First, the good news: Despite three years of receiving insufficient revenue to cover the big-spending ways enabled by the 1990s stock market and economic boom, Michigan’s political establishment has not tried to raise general income, sales, property or business taxes. Indeed, income tax cuts that had been enacted during the "fat years" have gone forward, albeit with one postponement.

Now, the bad news: While state legislators find themselves constrained by public intolerance for general tax hikes, they have found many ways to avoid spending cuts by increasing more narrowly targeted taxes or fees. Here is a list of the most significant of these:

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  • House Bill 4612 increased the state tax on Detroit casinos from 18 percent to 24 percent, boosting state revenue by $49 million per year.

  • House Bill 5632 increased the state cigarette tax by 75 cents per pack, and it increased the 20 percent tax rate on other tobacco products to 32 percent. This hike will transfer almost $300 million annually from smokers to the state.

  • Senate Bill 852 increased the state income tax rate from 3.9 percent to 4.0 percent between Jan. 1, 2004 and July 1, 2004, postponing a previously enacted rate cut. This caused a one-time $77 million loss to taxpayers, offset somewhat by certain Single Business Tax cuts.

  • Senate Bill 554 raised driver’s license and annual vehicle registration fees; added new registration "late" fees; and more. These will bring the state approximately $65 million annually from motorists.

  • Senate Bill 509 assesses an annual $100 "driver responsibility fee" on individuals who accumulate seven or more "points" on their driving records over two years, and it imposes additional fees for specific offenses. A $300 fine for driving without a proof-of-insurance form was later repealed. The remaining provisions will transfer approximately $50 million annually from motorists to the state.

  • House Bills 4556 to 4569 closed so-called "tax loopholes," which will cost certain businesses and nonresident taxpayers an additional $18.8 million annually.

  • House Bill 5504 authorizes a multistate compact to collect sales tax on purchases from out-of-state merchants that are made over the Internet or from catalogs. Estimates of how much this could increase the state’s tax burden range from $30 million to $500 million per year.

These tax and fee increases will wrest some $260 million in one-time wealth transfers from citizens, and more than $500 million more in ongoing annual levies, not including the potentially massive "Internet tax" (HB 5504). And this list is not exhaustive — there were many other targeted tax and fee hikes, including many that raise the cost of doing business in Michigan.

Compared to the impact that permanently higher income, sales, property and business taxes would have on taxpayers and our economy, the tax and fee increases listed here are less damaging. They are still bad news for Michigan, though. According to Mackinac Center econometric research, the tobacco tax increase alone will cost the state some 5,000 jobs.

In addition, all of these revenue increases allow legislators to postpone the necessary task of scaling back the size and scope of Michigan’s state government. Our per-capita state-and-local tax burden is still above the national average. To survive in an unforgivingly competitive world economy, this must change, and this means government must get smaller.

And the so-called "sin taxes," which are targeted at politically vulnerable groups like smokers, have additional costs. The tobacco tax, for instance, will increase the incentive for smuggling and related criminal activity. Moreover, these "consumption" taxes could become a bad legislative habit. Today it is smokers and bad drivers who pay more, but attempts to increase liquor taxes are sure to return, and various proposals to tax fatty foods are waiting in the wings. One day, badgered Michiganians may be thinking, "First they came for the smokers, and I didn’t complain; then, the drinkers; then, the gluttons — and when they came for me, I had no grounds to complain."

The Legislature's recent tax and fee increases show that the pressure to spend still overcomes politicians’ recognition that Michigan’s taxes and government will need to get smaller. This is a failure of will that has a very real cost to our economy and our freedom.


Jack McHugh is legislative analyst for 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 properly cited.