Anemic economic growth and fresh bad news on the jobs front (Comerica moving its headquarters out of Detroit, Pfizer jobs leaving the state) are the backdrop for a proposal by Gov. Jennifer Granholm to impose a 2 percent excise tax on most services in the state. The first independent econometric analysis of the service tax shows it would destroy up to 19,000 additional Michigan jobs through fiscal year 2008. The analysis was performed by the Beacon Hill Institute of Massachusetts, a nonpartisan, nonprofit research organization with expertise in modeling the economic impact of state tax policy changes.
Gov. Granholm’s "two penny" tax is the largest piece of an overall package that would also resurrect the death tax; raise cigarette, tobacco product and liquor taxes; and provide a tax break for those who trade in a used car when buying a new one. The package also includes a replacement for the single business tax that would take $480 million less from businesses located in the state. Combined, the administration says its "tax restructuring proposal" would amount to a net $1.1 billion tax increase.
However, neither the Mackinac Center for Public Policy nor anyone else can predict which parts of this proposal might become law. Therefore, to measure just the impact of the proposed service tax, the Center approached the Beacon Hill Institute with a simple request. "Other things being equal, what would be the net impact on Michigan’s economy of a new 2 percent service tax?"
BHI’s analysis indicates Michigan can expect significant job losses should the tax be implemented. Further, the additional revenue the tax will generate during its first full year will fall substantially short of the $1.47 billion the Granholm administration projects. Compared to a "static" analysis, the well-proven BHI model shows that the lower return on capital caused by the tax increase would mean less investment in Michigan, resulting in the creation of fewer jobs, less wealth and lower revenue for the treasury. BHI estimates fiscal year 2008 revenue of only $1.25 billion in new revenues — $221 million less than the administration is counting on.
Indeed, this tax could be the load of bricks that finally breaks the back of an already battered state economy. According to the Bureau of Economic Analysis, Michigan is 48th among the 50 states in estimated 2005 state GDP growth; is dead last in home price appreciation from the last quarter of 2005 to the last quarter of 2006 according to the Office of Federal Housing Enterprise Oversight; and, in 2006, was the state with the highest annual unemployment rate in the country at 6.9 percent.
Moreover, Michigan is actually being propped up by a strong national economy. Should the nation’s fiscal fortunes dip, the employment picture here could get dramatically worse, because we’re essentially "exporting" potentially higher unemployment as people leave the state to take jobs that are plentiful elsewhere. A national slowdown would close that pressure relief valve. Lastly, none of this accounts for the very real possibility of other major employers leaving the state.
The Mackinac Center for Public Policy has made hundreds of recommendations over the years to make Michigan a more attractive place for people and job providers alike. To generate some real hope for a change, Lansing policymakers need to start adopting these growth-generating proposals. Their first step should be to consider the economic damage this tax hike would impose. That leads to the second step, which is to adopt thoughtful spending reforms. Michigan can’t tax its way to prosperity and shouldn’t try.
The Beacon Hill Institute study is at www.mackinac.org/8345.
Michael D. LaFaive is director of the Morey Fiscal Policy Initiative 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.