legislators right now whether there will be a tax increase this year, and
they're likely to say the same thing: A tax increase is dead this year. But
Gov. Jennifer Granholm's proposal to extend Michigan's current sales tax to
services will be under consideration until the governor leaves office in
December, and it will become more attractive to legislators as Michigan's
balanced budget deadline of Oct. 1 looms closer. Michigan taxpayers should
therefore know that this bad policy idea is based on phantom facts.
The stability of Michigan’s current sales tax should warn state legislators away from enacting the governor’s new tax proposal.
Consider that the state has the highest
unemployment rate in the country and is in the bottom 10 states in per-capita
production — down from 19th place just a decade ago. Nevertheless, in the past
year, Michigan's treasury has been outperforming Michigan's economy. The
state's tax revenues dropped 4.9 percent in 2009, but the state shed 6.9
percent of its jobs.
The governor has often promoted the tax by trying
to claim Michigan is below average in the number of services the state taxes.
But the data she uses can't sustain her argument. Her figures on sales taxes on
services come from the National Federation of Tax Administrators, which
considers only 168 services in its analysis and notes, "The list of services in
this survey is not a comprehensive list of all services that can or should be
The reason the
NFTA's list is not comprehensive is because the economy is complex, changing
and largely outside of governmental control. There are more than 9,000
service-industry classifications, according to the Federal Office of Management
and Budget. Thousands of services are provided in Michigan's economy. Mark
Perry, a Mackinac Center adjunct scholar, regularly gathers data on new
services being developed, from universities that outsource the grading of term papers to people who hire professionals
to break up with their boyfriends or girlfriends.
selected services in an attempt to get a good sample, but it's difficult to
tell whether it is truly representative of how states approach sales taxes on
services. For instance, even though Michigan's sales tax is generally a tax on
retail goods, a lot of services wind up being tapped for sales tax revenue
anyway. Just look at your cell phone bill to verify this. Most states have
applied their sales taxes that way.
enacting a service tax would make Michigan unusual. According to the
Washington, D.C.-based Tax Foundation, only five other states generally tax
services: Hawaii, New Mexico, Mississippi, South Dakota and West Virginia (not
all of them state this explicitly in their statutes).
make it possible to check whether a service tax would live up to its promises
of stability and better reflect the changing economy. As it stands, states with
a service tax have actually experienced a relative decline in sales tax
revenue. Taken as a whole, sales tax revenues in these states fell from 3.4
percent of the personal income to 3.1 percent between 2000 and 2009.
sales tax is a stable source of revenue. While income tax revenues are expected
to decrease nearly 10 percent this year, sales taxes are expected to fall by
just 1 percent.
The sales tax
is robust because it has little to do with the fate of Michigan's major
manufacturers. Sales taxes are enacted on what Michigan residents purchase, not
on where they work. And the batch of goods that Michiganders purchase has been
largely unchanged for the past two decades. Residents generally spend more on
golf carts, jet skis and health insurance and less on newspapers. A giant shift
away from consuming goods to consuming services has not been evident in the
of Michigan's current sales tax should warn state legislators away from
enacting the governor's new tax proposal. Michigan's economy doesn't need it.
The state government budget doesn't need it. As legislators approach the budget
deadline, they should instead reduce state spending. This would be a real
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