which I'm guessing is close to zero already. This proposal is shamelessly self-serving.
E. Manuel Goldstein
Sun, Mar 6, 2011 : 5:46 p.m.
Tax all income (earned and unearned - like capital gains, etc). Return to the tax rates that existed during the Eisenhower administration - nationally. Legalize marijuana entirely. This reduces law enforcement costs for a benign substance, reduces incarceration rates, court time, etc, and allows the State to garner revenue in the form of taxes levied on a substance which many Michiganders will consume.
Tru2Blu76
Sun, Mar 6, 2011 : 4:32 p.m.
Mr. Levitt has done a good job in assessing the problems and outlining the "somewhat over-reaching" concepts of our Republican governor. I also think he's on the right track: we are in crisis across the country and it's time now to face the music - for - everyone - to face the music regarding shared tax burdens. Those who are still in the world of "me first, my concerns and my money are not for the community" - you may leave at any time. The rest of us Michiganians are ready to man-up, just don't come asking to get back into our club.
David Briegel
Sun, Mar 6, 2011 : 5:51 p.m.
It is quite evident from some of the posts on this blog!
braggslaw
Sun, Mar 6, 2011 : 5:05 p.m.
They are leaving... Or haven't you notice the massive brain-drain in Michigan?
Basic Bob
Sun, Mar 6, 2011 : 4:54 p.m.
I hope you are including the selfish benefits-for-life public "servants". Many people work hard with no chance for anything in retirement so these people can maintain their lifestyle after a short and undistinguished career. That's the music we're not facing.
bruceae
Sun, Mar 6, 2011 : 4:24 p.m.
Hey Joel, like another comment said, you and the rest of your liberal friends are free to send as much extra money as you want in to the state. As for me and my friends we think we are already paying too much and hope the governor's cuts go through.
braggslaw
Sun, Mar 6, 2011 : 3:48 p.m.
It is the nature of some to try to take from other what they did not earn. It is the nature of some to not recognize and accept the consequences of their decisions. When it is the nature of most, we will be like Cuba or North Korea. Blaming others is always easier than accepting the life you have created for yourself.
tim
Sun, Mar 6, 2011 : 3:41 p.m.
6% sales tax on food--- that might change our eating habits.
DonBee
Sun, Mar 6, 2011 : 3:21 p.m.
So long at it's OPM (Other People's Money) people love to spend it. For many folks, Sales Tax plus Gas Tax plus License Fees plus Federal Income Tax plus Social Security Tax plus Medicare Tax plus State Income Tax plus School Property Taxes plus County Property Taxes plus City or Township Property Taxes plus Permit Fees plus Franchise Fees on Telephones plus Franchise Fees on Cable plus Franchise Fees on Electricity plus Franchise Fees on Gas plus Taxes on Water and Sewer plus .... Is more than half of what they make. So many taxes have been buried in what we do each day in hopes that we don't notice. I don't mind consumption taxes and user fees, you use it, you pay for it. Since the average car go 50% further on a gallon of gas than it did when the gas taxes were setup, raising them makes sense. Much of what Governor Snyder proposes is to stop using the income tax and business tax system to shift money from one person to another and to stop subsidizing one industry over another. He is right, we should be open and honest about who is getting government money. No hidden subsidies, no picking winners and losers. You want money, you get a check and there is a budget line to support it. Then we really see what we are paying. As much as I might dislike Comcast, they are honest on their bills - in the list of what you are paying are a set of lines that read: Franchise Fee, FCC Fee, Michigan Regulatory Fee. Others bury it in the bill. It is time to be honest.
DonBee
Sun, Mar 6, 2011 : 8:12 p.m.
I did not say the new system did not, only that it is time to be honest. It is time to stop using the tax system as a wealth transfer system. Taxes should take money. Subsidies, welfare, etc should be a separate system. That way people would know when they are getting something from the government. I am in favor of eliminating all deductions on all taxes. Make the forms simple. Line 1: How much did you make Line 2: How much did you spend to make it Line 3: Line1 minus Line 2 Line 4: Tax rate (please consult table) Line 5: Multiple line 3 times line 4 Line 6: How much tax have you paid Line 7: Subtract line 6 from line 5 If Line 7 is a positive number send us a check, if it is negative, we will send you a check. No difference in source of income, number of people in the house, home ownership, age or anything else. Nothing at all hard about completing the tax form. Much harder to cheat, many accountants and lawyers available to do productive work.
David Briegel
Sun, Mar 6, 2011 : 5:48 p.m.
It is disingenuous to state that the existing system has not picked winners and losers just as the proposed system picks winners and losers!
Floyd
Sun, Mar 6, 2011 : 3:09 p.m.
Tax the rich!
Bogie
Sun, Mar 6, 2011 : 3:02 p.m.
These ingenious ideas have fared well for many countries, like France, Greece, etc etc etc. It only makes sense to punish those, who are sucessful. GIVE ME A FLAT TAX!
richard ziegler
Sun, Mar 6, 2011 : 2:48 p.m.
Let them eat cake...let them eat cake When the people's income is down, taxes based on that income fall. Some people find it perfectly reasonable to jack up income tax rates. Or you could observe that this pours salt on the wound by taking and increased share of their diminished income. but there is always the solution of let them eat cake. I learned my lesson. sincerely ,Marie Antoinette
Top Cat
Sun, Mar 6, 2011 : 2:44 p.m.
A "Washtenaw County Democratic Party delegate" advocating an across the board tax increase ? Perhaps Mr. Levitt missed the election results on November 2.
Ron Granger
Sun, Mar 6, 2011 : 2:37 p.m.
