Commentary

‘Tax Cut Fever’ – Never Burning Hot

There are allegations that Michigan lawmakers are suffering a bout of “tax cut fever” and have slashed taxes over the past decade. These accusations are a way of denigrating the desire of people who would rather keep more of their money than be forced to give it to Lansing. Considering the state’s financial situation, there is more of an outbreak of tax cut phobia than fever.

The state is on its fifth year of an economic recovery that drove up tax revenue. Income tax revenues are up $3 billion more than just four years ago. Preliminary revenue estimates show another $1.6 billion in tax revenue for the upcoming fiscal year above fiscal year 2014.

Moreover, to say that policymakers have been cutting taxes like it’s going out of style relies on a bad definition over what constitutes a tax cut. Not everything that results in less money in the state treasury is a reduction in taxes.

Consider former state official Doug Drake’s list of “tax cuts.” These include subsidies to selected businesses in the form of refundable tax credits. On the treasury’s financial records, they will note that the government has less net revenue because of this. But in order to give out money in these tax credits, government must raise tax money elsewhere.

By increasing a tax credit somewhere, the state would still be extracting just as much revenue from the general taxpayer. Giving out subsidies through film credits, for instance, may mean less revenue for Lansing, but that matters little to taxpayers who still have to finance those expenditures.

The most extreme example is in the Michigan Business Tax. This “tax” is only filed by companies that have received special tax credits. Thus, it does not raise any revenue — it pays it out. The state expects that it will have paid out $734 million to those tax filers in fiscal year 2014. In order to pay out these credits, this money has to come from other taxpayers.

The difference will be important in the upcoming sales tax ballot proposal. The Earned Income Tax Credit will be increased and this is pitched as tax relief. The credit will deliver cash from general taxpayers to those filers who have low incomes and children, regardless of their tax burdens. Often, this involves more credits that are more than tax liabilities. This is taxpayer-financed assistance and qualitatively different from easing tax burdens.

Moreover, Michigan taxpayers have been faced with tax increases over the past decade. The state increased its personal income taxes in 2007 from 3.9 percent to 4.35 percent. This was initially a temporary tax increase that was made perpetual in 2012 after phasing down to 4.25 percent.

The state also increased its business taxes by 22 percent in 2007.

When it comes to easing the burden of taxation, only the move from the Michigan Business Tax to the corporate income tax applies.

So over the decade, it’s 2-1 in favor of tax rate hikes. It is strange to say that Michigan legislators have been suffering from a tax cut fever.

But the state has also changed some of its broad-based exemptions over the period as well that some may consider tax cuts and tax hikes.

The 2011 tax reforms took away exemptions for pension income and reduced and eliminated a number of smaller exemptions.

Proposal 1 of 2014 eliminated personal property taxes on small business establishments and will phase out these taxes on industrial businesses. These taxes will still remain for larger commercial entities and utility providers, and even industrial businesses benefiting from these reductions will still pay some taxes on their business equipment.

Even including these changes for exemptions, the story of Michigan’s past decade is one of tax increases, not “tax cut fever.”

Yet calling it an illness denigrates the intentions of the people who support lower taxes. Finding ways for governments to spend less and let people keep more of their earnings is a noble cause. The people who want this ought not have their intentions written off as pathological. Especially when reducing the state’s tax rate is an affordable option.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.