Michigan: A National Leader in Tax Hikes

Gov. Jennifer Granholm argues (with some remorse) that during her seven-year tenure, Michigan has cut more from its budget than any other state. The claim is dubious, but another milestone about which she does not boast is verifiable: Since Gov. Granholm's first inauguration in January 2003, Michigan has led the nation in tax increases.

States rely on four major taxes to finance their general operations: income, sales, business and tobacco taxes. Gov. Granholm has signed into law increases in three of these: tobacco taxes in 2004 and business and income taxes in 2007. Only two other states, Maryland and New York, have increased all three of these taxes since 2002.

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Michigan's governor is now looking to run the table by expanding the sales taxes to include services. According to the Gongwer Michigan Report, when combined with a proposed reduction in the rate from 6.0 percent to 5.5 percent, the change is projected to extract an additional $900 million annually from Michigan residents. This tax hike would go into effect on Dec. 1, 2010, with the increased revenue gradually offset by business tax cuts phased in over the following two years.

Setting aside the veracity of the budget cut claims, the apparent contradiction in a state being both a leader in tax increases and budget cuts is resolvable: Actual tax revenues (as opposed to rates) are largely determined by the health of a state's economy, and Michigan's health has been poor for going on 10 years.

Over the next two years, the governor's proposed sales-tax-hike-now and business-tax-cut-later will transfer an additional $881 million from the struggling private sector to state government. This will make Michigan less competitive, and is unnecessary when there are many ways to cut government operations and payroll costs.