With Wisconsin’s labor and budget storms raging in the background, the governor of neighboring Michigan is charting a comparatively calm route toward more modest budget and tax reform.
Newly installed Gov. Rick Snyder (R) has proposed a Fiscal Year 2012 budget that closes a $1.8 billion deficit without a net tax hike. He also has a plan to greatly simplify the state tax code and, among other things, eliminate large chunks of an overgrown “economic development” complex.
While the Snyder budget does not raise taxes overall, it does raise them on some individuals, most notably retirees. Dubbed the “granny tax” by opponents, eliminating the personal income tax pension exemption for public- and private-sector retirees may raise as much as $900 million. Michigan is one of only three states that offer this exemption, which applies to 100 percent of government pension income but only a portion of private pensions.
‘Roll Back Personal Income Tax’
Joe Lehman, president of the Midland, Michigan-based Mackinac Center for Public Policy, described this as the least fortunate part of the Snyder budget, and he characterizes it as unnecessary given the ample additional opportunities to trim spending.
“If the administration wants to remove the exemptions in the name of simplicity, they should also roll back the personal income tax by an amount at least equal to the value of those exemptions,” Lehman said.
Broadening Tax Base
To make the tax system more transparent, efficient, and simple the Snyder plan would:
• Scrap the complex Michigan Business Tax (including a 22 percent surcharge) and replace it with a simple corporate income tax with a rate of 6 percent. The MBT is widely reviled among state businesspeople. With its destructive gross receipts tax component, the MBT is expected to extract almost $2.2 billion from Michigan businesses this year.
Under the proposed replacement, Michigan businesses would be on the hook for just over $460 million for the first nine months the plan was in place. This figure does not subtract the revenue the state would lose to old business tax credits that would still be honored under the new system.
The first full-year estimates indicate the new (Fiscal Year 2013) tax would generate $748.8 million, but as much as $500 million could be given up due to refundable tax credits the state has already offered to various corporations. Not all of the credits would be collected in full, however, because not every company meets all of the requirements necessary in their agreement with the state to do so.
• To offset that lost revenue, Snyder proposes eliminating both a personal income tax exemption for pensioners and a state Earned Income Tax Credit program, and scaling back the Michigan Economic Growth Authority’s targeted corporate tax break and subsidy machine. An individual income tax credit against certain property tax payments would also be trimmed, and a scheduled rollback in the state personal income tax from the current 4.25 percent to 3.9 percent would be cancelled. In general, special carve-outs for businesses and individuals would be scrapped in favor of a broader base and lower taxes on commerce.
• The proposed budget also includes spending cuts, including up to $300 million in reduced state revenue sharing to local governments, nicking schools by $300 per student, and slicing $280 million from higher education.
Snyder also proposes to try to wrest $180 million in concessions from state employees (an effort that could spark the same type of labor law battle just waged in neighboring Wisconsin and Indiana). All told, the governor’s plan includes some 60 general fund spending reductions, among them privatizing prison food services and the health aides in at least one state veterans home.
Michael LaFaive ([email protected]) is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy.