Tax Cuts: Tonic for an Ailing Economy

The following is based upon testimony by Mackinac Center for Public Policy President Lawrence W. Reed before two panels of the Michigan Legislature—first the House Commerce Committee and then the Senate Economic Development Committee—on Tuesday, Oct. 23, 2001.

Thank you, Mr. Chairman and members of the Committee.

At a news conference at the Capitol on Oct. 18, a dozen state representatives and senators were on hand to endorse a package of six proposals crafted by the Mackinac Center for Public Policy and the Michigan Chamber of Commerce to help stimulate a sagging Michigan economy.  Sen. Bill Schuette of Midland is leading the effort to give these ideas a wide and favorable hearing and, in the process, to turn back the growing but misguided calls for raising taxes or canceling already-passed and scheduled reductions in the state's tax burden.  It has been a pleasure to work with him and my friend Jim Barrett, president of the Michigan Chamber, in advancing sound public policy for our state.

The six proposals are

• Curtail Government Spending.  Reduce state government spending for the current fiscal year by 5 percent.  This will help properly prioritize state spending, force improved efficiencies in the delivery of services, and keep more dollars in the pockets of those who actually generate jobs and put food on the table for families.  This will save nearly $490 million out of a General Fund/General Purpose budget of approximately $9.74 billion.

• Speed Up Tax Cuts For Working Families.  The Michigan personal income tax rate for 2001 is 4.2 percent and set to fall by 0.1 percent each year until 2004, when it will settle at 3.9 percent.  Though those reductions are scheduled to take place on Jan. 1 of each year, we recommend they be implemented on Oct. 1 of each year, beginning retroactively this very year.

• Stimulate Capital Investment.  Michigan's Single Business Tax is scheduled to be phased out over 23 years at the rate of 0.1 percent per year on each Jan. 1.  We recommend that these reductions be implemented on Oct. 1 of each year. 

• Lower the Cost of Home Ownership.  The state's real estate transfer tax stands at $3.75 per $500 of total home value at the time of purchase.  To encourage home ownership, that rate should be cut to $2.50 immediately.

• Help Businesses Create Jobs by Lowering Payroll Taxes.  Michigan's unemployment insurance payroll tax base—currently at $9,500 of an employee's earnings—should be restored for at least a year to the federal level of taxable wage base, which is $7,000.  This would have no direct impact on state revenues because employers pay this tax into a separate fund, which presently is in surplus, and mirroring the federal wage base for one year would help cut the overall tax burden on all Michigan businesses.

• Jump-Start Investment in Telecommunications Infrastructure.  Under current law, telecommunications property is taxed based on intangible assets such as income.  Most other personal property in Michigan is taxed based on the depreciated value of tangible personal property.  This discriminatory treatment of telecom property is a major barrier to private investment in Michigan's infrastructure and should be ended.

I would like to focus my remarks on one critical area—the personal income tax and Single Business Tax reductions passed in 1999 and 2000.  We are in the early stages of implementing those cuts and delaying or canceling them would send the wrong message to families, workers, and job creators.  Indeed, as this package calls for, we should be accelerating those reductions to aid a wounded economy.  Moreover, legislators should not abdicate their responsibility to deal with slowing revenues the same way everyone else must handle similar situations in their homes or businesses—by reprioritizing budgets and curtailing spending.

Keep in mind that in spite of progress to reduce the burdens of state and local government in recent years, Michigan still ranks as a highly taxed state—the ninth highest on a per capita basis, according to the Tax Foundation.  We can't afford to reverse course.

Our complicated Single Business Tax is especially onerous to the businesses that pay it.  It's the only comprehensive, statewide, value-added tax imposed by a state, and businesses pay it whether they earn a profit or not.  If Michigan had a standard corporate income tax, the rate necessary to raise the revenue brought in by the SBT would have to be in the vicinity of 15 percent—far higher than the corporate income tax rates of perhaps all but two states.  That ought to tell us what businesses here have been saying for years, namely, that the SBT is a job-killer.

Let me call your attention to the accompanying chart, which depicts the number of jobs likely to be created by the planned personal income tax and SBT reductions over the next five years.  Think of it also as the number of jobs that will never be created if the tax cuts are canceled.

The data for this chart are derived from an econometric model developed for the Mackinac Center for Public Policy by the Boston-based Beacon Hill Institute for Public Policy Research, a nonpartisan economic research arm of Suffolk University.  Dubbed the State Tax Analysis Modeling Program, or STAMP, it measures the economic effects of state-level tax changes by applying dynamic, state-of-the-art statistical and econometric methods to data derived from state and federal economic reports.

As the chart indicates, the planned tax cuts will create an estimated 5,405 new jobs in 2002.  By 2003, the scheduled cuts will create a cumulative total of 16,376; by 2004, 33,079; by 2005, 52,899; and by 2006, a grand total of 75,924.  In 2002, keeping these tax cuts in place would reduce revenues to the state by about $267 million, or a little more than half the amount of the savings from our proposed 5-percent cut in spending.

Speeding up implementation of the reductions from a Jan. 1 start-date to an October start-date each year, as we call for in this stimulus package, would reduce state revenue next year by another $70 million, according to the Senate Fiscal Agency.  That figure is likely be lower, however, because SFA numbers rely on static analysis and do not account for the dynamic, pro-growth effects and behavior changes that come when government lightens the load it imposes on people.

All of the tax cuts in this package would cut revenues to the state but if we don't make them, we will cut revenues by postponing our economic recovery.  And they can easily be afforded by realizing the savings we propose through budget cuts and/or tapping into Michigan's still-sizable "Rainy Day Fund."

The STAMP model that the Mackinac Center utilized in this analysis has been adapted to New York City and used and endorsed by Mayor Rudy Giuliani.  But I have another reason for mentioning Mayor Giuliani: His recent actions are very instructive for policy makers in Michigan on this issue of tax cuts.

The economic fallout of the Sept. 11 terrorist attacks blew a billion dollar hole in this year's $39-billion New York City budget.  Mayor Giuliani still has more than $17.5 billion in tax cuts in the pipeline through 2005.  As in Michigan, there are those in New York who are saying that the way to meet the unexpected revenue shortfall is to cancel or delay tax cuts.  In characteristic rhetorical flourish, the mayor declared two weeks ago that doing so would be "a stupid, idiotic, moronic thing to do."  Instead, he called for a 15 percent across-the-board cut in city spending, with the exception of police, fire, and school budgets.  They are to be cut just 2.5 percent. 

Mayor Giuliani understands that when the patient is weak or ill, the doctor shouldn't bleed him as was common practice in days when we didn't know any better.  Rather, the doctor should stimulate the patient by strengthening his immune system, and that means leaving the blood in his veins instead of on the floor.

Making tough decisions.  Doing what's right.  Removing burdens, not adding to them.  That's leadership.  That's what taxpayers pay their elected representatives to do.  That's what we need to see more of in Michigan, and it's what this stimulus package we propose would help accomplish.  Mayor Giuliani's actions not only reinforce our message, they make our proposal appear rather modest by comparison.

I urge you to favorably consider this package of proposals.  If you favor stronger families and businesses, you will keep Michigan on course for smaller, better, and more accountable government.