Michigan’s High Taxes Drag Down State’s Economy

Published January 1, 2008

Defenders of Michigan’s recent tax increases argued additional revenue is necessary to provide much-needed government services. (See “Michigan Legislature Approves Income Tax Hike, New Sales Tax,” Budget & Tax News, December 2007.)

This same argument was used when the state established its Single Business Tax in 1965. Two years later, the argument was used again when Michigan established the state’s income tax.

Higher Taxes, Slower Growth

Do new taxes aid the state’s economy, as proponents suggest? Looking at history, the answer is obvious.

From 1940 to the mid-1960s, Michigan’s economy consistently produced between 4.5 and 5 percent of the nation’s personal income.

Since then, Michigan’s economy has lost jobs and income relative to the rest of the nation. The state now produces about 3 percent of the nation’s personal income.

Michigan is not alone in this. A substantial body of economic research shows states that raise the tax burden on their citizens tend to lose income and jobs to states that reduce tax burdens.

Tax Cuts, Sustained Growth

Since 1965, the only period of significant tax relief for Michigan citizens occurred from 1984 to 1994. During these years the state income tax was cut from 6.35 to 4.4 percent.

As the accompanying figure shows, these are the only years since the mid-1960s in which Michigan did not experience a major decline in income relative to the rest of the country. This period is also the only time in the past 30 years the state experienced a sustained growth in new jobs.

Unfortunately, Michigan’s politicians fail to understand that raising taxes begins a vicious cycle. As individuals and businesses leave the state, the economic climate deteriorates. With the loss of business and jobs, tax receipts suffer and government services have to be curtailed. Raising taxes to make up for the shortfall accelerates the loss in jobs and income. This in turn accelerates both a loss in tax receipts and cuts in state services.

Worst Performance in Nation

Michigan is now in this vicious cycle. Over the past year U.S. personal income increased by 6.3 percent. In some states income grew faster. In others, it grew slower. Michigan has the dubious distinction of having the worst economic performance of all 50 states.

Michigan now has the slowest growth in income and the highest rate of unemployment. And this was the case before Gov. Jennifer Granholm (D) insisted on and won a major new increase in taxes, which promises only to make things worse.

While Michigan tax receipts should increase in response to the latest tax hikes, the increase will be temporary. It takes time for businesses to relocate. As they relocate, Michigan will lose jobs and income to other states. Before long, Michigan’s politicians will again be faced with a shortfall of revenue. With less revenue, they will once again be forced to cut government services and jobs.

To reverse this vicious cycle, Michigan must do what other states have done to attract jobs and businesses. Lawmakers must significantly reduce the tax burden on citizens. Doing so will help reverse the economic deterioration of the past 40 years.

Robert Genetski ([email protected]) is one of the nation’s leading economists and financial advisors and a Michigan resident.