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Michigan Can Afford a Tax Cut as Revenues are Growing

March 16, 2017

By James M. Hohman
    In a statement explaining why he voted against a bill to slightly lower income tax rates over time, Rep. Chris Afendoulis, R-Grand Rapids Township, remarked, “This plan will jeopardize our state’s bond rating and will create a structural deficit in the general fund of over $2 billion by 2022.” However, Michigan’s budget picture is rosier than he suggests: Revenues have grown and are growing. Michigan can afford a modest tax cut.

    The small rate reduction voted down in the House would have lowered the rate from 4.25 percent to 4.15 percent starting on Jan. 1, 2018, with further reductions coming later. The reduction would mean that residents keep $195 million more of their income and Lansing would receive $195 million less from this tax. If the tax cuts continued as scheduled, this number would increase to $463 million the year after.

    This would require no budget cuts at all since the reductions are smaller than the expected increase in state revenue. The governor’s budget for next year alone proposes spending $777.5 million more than the state does now. The proposed tax cut would only reduce the rate at which the state government increases its budget.

    The tax-cut proposal comes after a large increase in tax revenue. Since 2010, Michigan tax and fee revenues increased by $5.8 billion, a 23 percent gain.
    Michigan’s fiscal situation is even stronger than those numbers suggest. Lawmakers employed some tricks that depress state revenue. One method is to spend taxpayer dollars in the form of “refundable tax credits.” When some “taxpayers” claim credits that exceed what they owe in taxes, they get a check that comes from other taxpayers. The state considers this spending as something that “lowers revenue,” even though it transfers cash from all taxpayers to politically favored interests.

    Likewise, the state can give money to other entities without having to recognize it as spending, further understating the amount it spends. For example, the state earmarks one of its taxes to local governments to reimburse them for cutting property taxes levied on business equipment. Local units will get $321.5 million from the state this year, all of which is not considered state spending.

    When it comes time to reduce the burden on regular taxpayers, though, lawmakers do not explore such gimmicks.

    And as Lee Chatfield, R-Levering, pointed out, the state’s appropriations process is set up to prioritize spending. The state’s $55.4 billion budget covers a lot of ground, and a modest $195 million tax cut can be a part of that process.

    Lawmakers tend to find ways to come up with the money when pressed. Before raising fuel and vehicle registration taxes, they found $400 million in the budget to pay for road repairs. They freed up cash for bailouts of Detroit and the Detroit Public Schools. They found the money when the $1 billion bill for Granholm-era business subsidies came due. Asking lawmakers to come up with a way to spend $195 million less than they would otherwise is a reasonable request.

    Michigan’s budget continues to grow. It is disappointing that lawmakers feel like they need to spend all that comes in, and more. That is the message they’ve sent to residents when they voted down the modest decrease in tax rates.

    Hohman is a columnist with Mackinac Center for Public Policy.

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