Fairness and the Sales Tax

"Fairness" and the Sales Tax

The property tax is widely seen to be an unfair tax, because it is not related to "ability to pay" and because the assessing system is not reliable. On both these measures the sales tax is much more "fair." First, there is little question over the base of the tax, since it is generally collected on the sales price. at the time of the sale.

Second, the sales tax is very closely related to "ability to pay." Despite frequent claims to the contrary, the Michigan sales tax is slightly "progressive" when properly analyzed, meaning that the proportional burden increases as income increases. Two factors account for this: First, the sales and use taxes exclude food, prescription drugs, and most services including rent. For many lower income taxpayers, food, drugs, and rent are a very high proportion of their spending. As a statewide total, the sales and use tax revenue compared with personal income in the state indicates that about 45% of income is spent on sales- or use-taxable items.[14]

The second factor is that consumption, over a period of years, tracks income almost exactly. Taxpayers who earn more than they spend in a single year and save the difference, are simply deferring their consumption.[15] In a typical lifespan most taxpayers start out consuming far more than they earn (as children, teenagers, and college students); then begin earning. although borrowing heavily; then earn more than they spend, as they pay off debts and save for retirement; and finally begin spending much more than they earn, by living off pensions and other savings. Over the life cycle, a flat percentage sales tax ends up taking about the same share of income from high-income as low-income taxpayers. With the exclusions for food, drugs, and rent, the Michigan sales tax is slightly progressive.

Embedded Business Taxes

Consumers also pay taxes mixed into the prices of their goods and services. Much as renters pay property taxes through their rent, consumers pay business taxes through the prices of every good and service they purchase. Business taxes are also paid indirectly by investors, who receive lower returns. Since the majority of investments are made for retirement savings and pensions, this means lower income during retirement years. Finally, workers receive lower wages because of business taxes. Since workers require both real property (land) and personal property (computers and equipment) to work productively, the property tax is an indirect tax on their output, and therefore their wages.

Embedded local business taxes are almost impossible to decompose into the prices consumers pay, the returns investors receive, and the wages workers receive. Nonetheless, the reduction in the property taxes businesses pay will provide a significant benefit to Michigan Consumers, investors, and workers. In the aggregate, business property tax reductions would add at least $400 million of benefits to these groups.[16]

Senior Citizens and the "Circuit Breaker"

Many senior citizens benefit from an income tax credit for property taxes, known commonly as the "homestead" or "circuit breaker" credit. The Constitutional amendment contained in Proposal "A" would not change the "circuit breaker" program, which was created by state law. This credit can be for up to 100% of property taxes above a fraction of income, within certain income limits and subject to a $1200 limit. Many analyses of "A" assume that all senior citizens receive this credit. and that a reduction in income tax credit offsets their entire property tax cut.

This would not apply to the majority of senior citizens, for the following reasons. First, according to the Department of Treasury, 30% of those seniors receiving income tax credits for property taxes are already at the $1200 limit.[17] Thus, a reduction in their property taxes at least initially does not reduce their credit. Second, a reduction in property taxes is an immediate increase in disposable income, while a property tax credit is often received sometime the following spring or summer. Taxpayers are better off holding their own money, rather than allowing the state to draw interest on it. Third, the income thresholds are not indexed to inflation, and apply to total household income.Thus, many seniors who have saved for their retirement, or who have some earnings, are not eligible for the full credit. (This is particularly true for non-senior citizens families with two-earners.) Finally, the "circuit breaker" is a part of the income tax code, which can be changed at any time by the legislature. Even if it is not changed, inflation is slowly reducing its value.

The State/Local Balance and the Lottery Debacle

"A" would constitutionally dedicate lottery earnings to the school aid fund. However, this is more an attempt to redress an injustice perpetrated over the past two decades than to reduce property tax burdens. Lottery revenue is already dedicated by statute to the school aid fund. However, under "A" the state/local share of public school funding will return to close to what it was in the mid-1970's, plus additional lottery funding: about 58% state share, plus another 8% for the lottery.[18]