(Editor’s note: This is an edited version of testimony provided by Mackinac Center Senior Economist David Littmann to the Senate Finance Committee regarding Senate Bill 402.)
While Michigan is doing better, it should have been capitalizing far more on the past two years of national economic expansion. After all, the unusually low financing rates that have served as a catalyst for impressive improvements in auto industry sales, employment and profitability are unlikely to remain this favorable for another full calendar year.
Budget surpluses that have accrued to state coffers, in part reflecting Lansing's unwillingness to reduce marginal income tax-rate hikes from the Granholm era, must now be returned to Michigan's households and families. Such private-sector enhancements would incentivize market forces and re-invigorate Michigan's image in the domestic and global economies
Instead, despite improvements, Lansing is still pummeling the private sector with high taxes and higher spending. Notwithstanding useful reform of the business tax and a mixed bag of personal property tax changes, many taxes, fees and the amount of spending have risen. More growth in Michigan's public sector, especially proposals to further insulate Detroit's public sector at the expense of Michigan's private sector, will hurt rather than help the long-term business climate of our state.
Leadership in Michigan requires a vision of economic excellence and fiscal strength. The elimination of waste, fraud and departmental duplications should be among its highest priorities.
Instead, Michigan budgets continue to expand, in good times and bad. A surplus, rather than being used for attracting and retain business, entrepreneurship and population by enabling existing tax-base generators to expand, is in danger of being co-opted by Lansing.
Failure to return surpluses to the private sector of Michigan announces policies of political favoritism — subsidies determined by politicians and directed toward a chosen few firms and individuals at the expense of the general public, both current and future generations in Michigan.
Will Michigan ever make it back into the top 10 business climates among the 50 states? We are again squandering a short-lived window of economic momentum.
Very modest reductions in marginal income tax rates are a very modest step in the right direction. Truly visionary leadership would be seriously exploring how to eliminate the income tax altogether, which would also require significant downsizing of state government. If we want to see Michigan reclaim the economic pre-eminence it once held, only bold steps like these will make it happen.
Some “quick hits” on Income Tax Marginal Rates
Assembled by Michael LaFaive, Director of the Mackinac Center’s Morey Fiscal Policy Initiative
What Is the Evidence on Taxes and Growth
William McBride, chief economist at the Tax Foundation
Published by the Tax Foundation, December, 2012
“While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy. In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth. Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes.”
Tax Myths Debunked
Randall Pozdena, former vice president of research at the San Francisco Federal Reserve Bank, Dr. Eric Fruits, president of Economics International Corp.
Published by the American Legislative Exchange Council, February, 2013
“The evidence that lowering marginal tax rates grows the economy is voluminous and, because individual states vary so much in the level and type of taxes levied against the backdrop of federal policy, it is relatively easy to demonstrate a causal relationship between lower marginal tax rates and greater employment overall and migration to those states with preferable, low income tax rates.
“Thus, instead of states cutting taxes—the most theoretically and empirically promising means of stimulating the economy—a standard prescription for them is to raise tax rates to preserve or increase public spending during a business cycle downturn. The irony is that both halves of this policy are, in fact, depressive, so there is a negative net effect on economic activity.”
Graduated Income Taxes Hurt State Growth
Mackinac Center blog post, Nov. 24, 2009
Last but not least, responding to a proposal to repeal Michigan’s constitutional prohibition on a graduated income tax, Michael LaFaive reviewed several studies, some of which also include findings on the impact of income tax rates. They include:
Does the Progressivity of Taxes Matter for Economic Growth?
Elizabeth M. Caucutt, University of Rochester; Selahattin Imrohoroglu, University of Southern California; Krishna B. Kumar, University of Southern California
Published by the Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis
“Quantitatively, welfare is unambiguously higher in a flat rate system when comparisons are made across balanced growth equlibria…”
State Income Taxes and Economic Growth
Barry W. Poulson and Jules Gordon Kaplan
Published by the Cato Institute, Winter 2008
“The analysis reveals that higher marginal tax rates had a negative impact on economic growth in the states. The analysis also shows that greater regressivity had a positive impact on economic growth. States that held the rate of growth in revenue below the rate of growth in income achieved higher rates of economic growth.”
The Robust Relationship Between Taxes and State Economic Growth
W. Robert Reed, Department of Economics, University of Canterbury, Christchurch, New Zealand
Published by the National Tax Journal, March 2008
Abstract: “I estimate the relationship between taxes and income growth using data from 1970–1999 and the 48 continental U.S. states. I find that taxes used to fund general expenditures are associated with significant, negative effects on income growth. This finding is generally robust across alternative variable specifications, alternative estimation procedures, alternative ways of dividing the data into “five year” periods, and across different time periods and Bureau of Economic Analysis (BEA) regions, though state–specific estimates vary widely. I also provide an explanation for why previous research has had difficulty identifying this “robust” relationship.”
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