Anemic economic growth and fresh bad news on
the jobs front (Comerica moving its headquarters out of Detroit, Pfizer jobs leaving
the state) are the backdrop for a proposal by Gov. Jennifer Granholm to impose a
2 percent excise tax on most services in the state. The first independent
econometric analysis of the service tax shows it would destroy up to 19,000
additional Michigan jobs through fiscal year 2008. The analysis was performed by
the Beacon Hill Institute of Massachusetts, a nonpartisan, nonprofit research
organization with expertise in modeling the economic impact of state tax policy
Gov. Granholm’s "two penny" tax is the largest
piece of an overall package that would also resurrect the death tax; raise
cigarette, tobacco product and liquor taxes; and provide a tax break for those
who trade in a used car when buying a new one. The package also includes a
replacement for the single business tax that would take $480 million less from
businesses located in the state. Combined, the administration says its "tax
restructuring proposal" would amount to a net $1.1 billion tax increase.
However, neither the Mackinac Center for
Public Policy nor anyone else can predict which parts of this proposal might
become law. Therefore, to measure just the impact of the proposed service tax,
the Center approached the Beacon Hill Institute with a simple request. "Other
things being equal, what would be the net impact on Michigan’s economy of a new
2 percent service tax?"
BHI’s analysis indicates Michigan can expect
significant job losses should the tax be implemented. Further, the additional
revenue the tax will generate during its first full year will fall substantially
short of the $1.47 billion the Granholm administration projects. Compared to a
"static" analysis, the well-proven BHI model shows that the lower return on
capital caused by the tax increase would mean less investment in Michigan,
resulting in the creation of fewer jobs, less wealth and lower revenue for the
treasury. BHI estimates fiscal year 2008 revenue of only $1.25 billion in new
revenues — $221 million less than the administration is counting on.
Indeed, this tax could be the load of bricks
that finally breaks the back of an already battered state economy. According to
the Bureau of Economic Analysis, Michigan is 48th among the 50 states in
estimated 2005 state GDP growth; is dead last in home price appreciation from
the last quarter of 2005 to the last quarter of 2006 according to the Office of
Federal Housing Enterprise Oversight; and, in 2006, was the state with the
highest annual unemployment rate in the country at 6.9 percent.
Moreover, Michigan is actually being propped
up by a strong national economy. Should the nation’s fiscal fortunes dip, the
employment picture here could get dramatically worse, because we’re essentially
"exporting" potentially higher unemployment as people leave the state to take
jobs that are plentiful elsewhere. A national slowdown would close that pressure
relief valve. Lastly, none of this accounts for the very real possibility of
other major employers leaving the state.
The Mackinac Center for Public Policy has made
hundreds of recommendations over the years to make Michigan a more attractive
place for people and job providers alike. To generate some real hope for a
change, Lansing policymakers need to start adopting these growth-generating
proposals. Their first step should be to consider the economic damage this tax
hike would impose. That leads to the second step, which is to adopt thoughtful
spending reforms. Michigan can’t tax its way to prosperity and shouldn’t try.
The Beacon Hill Institute study is at
Michael D. LaFaive is director of the Morey
Fiscal Policy Initiative at the Mackinac Center for Public Policy, a research
and educational institute headquartered in Midland, Mich. Permission to reprint
in whole or in part is hereby granted, provided that the author and the Center
are properly cited.