Another Kind of Tax

The economy of the Great Lake State is in bad shape and appears to be getting worse. Major manufacturers — such as DaimlerChrysler — continue to cut jobs; Michigan is tied for first among states with outbound migration and our unemployment trails all but hurricane-ravaged Mississippi. Because the Legislature is grappling with a current-year $800 million budget deficit and the governor is proposing a $1 billion budget increase for fiscal 2008, Lansing policymakers are discussing tax hikes to make state government bigger.

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Raising taxes at a time when an economy is teetering only exacerbates economic troubles. It’s akin to bleeding a sick patient. But even without a formal tax hike, Michigan is at an economic disadvantage with other states because it imposes another kind of tax on our labor climate — the absence of a right-to-work statute. Right-to-work laws, which simply say no worker can be compelled to pay dues to a union as a condition of employment, exist in 22 other states and can help facilitate employment growth, something Michigan sorely needs.

Michigan’s per-capita Gross State Product growth rate from 2004 to 2005 ranked only 48th among the 50 states. According to the University of Michigan, the state will have lost 336,000 jobs between mid-2000 and the end of 2007. In 2006, according to Bureau of Labor Statistics data, the number of federal, state and local government employees in Michigan outnumbered manufacturing employees for a full-year for the first time since 1956, the first year BLS collected such data.

Some have recently argued that Michigan is not overtaxed. The highly respected Tax Foundation, however, places Michigan’s state and local tax burden above average — at 16th — among the 50 states. The Foundation also ranks Michigan’s single business tax as the worst corporate tax in the nation. While the single business tax is set to expire at the end of the year, a replacement tax has not yet been finalized.

How do right-to-work states fair economically? Consider a few facts.

In 2006, seven of the eight states with the fastest job growth were right-to-work states. This is not just a single-year phenomenon. As the Mackinac Center pointed out in a 2002 study, states with such statutes enjoyed manufacturing job gains of 1.43 million between 1970 and 2000, while non right-to-work states witnessed declines of 2.18 million jobs. In a 1996 study, economist Thomas J. Holmes showed that between 1947 and 1996, right-to-work states saw their manufacturing employment rolls expand by 150 percent. States with compulsory unionism were stagnant.

Holmes, a University of Minnesota economist writing for the Minneapolis Federal Reserve, defined a state as "pro-business" or "anti-business" based on whether the state maintained a right-to-work statute. He then examined manufacturing employment on each side of the state border. He found, "[O]n average, there is a large abrupt increase in manufacturing activity when crossing a state border from an anti-business state into a pro-business state."

His paper specifically noted that manufacturing employment is one-third higher (as a percentage of total employment in each county) in right-to-work counties than in counties in adjacent states without such laws.

Former University of Oklahoma economist W. Robert Reed, now with University of Canterbury in New Zealand, analyzed the impact that right-to-work laws had on wages. He found, "RTW states have average wages that are significantly higher than non right-to-work states" when controlling for other important variables, such as farming intensity and the wage rates of a state when it became a right-to-work state. The latter is a key variable because the poorer a state was when it passed a right-to-work statute, the better it did over time. States that were already wealthy when adopting right-to-work statutes did not see the same increases in relative wage rates. Economically, this makes perfect sense, since an influx of investment capital would increase productivity in the poorer states.

The available evidence strongly suggests that Michigan’s lack of a right-to-work law is a competitive weakness.

Just because the state doesn’t formally impose a labor climate tax doesn’t mean there isn’t one. Michigan should pass a right-to-work law — but short of this change the state might offset the cost of having a hostile labor climate with smarter budget and tax policies. First, the Legislature could solve its current and fiscal 2008 budget crisis with spending cuts instead of tax increases. Second, it could replace with the single business tax with nothing. The former does no more harm to already beleaguered job providers, and the latter actually reduces their burden.


Michael LaFaive is director of the Morey Fiscal Policy Initiative with 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 authors and the Center are properly cited.