Michigan tax facts, part 2: Who wants what in the long war over taxes

State government in Michigan will spend more than $52 billion this year, including both state and federal funds. Is that the right amount? How much is enough? How should that pie be funded and divided?

Wildly divergent answers to those questions drive Michigan politics.

Michael LaFaive of the Mackinac Center for Public Policy, a Midland-based free-market think tank, looks at that number and sees waste, bad schools, misguided investments and “corporate welfare.”

In his perfect world, he'd cut $1.2 billion from that budget for 2014-15. He'd scrap $300 million in corporate subsidies through the Michigan Economic Development Corporation, end more than $400 million in state revenue sharing to cities and end prevailing wages on state projects, a measure he calculates would save $100 million. He'd take savings from those and other cuts and fix Michigan's roads, an annual need estimated at more than $1 billion by transportation experts. And he’d offer a universal tax credit so parents can send their kids to any K-12 public or private school they choose.

“It would force existing schools to sharpen their pencils in a dramatic way,” he said.

Down the road, he'd eliminate one of three major taxes in Michigan – business, sales or income – to further trim the reach of government.

John Austin is Michael LaFaive’s political opposite.

Austin, director of the Lansing-based Michigan Economic Center at the Prima Civitas Foundation and president of the Michigan State Board of Education, sees a state tax-cutting its way to mediocrity.

If Austin could waive a magic wand, Michigan's state budget would be $8 billion higher. Michigan has a constitutional amendment – the Headlee Amendment – dictating that state revenues cannot exceed 9.5 percent of the total personal income of Michigan residents. In 2012, state revenues were $8 billion below the amount allowed by the state constitution.

“The strategy in Michigan for a decade plus of reducing income taxes on people and reducing the business tax has led to huge unmet needs,” Austin said.

He points to Minnesota, which has much higher tax rates than Michigan and spends far more on K-12 schools and universities. In 2012, Minnesota’s per capita income was $46,227. That’s $8,730 more than Michigan. In 2013, Minnesota’s unemployment rate was 5.1 percent. Michigan’s was 8.8 percent.

“The priorities (in Michigan) should be higher education and K-12 education, plus infrastructure and transportation and basic governmental services like police and fire and parks and clean water,” Austin said. “Those are Pure Michigan advantages that are now deteriorating.”

He noted that state spending on higher education fell by 28 percent from 2008 to 2014, leading universities to aggressively raise tuition and potentially put college out of reach for many.

Austin’s prescription: raise business taxes and change the state income tax to a progressive tax where wealthy individuals pay more.

In the real world under Lansing’s capitol dome, idealism rarely gets passed from either the left or the right.

But a real-world version of this ideological fight played out in 2011 when Gov. Rick Snyder did just what he promised in the campaign, eliminating the Michigan Business Tax and replacing it with a 6 percent corporate income tax. He also went beyond that promise – hiking taxes on pensions, homeowners, low-income workers and wage earners of all incomes. It passed against unanimous opposition from Democrats in both the state House and Senate.

It amounts to the most sweeping tax shift in Michigan since the 1994 school finance reform that swapped a cut in property taxes for a hike in the state sales tax from 4 cents to 6 cents.

Analysis by the Senate Fiscal Agency calculated that the business tax shift amounted to a $1.6 billion tax cut for business for fiscal 2012-2013. The House Fiscal Agency calculated that taxes on individuals would climb by $1.4 billion, including a $343 million hike in taxes on pensions, a $261 million tax hike on low-income individuals, $270 million in taxes on homeowners and a $223 million increase in income tax by freezing a scheduled drop in the tax.

LaFaive credits Snyder for pushing through a tax package he believes will make Michigan more competitive, even though individuals saw their taxes rise. He noted that the Tax Foundation, a Washington D.C.-based think tank, ranked Michigan’s corporate tax climate 9th most favorable in the country for 2014. It ranked 48th in 2011, the year before the tax package took effect.

LaFaive conceded that he “can't prove empirically” the business tax cut spurred jobs growth. State unemployment stood at 9.2 percent in January 2012 when the tax shift took effect. The rate in June was 7.5 percent. National unemployment fell even more sharply during that period, from 8.3 percent in January 2012 to 6.1 percent in June.

But he added: “This bodes well for Michigan's growth prospects. A net tax cut for the whole of Michigan is probably better for the state as a whole. A better economy is the best anti-poverty program.”

Norman Hawker, professor of finance and commercial law at Western Michigan University, is skeptical about claims that business tax cuts create jobs.

“If low taxes meant more and better jobs, then Mississippi and not Massachusetts and California would be the place where (high-tech centers like) Silicon Valley would all be locating to. Businesses do not expand to get tax cuts. They expand to meet demand.”

About the same time he signed the tax shift, Snyder approved a 2011-12 K-12 school aid budget that, according to the Senate Fiscal Agency, resulted in about $930 million in funding cuts. But that calculation did not account for one-time appropriations totaling $455 million, including $154 million in added per-pupil funding for “best practices” districts and $155 million to offset retirement costs. It is also worth noting that Michigan lost about $500 million in federal stimulus and education job grant funding from the previous budget.

In January, Snyder said that he raised education spending by $660 per student since he took office. In an analysis for Bridge Magazine, Mitch Bean, former director of the House Fiscal Agency, concluded that $439 of that was due to state spending and $222 due to a decrease in the total number of students.

Snyder also moved to eliminate incentive tax credits for everything from brownfield redevelopment, alternative energy, film, renaissance zones and credits awarded by the now-defunct Michigan Economic Growth Authority. The state instead offers grants, loans and other economic assistance through the Michigan Economic Development Corporation to firms that create jobs or invest in Michigan. Though film tax credits were ended, the Legislature approved $50 million in incentives for the industry for 2014-15.

A 2013 audit of the Michigan Strategic Fund, which authorizes MEDC expenditures, found that the agency failed to accurately track jobs growth and issued misleading data to the legislature for several of its incentive programs. The audit noted that its report to the legislature failed to note the 2012 bankruptcy of one firm – battery maker A123 – that received tax credits and a $10 million grant from the state.

Chris Rizik, CEO of the Ann Arbor-based Renaissance Venture Capital Fund, credits Snyder with ending incentives that have a questionable track record. A 2012 investigation by the New York Times found that state and local governments in the United States handed out more than $80 billion in tax credits and other incentives each year with little evidence they produce jobs.

Now, Michigan businesses are given a choice: keep past-authorized credits but be taxed under the old Michigan Business Tax or waive the credits and be taxed under the 6 percent corporate tax. Rizik believes the more modest, revamped business incentive program is more accountable and likely to be more effective.

“If you get into the position of just writing checks, you end up in a race to the bottom pretty quickly,” Rizik said.

Coming next:
Part 3: Who pays the taxes in Michigan
Part 4: What do your taxes pay for in Michigan