The idea that
Michigan tax revenues are declining faster than the private economy is a
well-worn talking point among tax hike proponents. For example, in the
introduction to its report on possible reforms, the "Legislative Commission on
Government Efficiency" stated that Michigan's tax system "is no longer
appropriately linked with the state's current resources/tax base."
The piece of
evidence often cited is the fact that since 2001, state revenues have fallen
increasingly short of the 1978 Headlee amendment's state revenue limit, which
caps state tax revenues at 9.49 percent of total personal income of Michigan residents. But apart from
excluding the large increases in federal revenue to Lansing, the state uses a
benchmark that improperly measures what Michigan taxpayers can afford. When the
limit is adjusted to exclude government transfer payments the state winds up
taking more than $1 billion above the limit, despite the fact that actual state
tax and fee revenues are currently some $8 billion below the cap.
The state is getting a growing percentage of the private resource base, and any proposed tax hikes would only shrink the private sector.
Personal income measures all the money obtained by
every resident of the state from payroll compensation, returns on capital (as
measured by dividends, interest and rent) and transfer payments (primarily
funds received from government programs like welfare, unemployment insurance
and social security). When the Headlee amendment was adopted in 1978, transfer
payments accounted for 11.2 percent of state personal income. Today, they
constitute 18.8 percent.
The intent of
the Headlee revenue limit was to ensure that state government did not grow
faster than the private economy. While income that individuals receive from
work and investments are reasonable indicators of their ability to pay more
taxes, money they collect from different arms of the welfare state is a
different matter. It is not a sign that tax burdens are more easily borne.
Also, the wages
and salaries component of "personal income" are people's gross pay — your
paycheck before all the deductions for FICA and income taxes and the like are
taken out. Those payroll deductions are also the source for most of the
transfer payments included in the aggregate personal income figure. Wages and
salaries are already burdened by these social welfare programs, so including
both the payments and the payouts themselves is a clear case of
So, what if
state personal income — the basis of Michigan's constitutional cap
on state government revenue — did not include these social welfare programs?
The accompanying chart shows striking results.
Without these government assistance programs,
state revenues would have exceeded the Headlee limit by $1.3 billion last year.
And except for three years (2002 to 2004), state revenues would have exceeded
the limit in each of the past 10 years.
It can be
argued that if the Headlee drafters did not intend transfer payments to be included as part of personal income, they would have used a higher
percentage for the revenue cap. But, if transfer payments remained at the same
percentage of personal income as existed in 1978, the state would still be
below the cap, though much closer than when growing transfer payments are
Perhaps more important than the question of
whether the state is above or below the limit, is whether the tax burden is
increasing compared to the private sector. Since 2001, there has been an upward
trend in personal income minus transfer payments. Proponents of tax hikes often
claim that the decreasing share of revenue is evidence that the tax system is "broken," but if that were the
case, it was broken in 2000 and fixed by 2002. It appears that the state is getting a
growing percentage of the private resource base, and any proposed tax hikes
would only shrink the private sector.
revenue has grown substantially in spite of the fact that the
Headlee-restricted revenue has increased more slowly. It is true that personal
income has increased at a greater rate than state revenues, but the reason is
not that Michigan residents are wealthier and more prosperous. The reality is
that the state's system of collecting taxes and fees has been more generous to
the government than to taxpayers.
James M. Hohman is a fiscal policy
analyst 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