This Week in Fiscal Policy News

Tax reform proposals and state pension underfunding

This morning the Washington D.C.-based Tax Foundation released its 2017 State Business Tax Climate Index. The index ranks the structure of a state’s tax system, not the actual financial burden it imposes.

Michigan’s position is unchanged from last year at No. 12. This is up from 2010 when the state was ranked 17th, according to Joseph Henchman, an economist with the foundation. Michigan’s ranking improved after it eliminated the hated Michigan Business Tax and related surcharge in favor of a more transparent Corporate Income Tax.

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The index is constructed from six subindexes including such items as the state’s property, sales and corporate income taxes. The outlier is Michigan’s Unemployment Insurance Tax, which came in at 47th worst among 50 states.

Henchman, a vice president with the foundation, argued that Michigan’s ranking for the unemployment-insurance tax was a function of “a relatively high minimum tax rate, a high maximum rate, charging benefits to the most recent employer only and charging employers even if the former employee’s benefit awards are reversed or the employee refuses suitable work.”

The West Michigan Policy Forum met Monday and more than 400 of its members — comprised of business leaders — voted on its top policy priorities.

The top vote-getter was pension reform. Moving government employees to a defined contribution program (similar to a 401k program in the private sector) from a defined benefit one could save billions of dollars going forward. Today’s system is underfunded and unaffordable.

In second place: Eliminate the state’s personal income tax. This bold idea — if adopted — would place the Great Lake State in some rarefied air among states. Only seven sister states function without a personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

The Mackinac Center has long called for rolling back the state’s personal income tax burden. In 2007 the Legislature imposed a “temporary” personal income tax hike, increasing rates from 3.9 percent to 4.35 percent. A change in 2011 reduced the rate, but only to 4.25 percent, and made the new rate permanent.

Ten tax-related bills were introduced in the House and Senate over the last week. The complete list is available at

Notable among the list were HB 5914 and SB 1096 which establish clawback provisions for taxpayers who receive tax credits under the Michigan Business Tax Act.

Related Articles:

Why Pension Reform Is Hard for Politicians

Why Michigan Pension Reform Matters

Mackinac Center: Michigan a National Innovator in Pension Reform

Mackinac Center Praises Groundbreaking Pension Reforms in Michigan

Pension Reform Legislation Benefits Students, Teachers and Taxpayers

State Retirement Managers Develop Convenient, Hypocritical Excuse