Michigan has a group of new lawmakers with new priorities. Democratic control of both the Michigan House and Senate has many people wondering whether they’ll pay higher taxes next year.
It’s possible. But there are reasons why the Legislature’s new Democratic majorities should reconsider any plans for a tax hike.
The most obvious reason is that the state doesn’t need more revenue. State taxes already bring in more revenue that they have before, and spending is up.
The state budget, excluding federal transfers and small amounts of local and private money, went up from $27.8 billion to $45.1 billion over the past decade. That’s a 26% gain when adjusted for inflation, including the recent spike in it.
Lawmakers also didn’t spend all the revenue they had available last year. They left $6 billion in the bank, where it remains.
The state operates on a constitutional balanced budget requirement, and lawmakers are often tempted to raise taxes when revenues grow less than expenses. But it’s tough to think tax hikes are needed when lawmakers have billions of cash on hand.
Taxes do more than raise revenue. They also discourage the thing that gets taxed. Legislators may feel like they ought to further discourage smoking, for example, by increasing cigarette taxes.
Unfortunately, cigarette taxes do little to discourage smoking and a lot to increase cigarette tax avoidance. Charging high taxes when other states charge less encourages people to buy cigarettes elsewhere and smoke them here, even though it’s against the law.
Different tax rates create a huge profit opportunity for large smuggling operations. The Mackinac Center has estimated that 34% of all cigarettes consumed in Michigan were smuggled into the state to avoid the cigarette tax in 2006. Thanks to the lack of tax hikes, that’s fallen to 20% today.
One out of five cigarettes is still too high. Legislators should work with nearby states to charge similar rates to end smuggling rather than to increase the profitability of already massive smuggling operations.
Another Democratic priority may be to raise the corporate income tax and to increase the number of businesses it applies to. During Gov. Rick Snyder’s tenure, partisans complained that he had raised taxes on people to lower taxes for businesses.
But all taxes are taxes on people. Just as a cigarette tax doesn’t get paid by cigarettes, a corporate tax hike falls on a business’s owners, workers, suppliers and customers.
Corporate income taxes are a double tax on economic activity. A business pays income taxes when it gains income, and that same income gets taxed again when it is transferred to the business’s owners.
Some lawmakers may want do to this, because they think the people who own stock in companies are better equipped to afford a tax hike. But on a dollar-for-dollar basis, business taxes hurt the state’s economic prospects more than other kinds of taxes. The desire to tax some entity that is not paying its fair share doesn’t work when the unfairly taxed entity is a fiction and hiking the tax would hold back the state’s growth.
There may be other tax hike debates that happen in 2023. It may take some time for new legislative majorities to find out whether they want to discourage other things through taxes.
There may discussions about how to restructure taxes without increasing how much money the state collects.
Gov. Whitmer said that she’d like to move to user fees rather than fuel taxes to fund roads. It’s a good idea to ensure that the people who use the roads pay for roads in proportion to their use. But lawmakers will need to follow through to show that it’s a better way to pay for roads, rather than an excuse to increase state revenue.
During the campaign, Whitmer promoted the fact that she had not raised any taxes. She should want to continue to make this claim. Michigan state government doesn’t need cash, and the tax hike plans on record have major problems.
James M. Hohman is director of fiscal policy for the Mackinac Center. Email him email@example.com.
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