On March 15, 1994, Michigan voters will render a decision on an important question relating to public school finance-one of the most complex propositions ever placed on the ballot here. "Proposal A" offers a mix of taxes to replace property taxes for schools eliminated by the legislature and Governor Engler last summer, as does a "back-up" or "statutory" plan that will automatically take effect if Proposal A fails.

The elements of these two plans are numerous and complicated. Important constitutional questions are involved. The ability of local and state governments to raise taxes from the levels each plan would initially establish ought to be important to taxpayers as they consider their options. And what the voters are buying for their money under each plan is not to be ignored either. These are but a few of the factors that carry weight in the March 15 decision, but they are not the subjects of this paper.

The focus of author Dean Stansel's analysis is the question, "Which impacts a state's economy with the least negative effects, the sales tax or the income tax?" This question, though it is one of many that voters must consider, is nonetheless central to the choice between Proposal A and its statutory alternative. Proposal A would raise the sales tax from 4% to 6% and cut the flat-rate personal income tax rate from 4.6% to 4.4%. The statutory plan would leave the sales tax unchanged and raise the income tax rate to 6%.

The U.S. Advisory Commission on Intergovernmental Relations (ACIR) calculates relative "tax capacity" and "tax effort" for every state. Tax capacity is an estimate of the amount of revenue a state would collect if it utilized a "representative" tax system comprised of national average tax rates applied to commonly used tax bases. A state's tax effort is the ratio of its actual revenues to its estimated capacity. According to ACIR data for 1991, Michigan's sales tax capacity ranked 24th, at 3 % below the national average, while the state's sales tax effort ranked 43rd, at a substantial 31% below the national average. Michigan's personal income tax capacity, meanwhile, ranked 18th, at just 1% below the national average, while its personal income tax effort ranked 27th, at 4% above the national average. At least in relation to the other states, it would appear that Michigan has less "room" to raise its income tax than it does to raise its sales tax.

Dean Stansel draws a clear conclusion on the issue of sales vs. income taxes and their relative economic effects. His finding should be helpful to voters as they decide how they will vote on March 15, but it should not by itself make the decision for them.

Finally, school finance is inevitably tied up with what it is we are financing. The Mackinac Center for Public Policy has made it plain in other forums that neither Proposal A nor the statutory plan buys us the sort of fundamental reform our educational system desperately needs. Irrespective of the March 15 outcome, the Governor and the legislature should work for those initiatives that will infuse competition and parental choice into the system, contain excessive costs through more contracting with the private sector, liberate teachers from stifling mandates and bureaucracy, and expand charter schools.

----Lawrence W. Reed, President, The Mackinac Center for Public Policy

For years, the effect of state and local taxes on economic growth has been a topic of much debate. Until the mid-1970s the conventional wisdom was that state and local taxes did not substantially affect economic decision-making. More recently, however, there is a growing body of empirical research which suggests otherwise. Many economists now agree that high and rising state and local tax burdens can significantly inhibit economic growth, and further, that some taxes can be far more harmful than others.

Economic theory speaks clearly on how the various kinds of taxes can affect economic growth. More specifically, there is little theoretical disagreement with the assertion that consumption taxes are less harmful to economic growth than are income taxes.