Michigan: Pure Disaster When It Comes to Tax Policy

The Michigan government is facing an unprecedented lawsuit charging that some of its public schools are inadequate to the point that they violate state law.  You might think this would make lawmakers revisit the wisdom of their tax-cutting compulsion, but you would be wrong.

Last year, anti-tax lawmakers’ crowning achievement in the Great Lakes State was to slash business income taxes by some $1.6 billion, or 83 percent.  Some of that cut was funded with cuts in state services, though most of it was paid for with personal income tax hikes (PDF) on the state’s elderly and poor.  Some lawmakers viewed those personal income tax hikes as a political liability, however, so Gov. Snyder went ahead and signed a token tax cut, worth an average of ten dollars per taxpayer per year, conveniently designed to take effect about one month before voters head to the polls in November.

But more troubling than this political gamesmanship is a pair of larger tax cuts that lawmakers may try to enact this fall after returning from recess.

In May, the state Senate passed a bill, after many months of negotiations, that repeals the tax businesses pay on industrial and commercial personal property (equipment, furniture, and other items used for business purposes).  The Detroit Free Press said that “there’s general agreement across party lines and all levels of government” that the tax is bad for business and should be repealed, and noted that the House may follow the Senate in doing so this fall.

There is also consensus, however, that since the overwhelming majority of revenue generated by the business personal property tax flows to local governments, localities can’t absorb a cut that severe.  But while the state seems likely to make up part of the difference, there are also serious doubts regarding how much of the lost revenue the state can actually afford to replace, and whether that replacement revenue will dry up the next time the state’s budget is battered by a national recession.

But property tax cuts for businesses aren’t the only pricey tax cut on the legislature’s list. Last month, the House overwhelmingly voted to slash the state’s personal income tax rate, at a cost of $800 million per year by 2018.  The bill’s sponsor promises that revenue growth resulting from the cut will be so strong that it will “not lead to program cuts or shifted funds.” Forgive us if we’re skeptical of that claim.

Finally, to top things off, reversing these tax cuts if they prove destructive and unaffordable could soon become a lot harder.  That’s because the Koch-backed Americans for Prosperity-Michigan has just submitted the signatures needed to put a measure on the ballot amending the state’s constitution to require a supermajority vote of the legislature to raise taxes. Just so we’re clear, supermajority requirements are one of the worst tax ideas of all time.  The Michigan League for Human Services explains the problems with the supermajority proposal in this report (PDF), including how it could entrench special interest tax breaks, damage the state’s credit rating, and pressure local governments to the point of breaking when state funds run short.