Hohman: Michigan economy needs to catch up
Michigan hands out corporate welfare to cover up for a poor business climate. It doesn’t work.
While 25 other states have fully recovered the jobs they lost during the pandemic, Michigan is down 71,400 jobs, a 1.6% decrease. It doesn’t look like the state is going to get above pre-pandemic levels any time soon, either. The state won’t recover the lost jobs until 2026, given the rate of growth the state experienced over the past five months.
In other words, Michigan is falling behind. Lawmakers ought to improve the state’s business climate in response. Gov. Gretchen Whitmer is instead making it worse. She wants to avoid the tax cuts already required by state law. Her alternative jobs strategy is not to improve the climate for everyone, but to shower a handful of businesses with large subsidies, paid for by the taxpayer.
The state income tax rate is set to fall from 4.25% to 4.05%, thanks to a 2015 law. Whitmer has asked lawmakers to pass a new law to avoid that rate reduction.
The state can clearly afford to reduce the income tax rate. State revenue has been strong, lawmakers are sitting on more than $8 billion in extra cash, and the minor reduction in tax rates would save taxpayers $673 million a year — very affordable, especially if lawmakers increase the budget at sustainable levels.
Cutting taxes improves state competitiveness, and Michigan is falling behind here as well. Over the past two years, 21 other states have reduced their tax rates. Ohio now taxes income at lower rates than Michigan.
Tax cuts are a powerful way to improve the state’s economic prospects. All businesses are subject to the income tax when they are profitable, so taxes affect a lot of employers. Small improvements that affect a lot of people can make a big difference. Businesses added one million jobs in Michigan in 2021 and lost around 800,000 jobs. Lightening the tax burden for everyone encourages more job growth and discourages job loss.
Michigan lawmakers should want to lower taxes. They should reject the governor’s attempt to keep tax rates high.
Instead of encouraging growth by improving the business climate, Whitmer wants to increase selective business subsidies. Lawmakers already added billions to one program that allows administrators to write large checks to whatever company they’d like.
The states growing the most aren’t the ones that hand out the most subsidies. They’re the ones with the best business climate.
Governors feel the need to hand out money when big companies ask for it. Reporters then write headlines about job growth, based on announcements. The problem is, headlines aren’t economic trends, and politicians can’t buy their way to job growth.
Other priorities from Michigan’s new Democratic leaders may harm the state’s economic prospects. The leaders have introduced bills that would force workers to contribute to unions, whether or not they want to be members. That approach is bad for union members, and it hurts Michigan’s economic growth. America is built on voluntary association, and lawmakers shouldn’t get in the way.
There are lot of ways to improve the state’s business tax climate. Lawmakers can change the tax treatment of a firm’s equipment purchases, so as to encourage growth. They can eliminate occupational licenses that serve more as a barrier to entry than a way to protect public health. They can encourage cheap and reliable electricity.
A better business climate would help Michigan attract people from around the country, especially those fleeing Illinois. It’s a nearby state where lawmakers are driving people and businesses away by high taxes and poor governance.
Michigan’s lack of job growth is holding it back. Lawmakers can improve the state business climate. They should focus their attention away from schemes to avoid tax cuts and toward improvements that make Michigan a more attractive place to add jobs.
James M. Hohman is the Mackinac Center’s director of fiscal policy. Email him at email@example.com.
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.