Gov. John Engler has earned a national reputation as a tax-cutter, and this reputation is well deserved for the most part. But the sad truth is that even after Gov. Engler’s efforts to reduce taxes, Michigan remains one of the most highly taxed states in the union. This high tax burden slows the state’s economic growth, which in turn results in a lower standard of living for all citizens. Clearly, a new tool is needed to help restrain the state government’s appetite for our money, an appetite that threatens the financial health of our state and our families.
Just how ravenous is that appetite? According to the National Tax Foundation, Michigan citizens, on average, pay 10.7 percent of their personal incomes in state and local taxes—the 14th highest rate in the country. Michigan’s tax on business activity is an even bigger problem. The Michigan Economic Development Corp. and SRI International report that Michigan businesses pay more taxes than businesses in 48 other states—at a rate nearly three times the national average.
The Legislature made a step toward reining in taxes by enacting statutes to gradually reduce the state’s flat-rate income tax to 3.9 percent and cut the Single Business Tax (the state’s primary business tax) over a 23-year period until it’s fully eliminated. Unfortunately, lawmakers are backpedaling on even this modest attempt at tax relief: The recent decline in state revenues has prompted action in Lansing that will result in at least a temporary suspension of the business tax phase-out.
One way to tame the tax beast is to require a “supermajority” in the Legislature in order to pass any tax hikes. For example, a proposal put forward by gubernatorial candidate and Lt. Gov. Dick Posthumus would amend the Michigan Constitution to require a three-fifths vote to increase the rate or base of any tax. Adopting Posthumus’s proposal would help to offset some of the negative effects of Michigan’s high tax burden: According to Americans for Tax Reform, economic growth in the 14 states that currently require a supermajority to increase taxes has exceeded that of the remaining 36 states.
Meanwhile, government spending has continued to balloon. State appropriations have risen from $24.1 billion in 1994 to more than $39 billion proposed for next year, a 63 percent increase in nine years. Requiring a supermajority to raise taxes would focus the Legislature on permanent solutions to the problem of overspending, such as getting a handle on Medicaid and special education expenses and enlisting our congressional delegation to reduce unfunded federal mandates.
Some might argue that supermajorities are undemocratic or “out of character” for Michigan, but such arguments are misguided. The Michigan Constitution as it stands contains a number of provisions for supermajorities. Article IX, Section 15 requires a two-thirds majority of the Legislature and submission to the voters of any issuance of bonds for specific purposes by the state. Article IX, Section 3 (which was part of the Proposal A school finance reforms of 1994) requires a three-fourths majority to approve any law “that increases the statutory limits . . . on the maximum amount of ad valorem property taxes that may be levied for school district operating expenses.” Article IV, Sections 29 and 30 also contain supermajority provisions relating to local ordinances and finances.
Nobel Prize-winning economist F.A. Hayek wrote extensively on the importance of limiting the power of the majority in a democratic system. In “The Constitution of Liberty,” Hayek wrote, “though democracy is probably the best form of limited government, it becomes an absurdity if it turns into unlimited government.” Indeed, limiting the power of the majority to impose its will is one of the main reasons for having a constitution in the first place.
Requiring a three-fifths vote to raise taxes from their already high level is both sound economics and sound political philosophy. It would force legislators to do a better job prioritizing their spending and, by creating a more stable and predictable tax environment, would encourage more robust job growth.
And most importantly, it would help keep the greedy hand of government from grabbing more and more of our incomes.
(Gary Wolfram, a former deputy treasurer for the state of Michigan, is George Munson Professor of Economics at Hillsdale College and a senior policy analyst with the Mackinac Center for Public Policy. Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.)