A recent Senate Fiscal Agency report was characterized by the Associated Press as stating that tax burdens in Michigan decreased over the past decade. This is a simplistic conclusion that ignores the reality that there are many ways to measure a state's tax burden, with each telling a slightly different story. The SFA report captures some of the ambiguity, but the AP's recap did not.
The image of a decreasing tax burden arises from two sources. First, there is an $8 billion gap between current state revenue and the constitutional limitation imposed by the Headlee amendment's state revenue cap, which restricts the state to spending no more than 9.49 percent of total state personal income.
What is misleading about that figure is that a significant source of growth in "personal income" comes from sources not available to pay higher taxes. Personal income includes money from government transfer programs like unemployment benefits, Medicaid and Medicare, and also from employer-paid benefits such as health insurance. The proportion of our population's income from such sources has risen sharply, but this hardly means that people are better able to pay more taxes. This chart showing the revenue cap calculations adjusted to reflect just transfer program growth paints a darker picture.
The second piece of evidence that tax burdens increased arises from Census figures showing state and local tax receipts. The report, however, shows very small changes in the state's tax burden. Here are the numbers from the 1998 to 2007 period covered in the SFA report:
- Per capita state and local taxes increased from $3,022 in fiscal 1999 to $3,691 in fiscal 2007. When adjusting for inflation, this is a decline of just 1.8 percent.
- State and local taxes as a percent of per capita personal income fell from 10.9 percent in fiscal 1999 to10.8 percent in fiscal 2007, a decline of just 0.1 percentage point.
So this much is true: Tax burdens per person and as a percent of per capita personal income have fallen, albeit by miniscule amounts. There are other ways to measure relative tax burdens, however, and these show a different direction for tax burdens:
- Michigan state and local taxes per job rose from $6,522 to $8,691 in constant 2007 dollars, an increase of 7 percent above inflation.
- Michigan state and local taxes per dollar of state Gross Domestic Product increased from 9.2 percent to 9.8 percent.
By itself, none of the measures provide a perfect indication of relative tax burdens, because they all reflect a different aspect of the economy. Looking at several of them together gives a fairer indication of changing tax burdens.
Thus, two out of four measures of the state's tax burden fell by scant amounts over this period, while two others showed substantial increases.
The SFA report also shows that Michigan's state and local tax burden ranking among the states has improved: In taxes per person Michigan went from the 16th to 30th highest tax state, and taxes per dollar of per capita personal income we went from 14th to 20th highest. This means that even though tax burdens went sideways or increased, other states increased much more, making the state a comparatively lower tax state. Michigan's rank in taxes per job stuck with the trend and fell from 12th to 20th highest.
While these measures that the SFA report inspected improved, one other measure of the state's tax burden did not. Michigan's rank among the states in taxes as a percent of GDP increased from 18th to 19th highest over the period.
Important for assessing changes in the relative well being of different populations, and not reflected in these state ranking comparisons, is the fact that tax collections are "elastic," which means they respond sharply to economic trends. This chart showing changes in state tax collections compared to growth or decline in employment levels illustrates:
Given that Michigan lost more jobs than any other state since 2000, one would expect to find us at the bottom of all these changes of state ranking, not just the per capita measure.
The state and local data series used in the Senate Fiscal Agency's report are comprehensive ones, but they only reflect what happened through 2007 from the Census Bureau's comprehensive finance surveys. More recent reports of just state tax collections tell another part of this story: Although Michigan lost a greater percentage of its jobs than all but two states, the state's tax revenues took a much smaller hit than average. Thus, contrary to notions that an "obsolete" tax system here is "underperforming" in a 21st century economy, the reality is that Michigan state government is all too efficient at extracting a relatively greater amount of revenue from a shrinking number of jobs.
The question of whether Michigan's tax burdens have increased or decreased is more complex than one measure can answer. When all the different measures are examined, the state's burden is arguably heavier than it was a decade ago, not lighter. Regardless of ambiguous tax burden changes, tax rates here unquestionably increased, as most tobacco users, businesses and personal income tax payers are painfully aware.
James Hohman is a fiscal policy analyst at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted provided that the author and the Center are properly cited.