Proposal "A" would have significant indirect effects including those on federal tax liabilities. The biggest immediate effect is a reduction in property taxes which are deductible for those who itemize under the current IRS code. Sales taxes used to be deductible, but currently are not. The revenue analysis in this study does not include federal tax effects for three reasons.

First, the federal tax code will almost certainly change. The new administration has several times promised to increase taxes on "the rich," and their formal proposals have specified tax increases on those with income as low as $25,000 – making "rich" a very vague term indeed. The sales tax used to be deductible, and property tax deductions are already limited for higher-income taxpayers. Thus, it is not at all clear what the future federal tax code will be.

Second, only about 35% of Michigan taxpayers itemize their deductions, and those tend to be the higher-income taxpayers. Thus, the majority of Michigan taxpayers do not now receive any federal deduction for property taxes, and the new administration in Washington has already proposed tax increases on everyone else, which could easily include further restriction on property tax deductibility.

Third, analyses that include federal tax deductibility normally make two other incorrect assumptions: that the additional federal taxes bring no benefit to Michigan, and that all Michigan taxes are paid by Michigan residents. In the first case. the benefit to Michigan of an additional dollar's worth of federal taxes is clearly a small fraction, but probably not zero. In the second case, tourists pay probably pay 5% or more of the sales and use taxes in the state, although this figure is not well supported by evidence. Thus, to include federal deductibility, we would have to also include these other factors.

The impact of these factors, while not included in the basic analysis is estimated separately in the "What if?" section, page 24.