What Impact Do Tax Increases Have on Employment?

Jan. 26, 2004

The Honorable Leon Drolet
33th District
Michigan House of Representatives
P.O. Box 30014
Lansing, MI 48909-7514

Dear Rep. Drolet:

Thank you for contacting the Mackinac Center for Public Policy regarding use of the Mackinac Center’s State Tax Analysis Modeling Program (STAMP). The STAMP is a Computable General Equilibrium Model built by the Beacon Hill Institute of Boston for use by the Center. Different versions of the program have been used across the country by clients ranging from the state of Oklahoma to policy institutes in Arizona, California, Maryland and many other states.

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Per your request, I have used the program to model two opposing policy changes involving the state income tax: an increase from the current 4.0 percent to 6.35 percent, and a reduction from 4.0 percent to 2.6 percent. While the analyses are limited to these two scenarios please be advised that the model can be used to examine the impact of other rates, as well as changes to the state sales, motor fuel, and property taxes.

According to STAMP, raising the state income tax to 6.35 percent from its current 4.0 percent would decrease state employment from its "baseline"— that is, from levels that are expected without changes to the tax system — by 64,957 workers in the next 12-18 months. The majority of these job losses would occur in the 12-month period following the increase in the tax rate. The "business services" sector would be hardest hit, with an expected drop in employment of 14,800.

By contrast, the model shows that a cut in the income tax from 4.0 percent to 2.6 percent would increase employment above the baseline by 43,221 workers in the next 12-18 months. The biggest gain from such a cut would be in business services, which would add 9,500 workers to its employment rolls. The model also calculates a gross "cost" or decrease in income tax revenue to the state of $2.12 billion. However, the model also predicts that the state would receive an additional $102.7 million from other tax sources (sales, for instance) from increased economic activity, for a net decline in total revenues of $2.02 billion.

While both of these changes in policy show dramatic changes in employment, I would be remiss if I did not also point out that simply delaying the income tax cut can also have a dramatic effect. Last fall the Mackinac Center used the STAMP model to estimate the affect of pausing the scheduled Jan. 1, 2004 income tax cut one year. According to the model, the pause will thwart the creation of nearly 3,000 jobs this calendar year — more than the 2,700 jobs lost due to the closing of the Electrolux plant in Greenville.

I trust that you will find this impact analysis useful. If you would like to employ the model under other policy scenarios please do not hesitate to contact me directly.

Michael LaFaive
Director of Fiscal Policy