By Bob Schneider
Michigan Citizens Research Council
Michigan’s House and Senate are pushing state budget bills for fiscal year 2023 through their respective chambers this week, paving the way for final budget deliberations with the Whitmer administration after revenue estimates are finalized. state on May 20.
Both chambers’ spending plans have one thing in common: They both leave room for a healthy amount of tax relief for Michigan residents. The Senate budget proposal specifically allocates funds to a Senate tax cut fund, signaling its intention to implement $1 billion in permanent annual tax relief and an additional $1 billion in one-time tax relief for the 2023. In a similar vein, the House budget plan also withholds $1 billion for tax relief. Both chambers rely more on tax relief than Governor Whitmer’s budget proposal, which proposed an expanded income tax credit and the phased repeal of 2012 tax changes that reduced exemptions for certain income from retirement. These proposals are expected to reduce state tax collections by approximately $770 million by fiscal year 2025.
Clearly, finalizing details on taxes cut, by how much, and for whose benefit will be a major agenda item as the legislature and administration work to finalize the fiscal year 2023 budget. before everyone embarks on the campaign trail leading up to the November elections. But while election-year tax cuts are popular with voters, we noted earlier that Michigan is just emerging from a decade of declining state revenue that has dramatically reduced the delivery of health services. state, cut state employment by more than 20%, and led to major budget cuts in areas like higher education and state revenue sharing.
Should the top priority for billions of dollars in revenue reserves be tax relief or increased public investment in areas such as infrastructure, education or public health? As budget deliberations progress, here are three things policymakers — and the public — need to keep in mind when deliberating on the appropriate level of tax relief.
Michigan is a low tax state
It is said that nothing is certain in life except death and taxes, and few of them are eager to send in their taxes every April 15th. But, contrary to what many might think, Michigan residents are doing relatively well when it comes to their tax burdens. .
Michigan’s tax burden has fallen quite sharply since the start of this century. The chart below examines Michigan’s state tax collections as a percentage of personal income since 1991. In 1994, Michigan voters approved Proposition A, which increased sales and tax rates. state use from 4% to 6% and triggered other tax changes as part of sweeping K-12 school funding reforms. As a result, the state tax burden increased significantly in the mid-1990s. Since 2000, however, the state tax burden has decreased. For fiscal year 2021, state tax revenue was 6.4% of personal income, just below the fiscal year 1991 rate before Proposal A.
Similarly, income from the General Fund and the School Aid Fund – the state’s two main discretionary income funds that dominate annual budget deliberations – has fallen from 6.8 percent of state personal income over the past from fiscal year 2000 to 5.2% in fiscal year 2021. In short, although it doesn’t feel like it, the state government is taking a smaller share of the average Michigander’s salary than it didn’t 20 years ago.
Additionally, Michigan’s overall tax burden is relatively low compared to the other 49 states. A recent report by the Tax Foundation, a nonprofit think tank, found Michigan’s combined state and local tax burden ranked 46th out of 50 states. The table below compares Michigan’s effective state and local tax rate (defined as total state and local tax revenue as a percentage of the state’s share of net national product) to that of its closest neighbours. Michigan’s effective tax rate is lower than the rate in eight of those states. Only Tennessee residents have a lower effective state and local tax rate.
State tax cuts do not translate into economic recovery
Like the rest of the country, Michigan is facing economic challenges related to the continued decline in employment resulting from the COVID-19 pandemic; the impact of abnormally high inflation on family budgets, and international economic uncertainties with the war in Ukraine. Many see the tax relief as a timely way to stimulate the economy and put money back in the pockets of Michigan residents.
Overall, however, the state tax cuts provide no net boost to the state economy. Indeed, Michigan’s constitution requires the state to enact a balanced budget that aligns spending with disposable income. Admittedly, the tax cuts increase the disposable income of the households concerned, and at least part of this additional disposable income is spent. These expenditures create new income for others (e.g. local grocery or restaurant workers), and the economic ripple effect of a tax cut in effect generates new economic activity from the from taxpayers.
However, without any tax cuts, those same revenues would still be spent. Only in this scenario is it spent on publicly funded public services. These expenses include payments to health care providers for Medicaid-funded services; grants to K-12 school districts, universities, and community colleges for educational activities; revenue sharing with local governments; and of course government employee paychecks. This public sector spending has the same economic ripple effect as tax cuts. In short, a $1 million tax cut adds $1 million of disposable income to taxpayers, but at the same time eliminates $1 million of income for people who would otherwise provide public services, which they are state employees, school/university employees or state employees. contractors.
Note that the story is very different at the federal level. As we showed last year, federal stimulus measures related to the COVID-19 pandemic (e.g. tax refund checks, enhanced unemployment benefits, Paycheck Protection Program ) gave a huge short-term boost to Michigan’s personal income, which in 2020 grew at the highest rate. in more than three decades. This boost was achieved because, without balanced budget requirements, the federal government could increase spending and implement tax relief at the same time; finance the resulting budget deficit through borrowing. Most economists agree that persistent deficits bring their own long-term challenges, but deficit spending can and has been used to stimulate the economy.
It’s not allowed in Michigan, however, negating any net economic impact of state tax cuts here.
Tax cuts come with budget compromises
When Michigan’s Legislature approved a plan in March that would have cut state tax revenue by $2.5 billion a year, Governor Whitmer vetoed the bill, calling it “fiscally irresponsible.” Our March analysis of the draft legislation illustrated his concerns. It showed that the one-time revenue surpluses were sufficient to cover the resulting revenue loss in fiscal year 2023, but that the plan would require a permanent $1.3 billion cut to the General Fund budget. as of FY2024. This equates to approximately 10% of all General Fund current expenditures.
As discussions of tax relief resume, budget writers — and the general public — should have a clear view of how any resulting budget shortfall will be handled before decisions are finalized on how much. To be clear, state taxes should not be higher than necessary. Our tax system should generate sufficient revenue to provide needed public services efficiently and effectively. If the state provides services that are not needed, then those services can be properly disposed of, allowing taxpayers to return revenue savings. The challenge is that what constitutes a “necessary public service” is intrinsically shaped by our ideological and political views.
It seems very likely that tax relief in one form or another will be an important part of the final budget deal that is expected to be reached sometime before the July 4 recess. Ideally, the tax relief agreement will recognize Michigan’s recent revenue history and be transparent about the fiscal compromises that are necessary.
The Citizens Research Council of Michigan is a statewide agency dedicated to building sound government policy through evidence-based research for Michigan.