Policy Documents

Research & Commentary: Michigan Income Tax Reform

January 22, 2014

Michigan is facing a budget surplus, and as a result several legislative leaders are now considering lowering the personal income tax. According to the Senate Fiscal Agency, this surplus totals around $1.3 billion and results from the improving economy and lower-than-predicted business tax refunds. Income taxes are among the most disruptive factors affecting economic growth; they discourage capital inflow and hinder the creation of new jobs.

In 2011, Gov. Rick Synder proposed and lawmakers approved a significant reform of Michigan’s corporate tax system that replaced the corporate gross receipts tax, known as the Michigan Business Tax, with a 6 percent net income tax and broadened the tax base by eliminating tax preferences. This $1.6 billion business tax cut was offset by a $1.4 billion tax increase on individuals, including new taxes on retirement income. Before these reforms, the personal income tax was scheduled to be reduced to 3.9 percent by late 2015, enacted in response to a 2007 tax hike.

Although no proposals officially have been made, two tax cut plans have been circulating around Lansing. The first, proposed by Republican tax leadership in the Michigan Senate, includes a gradual cut in the state personal income tax rate from 4.25 percent to 3.9 percent over four years. The second plan, likely to be proposed by state Sen. Jack Brandenburg, according to the Associated Press, would decrease the personal income tax rate a tenth of a percentage point annually beginning in 2015 until it reaches 3.9 percent in 2018. Both plans aim to restore the personal income tax rate to 2007 levels.

Recent studies show states with no income tax or with lower income taxes perform better economically and achieve greater job and population growth than those with higher taxes. Both of the tax reform plans being considered take a step in the right direction, but lawmakers could go even further. Lowering income taxes dramatically improves a state’s economy while generating new jobs. The ideal reform for state corporate income taxes would be to eliminate them altogether. Short of that, legislators should strive for a tax system that is flat, not progressive, with as few tax brackets as possible.

The following articles examine income tax reform from multiple perspectives.


Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.” 

Michigan Lawmakers Call for State Income Tax Cut
http://www.theoaklandpress.com/government-and-politics/20140104/michigan-lawmakers-call-for-state-income-tax-cut
David Eggert of the Associated Press reports that in anticipation of a sizable budget surplus, Michigan Republican lawmakers are considering proposing a broad-based tax cut this election year—most likely a reduction in the state’s income tax. 

Tip Sheet: State Income Tax Reform
http://heartland.org/policy-documents/tip-sheet-state-income-tax-reform
This Policy Tip Sheet from The Heartland Institute examines state income taxes, documents economists’ judgment of them as the most destructive tax and a deterrent to economic development, and provides data showing states with no income tax perform better economically and enjoy greater job and population growth than those with higher taxes. 

Despite Claim, Tax Cuts Have Not ‘Overwhelmed’ Michigan
https://www.mackinac.org/19484
Writing for the Mackinac Center, Tom Gantert responds to the claims previous tax cuts enacted in Michigan have overwhelmed the state’s finances. 

Michigan Implements Positive Corporate Tax Reform
http://taxfoundation.org/blog/michigan-implements-positive-corporate-tax-reform
Mark Robyn examines the recent corporate tax reform package passed in Michigan and the positive effects it is likely to have on the state’s economic development and competitiveness. 

Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The sixth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes. 

Institute Brief—No Income Tax: The Key to Economic Growth
http://heartland.org/policy-documents/institute-brief-no-income-tax-key-economic-growth
The Public Interest Institute documents how states with no income tax are doing compared to those with income taxes: “Studies show that states without an income tax have greater economic growth rates than states with an income tax, including greater rates of income growth, population growth, and job growth, and are more attractive to businesses looking for locations to build or expand.” 

Personalizing the Corporate Income Tax
http://heartland.org/policy-documents/personalizing-corporate-income-tax
In a Fiscal Fact article, Gerald Prante and Scott Hodge discuss the effect of corporate income taxes on individual households. They write, “Examining income groups, Chamberlain and Prante found that low-income households pay more in corporate income taxes than they pay in personal income taxes. Geographically, households in largely urban congressional districts and metropolitan areas bear a disproportionate share of corporate income taxes today and, thus, would receive a significant boost in living standards if the corporate tax burden were reduced.” 

Tax Efficiency: Not All Taxes Are Created Equal
http://heartland.org/policy-documents/tax-efficiency-not-all-taxes-are-created-equal
Jason Clements, Niels Veldhuis, and Milagros Palacios explain how governments can extract tax revenues in the least costly and least economically damaging manner in order to improve economic performance. 

State Income Taxes and Economic Growth
http://heartland.org/policy-documents/state-income-taxes-and-economic-growth-0
Barry W. Poulson and Jules Gordon Kaplan explore the impact of tax policy on states’ economic growth within the framework of an endogenous growth model. Regression analysis is used to estimate the impact of taxes on economic growth in the states from 1964 to 2004. The analysis reveals higher marginal tax rates impose significant damage on economic growth.

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other tax topics, visit The Heartland Institute’s Web site at http://www.heartland.org, Budget & Tax News at http://news.heartland.org/fiscal, and PolicyBot, Heartland’s free online research database, at www.policybot.org

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.