No new ideas here - tax and spend. Michigan government is like a cornered animal, desperate for money. They're going to stick it to anyone they can. So serious question from someone born here - why would anyone want to live in Michigan? Taxes are *high* (and for what?). The economy is busted. The real estate market is destroyed. Clue: Washington State and Seattle have no income tax. Maybe that's one of the reasons google (real google engineering, not just a sales office like A2), microsoft, amazon, facebook, and a lot of other serious tech companies have offices there. For all of the progress, Ann Arbor and Michigan have very little in that regard. More and more, people are able to work remotely, and not subject to draconian local tax restrictions. You'd probably be surprised at how many former Michigan people are out in Seattle. Michigan may have the great lakes, but you can actually eat the fish from the pacific northwest. And there is far better access to ocean, islands, mountains, rain forests, etc. Taxing people out of Michigan is not a solution. Michigan is not a utopia, nor the center of the world.
fjord
Sun, Mar 6, 2011 : 2:28 p.m.
We've already cut too much. Higher taxes, as much as nobody wants them, are the only answer. The era of Republican tax-cutting insanity must end.
Cash
Sun, Mar 6, 2011 : 2:07 p.m.
snoop, "I'll stick with the Gov , shared pain for all with reduced spending in the government sector. " In Snyder's budget, how is big business sharing in the pain? In Snyder's budget how are the wealthy sharing in the pain? They aren't. The pain in Snyder's budget is not shared.....is is heaped on the elderly and the working poor....and the benefit is handed over to big business.
Cash
Sun, Mar 6, 2011 : 4:38 p.m.
Don Bee et al, I suppose it's hard to imagine but I am NOT talking about myself. I know of many elderly who cannot afford basic care right now. This is not about me. I do fully understand "about pensions" and I understand about elderly who are sick and paying out their last dollars for care and have to cut their care and meds because they cannot afford it. In fact, I understand and see the suffering of the elderly more than most folks do. And I wish that wasn't true.
DonBee
Sun, Mar 6, 2011 : 3:25 p.m.
Cash - You are the lucky one and don't want your pension taxed. Unfortunately your neighbor on a 403 or a 401K retirement has their's taxed. How can that be even close to fair?
David Briegel
Sun, Mar 6, 2011 : 3:17 p.m.
Dividend Income is income also and it needs to be taxed at a higher rate. The wealthy did ok when it was taxed at double the current rate!
snoopdog
Sun, Mar 6, 2011 : 2:49 p.m.
You simply don't want your pension taxed Cash, lets tell it like it is. Pension income is income and lumping in the elderly with the working poor is just a ploy and you know it. The elderly in this state have it pretty darn good, they live much "fatter" than than their much younger counterparts, having pensions and social security. Young Michigan residents will certainly never have pensions ( unless they are gov employees) and most likely will never get social insecurity.
Hot Sam
Sun, Mar 6, 2011 : 2:25 p.m.
Until we eliminate the plethora of breaks and omissions, then what we have is not truly "flat".
Edward R Murrow's Ghost
Sun, Mar 6, 2011 : 2:19 p.m.
Let's not confuse this "discussion" with any facts, Cash. Rants about the IRS when the piece is about the state. Rants about the necessity of a flat when that is exactly what the state has. And you expect these folks to work on an fact-based and logical plane? Good Night and Good Luck
snoopdog
Sun, Mar 6, 2011 : 2 p.m.
Nothing new here, just the same old tax and spend ideas. No cost controls for education, for the police or courts. No ideas for reducing spending when the money is not there, just raise taxes. I'll stick with the Gov , shared pain for all with reduced spending in the government sector. And going with a graduated income tax will erode revenues even further because those already paying the most in taxes will have to pay even more, they have the ability to pack their bags and leave while the rest of us are stuck in this rat-hole of a state. A flat tax is long overdue, get rid of the IRS, get rid of the loopsholes, the special interest tax credits and simplify !
David Briegel
Sun, Mar 6, 2011 : 1:59 p.m.
I think that the income tax should be progressive as is the Federal Income Tax. Those who have benefitted the most from our Great Society should support the governmental system from which they have benefitted!
Hot Sam
Sun, Mar 6, 2011 : 3:24 p.m.
You know Dave I may even agree to a few different rates if you could eliminate the nonsense...
Knick
Sun, Mar 6, 2011 : 3:18 p.m.
Wake up people. Those who benefitted from the Great Society? That would the welfare beneficiaries and those you would propose to tax more now paid for it. Anybody home? Pay more dude, make yourself feel better. Oh, that's right, you want "others" to pay more because they use the schools, public programs, roads, etc. more? No, that would be the same people who benefitted from the Great Society who take far more from the public sector. Detroit could have rebuilt 3X ground up from all the Great Society cash flushed through its corrupt system run 100% by tax and spend liberals......
David Briegel
Sun, Mar 6, 2011 : 3:14 p.m.
You can have a progressive income tax without all the exemptions. They don't depend on one another? Good one ghost1
Edward R Murrow's Ghost
Sun, Mar 6, 2011 : 2:17 p.m.
Yes, a progressive income tax makes it desirable to be poor. Don't you know that, Mr. Briegel?? Good Night and Good Luck
Hot Sam
Sun, Mar 6, 2011 : 2:14 p.m.
The problem is Dave, that when you have a system that continues to give breaks for certain behaviors, then who gets the most breaks? As with the federal system, every time the rates get more "progressive", they add a few thousand more credits and other nonsense... Flat rates would make those who make ten times more pay ten times more. Pretty progressive if you actually collect it!
Hot Sam
Sun, Mar 6, 2011 : 1:42 p.m.
Yet more evidence that we are long overdue for some kind of flat and fair taxation.
braggslaw
Sun, Mar 6, 2011 : 1:24 p.m.
If people want to pay more taxes.....feel free to do so It is always easy to give away somebody else's money