Time for Another State Tax Cut: It's the Law

This essay appeared in the Detroit Free Press on October 11, 1999.

In 1978, the voters of Michigan approved the "Headlee Amendment" to the state constitution. That decision expressed a strong desire to place limits on the growth of state and local government and to provide important protections to taxpayers. Thanks to one of the amendment's provisions and robust revenues accruing to the state's treasury, the state's taxpayers are now owed a tax cut.

Article IX section 26 of the Constitution fixes a limit on state taxes as the share of our personal income taken by the State government at the time the amendment passed. That share—9.49 percent—is the maximum amount of all personal income of all Michigan residents that can be taken by the State in taxation. It's a commonsense limit, and one that has helped keep our state government in line over the 21 years since Headlee was on the ballot.

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The State finished its 1999 fiscal year in excellent shape, with a rainy day fund topping $1 billion, record school funding, and recently adopted tax reductions. Revenues were so strong that the state's receipts appear to have exceeded the Headlee revenue limit, a fact which has gone almost unnoticed in Lansing.

In 1994, the Governor's Headlee Amendment Blue Ribbon Commission reported that the amendment's revenue limit had accomplished its intended purpose of restraining the growth of state revenue and spending. While the limit was imposed at an historic high level of revenue as a share of personal income, it has since effectively prevented the state's share of our income from rising beyond that level.

In the same year as the Commission's report, the state exceeded the limit and properly responded with a special 2 percent income tax rebate. The 1999 excess, if confirmed, now calls for a similar tax reduction. Based on recent estimates from Senate Fiscal Agency Senior Economist Jay Wortley, a 1 percent income tax rebate would completely return the excess to the taxpayers that generated it.

While the 1999 excess over the Headlee limit is small, relative to the overall state budget, it nonetheless presents an opportunity to show the right way to do things. The right way to do things, our friends in Washington should see, is to let the people keep their own money whenever possible. And right now, it's possible—both here and in Washington.

The strong tax revenues for the state are really good news to Michigan taxpayers, who are enjoying a dramatic improvement in the state's economic fortunes. Over the past decade, Michigan has changed from one of the most highly-taxed states, to one with overall taxes slightly lower than the national average. That improvement in our business climate has helped the state's economic fortunes turn from gloomy to glowing, with unemployment rates now consistently below the national average.

The Michigan experience should be a shining example for our federal government, which continues to debate how to spend away its growing surplus on new federal programs or on "saving" troubled old ones. Tax revenue comes from the people, and leaving it with them is the surest way to improve the overall economy.

The citizens of Michigan should be pleased that the Headlee Amendment has contributed to today's favorable economic climate and vigilant that the legislature remain faithful to its provisions.


Patrick L. Anderson is managing director of Anderson Economic Group in Lansing, and Lawrence W. Reed is president of the Mackinac Center for Public Policy in Midland, Michigan. Both served on the Governor's Headlee Amendment Blue Ribbon Commission in 1993-94.