Study: 19,000 Michigan Jobs Jeopardized by Proposed 2 Percent Excise Tax on Services

Investments in the state will decline and revenues are likely to fall short of projections, tax experts estimate

For Immediate Release
Wednesday, March 7, 2007
Contact: Michael D. LaFaive
Director of the Morey Fiscal Policy Center

MIDLAND — Gov. Jennifer Granholm’s proposed 2 percent excise tax on most services could result in the loss of up to 19,000 Michigan jobs in just its first 16 months, according to research released today by the Mackinac Center for Public Policy.

Authored by economists at the Beacon Hill Institute in Massachusetts at the request of the Mackinac Center, the study shows that official revenue estimates fail to include the dynamic impact of hiking taxes on Michigan residents and job providers.

In order to measure the impact of the governor’s primary tax proposal, the Mackinac Center asked the Beacon Hill Institute to measure the impact that its most prominent component — a 2 percent excise tax on services — would have on the Michigan economy, all other things being equal.

"One of the fundamental tenets of economics is that when prices go up, quantity demanded goes down," said Michael D. LaFaive, director of fiscal policy for the Center. "Raising the price of anything — business services, for instance — means less of that service will be sold. Since this tax will raise the cost of everything from legal services to bowling, the impact will ripple through the economy, causing job losses and lower-than-expected revenue to the treasury."

The Beacon Hill Institute estimates that revenue from the excise tax will fall short of official projections by $221 million through fiscal year 2008. It is also projected to lower state personal income by $1.1 billion and reduce total investment in Michigan by more than $248 million. The analysis does not attempt to measure job or income changes resulting from other components of the governor’s tax and budget plan, which, combined, add up to a $1 billion net increase in annual taxes paid by Michigan workers and businesses.

"Michigan had the nation’s worst unemployment rate in 2006 at 6.9 percent" said Jack McHugh, legislative analyst for the Mackinac Center. "A new tax is the opposite of what’s needed to save a state with falling home values, declining personal income, reduced employment and lower population." McHugh is the author of "How To Replace the SBT With Nothing," an essay that lists nearly $1.9 billion worth of ideas for balancing the state budget without raising taxes.

More information and the Beacon Hill Institute report can be found at: