Prop 5 advocates say taxes are high, but figures show Michigan in the middle

It is an article of faith among small government advocates that Michigan residents are overtaxed, especially in relation to other states.

That might have been true in 1985, when Michigan ranked seventh in the nation with a state and local tax burden of 10.4 percent, compared to a national average of 9.7 percent. The data was compiled by the Tax Foundation, a group dedicated to lowering the nation's tax burden.

Over the past 20 years, Michigan's tax burden has hovered near the middle, relative to other states, ranking 20^th in 1990, 20^th in 2000 and 21^st in 2009. In 2009 (most recent year analyzed by the foundation), Michigan’s tax burden of 9.7 percent ranked just below the national average of 9.8 percent.

In 1978, voters approved the Headlee tax limitation amendments to the state constitution, placing limits on property taxes and overall total state spending each fiscal year.

The Headlee formula generally pegs the spending limit at 9.49 percent of state personal income in the prior fiscal year. For fiscal year 2011, total state revenue of $27.25 billion was $5.58 billion below the authorized limit.

Mitch Bean* of Great Lakes Economic Consulting, said those figures underscore Michigan's “middle-of-the-pack” status in state and local taxation.

“The notion that state government is out of control is nonsense,” said Bean, a former director of the House Fiscal Agency, the nonpartisan analysis staff for the state House.

Given the $1.7 billion business tax cut enacted in 2011, Bean suspects that updated figures for state and local taxes will place Michigan even lower, relative to other states.

Bean rates the tax changes enacted in 2011 – which cut taxes for business and raised it for individuals by cutting the earned income tax credit and ending a variety of other exemptions– as the most significant shift in tax burden in 30 years.

But Bean warned that past experience with corporate taxation suggests the 6 percent corporate tax will prove an unreliable revenue source, as corporate profits can swing abruptly from year to year.

“It is extremely volatile,” he said. A similar point was made last spring by George Erickcek, an economic analyst at the Upjohn Institute in Kalamazoo. Speaking to Bridge about stable vs. cyclical tax revenues, Erickcek said:

“The (6 percent) Corporate Income Tax looks like a very smart move in 2012. It should bring in surprisingly strong revenue. However, in the next downturn, I think the state will be sadly surprised to see how Corporate Income Tax revenues have disappeared.”

Bean believes it all but inevitable that legislators one day will face the need to reform the tax structure as economic conditions change. Bean asserted that Proposal 5, which would require a two-thirds vote for any tax increase, will only complicate that task.

And history suggests that can be even more daunting when legislators face the threat of recall over tax votes.

“From time to time, you need to change your tax base. The economy evolves. That typically involves increasing some and reducing others,” Bean said.

Oakland County Sheriff Michael Bouchard doesn't agree. Bouchard, who served in the state Senate as a Republican, considers Prop 5 a common-sense brake on government and high taxation:

“(Having a two-thirds vote requirement) is an appropriate level of discussion and deliberation before you take money out of people's pockets. In Michigan, people's income level, their net worth, their home value are all down. Why does government say we need more money?”

Bouchard argues that the measure would be better for business, which he believes could count on a more stable fiscal climate.

According to analysis by the House Fiscal Agency, the state income tax rate has changed more than a dozen times since 1967. Most of the changes were made in the early- to mid-1980s, including a number of temporary tax hikes instituted in response to the fiscal crises caused by the recessions of 1980 and 1981-82.

The rate remained constant for seven years, from 1987 until 1994, and then decreased from 4.6 percent to 4.4 percent as part of the school finance reform package associated with Proposal A.

The politics of taxes

In 1983, as state government struggled to deal with 17 percent unemployment, the nation's worst credit rating and a $1.7 billion deficit, Gov. Jim Blanchard signed a temporary income tax increase of 38 percent, raising the rate from 4.6 percent to 6.35 percent.

It led to the recall of two Democratic state senators, Phil Mastin of Pontiac and David Serotkin of Mt. Clemens, the first state officeholders to be so removed. Their defeat flipped the Senate from Democratic to Republican control and vaulted state Sen. John Engler into prominence as Senate majority leader.

Mick Stein, head of the Mastin recall drive, put it this way: “I am a capitalist and I feel that Blanchard, Mastin and the others are a bunch of socialists. They want to take from the haves and give to the have-nots.”

Nearly 30 years later, on Nov. 8, 2011, state Rep. Paul Scott, R-Grand Blanc, was recalled by voters riled up by his support of cuts in school funding -- and for the income tax on pensions.

Erickcek said it is no surprise politicians are reluctant to put their name next to the word “tax.”

“It's the old saying, 'Don't tax you, don't tax me, tax the guy behind the tree.' Nobody likes taxes,” Erickcek said.

Erickcek shares the concern of former House Fiscal Agency director Bean that Michigan's corporate tax could prove an uneven revenue source. And should the state face another steep deficit, he believes public schools and universities could take further hits.

State appropriations comprised about 80 percent of general fund revenues for the University of Michigan in the 1960s. They are projected to be 17 percent in fiscal 2012. Not adjusted for inflation, the state contribution to K-12 schools was less in fiscal 2012 that it was in fiscal 2001.

“The sitting duck in all this will be education. Tuitions are already continuing to go up. Our universities need the ability to attract the talent they need to do research. Our K-12 schools are also struggling. We have to compete on talent. Like any business, you have to make an investment to have a return,” he said.

*Editor’s note: Mitch Bean is a member of the Bridge Board of Advisers.

Ted Roelofs worked for the Grand Rapids Press for 30 years, where he covered everything from politics to social services to military affairs. He has earned numerous awards, including for work in Albania during the 1999 Kosovo refugee crisis.