LANSING – Wholesale tax changes – implementing a graduated income tax, levying a sales tax on services and eliminating personal property taxes and the Michigan Business Tax surcharge for businesses – were some proposals pitched to the House Tax Policy Committee on Wednesday as advocates said the initiatives would both address the state’s structural deficit and in some cases make Michigan more competitive.
Lawmakers, who either lived through the last major tax reforms from 2007 or were part of the general population when they went into effect, questioned how residents would be affected or feel about the particular changes being proposed.
“What do you say to residents who say the economy isn’t here anymore to support the size of government?” said Rep. Jeff Mayes (D-Bay City).
He said while lawmakers should maybe take a look at increasing some revenues, there is the argument that at this point “maybe some say government can’t be all things to all people.”
Sharon Parks, executive director of the Michigan League for Human Services, argued government has shrunk its staff and services and the general fund, adjusted for inflation, is at the point it was in the 1970s.
But Mayes countered, “Those arguments are lost on the average person. Going forward I think we really have to explain that to the people of Michigan.”
Michigan State University economics professor Charles Ballard told the panel that part of the problem lawmakers ran into two years ago was that the Legislature increased the rates on taxes, through the income tax and eventually through the MBT, and didn’t broaden the base.
Ballard said the state’s sales tax rate could be reduced in exchange for broadening the base to include services and that would collect “substantially” more revenue than what is currently coming into state coffers. A proposal Ballard has made before is to swap out the Michigan Business Tax entirely and institute a graduated income tax. But he added the sales tax on services as a component to the proposal.
While the perception is that Michigan is a high tax state, Ballard said state and local taxation as a percent of personal income remains close to the national average, which has fallen significantly in recent years.
Mike Johnston, vice president of government affairs for the Michigan Manufacturers Association, who testified before Ballard, was in agreement that the state is in the middle of the pack in terms of tax burden. But he added a caveat.
“We are a high tax state for manufacturing,” he said.
One of the state’s greatest barriers to investment is the tax on personal property, such as manufacturing equipment, that many other states don’t have. However, Johnston said addressing that would also entail dealing with the problem that creates for local government funding.
MMA also advocated eliminating the MBT surcharge and simplifying the modified gross receipts within the MBT as it doesn’t allow deductions for labor, financing and depreciation on existing investments. Mr. Johnston said MMA is open to making the gross receipts change revenue neutral, but is currently still discussing that with the Department of Treasury.
Parks outlined tax and spending options she said would both address the fairness issue within the law and deal with the state’s structural deficit:
Instituting a 6 percent sales tax on services, which would raise $1.65 billion.
Establishing a graduated income tax with single incomes of $60,001 and married incomes of $120,001 or more paying a 6.9 percent rate. Single people making below $20,000, or joint filers making below $40,000, would pay a 3.9 percent rate, while the rest would pay the current 4.35 percent rate. The proposal would raise $600 million.
Reducing senior preferences by taxing some retirement income, which would raise $200 million.
Increasing the beer tax, which would raise $100 million.
Decoupling from the federal estate tax, which would raise $250 million.
Closing some tax loopholes, which would raise $400 million.
Reducing prison spending by $300 million.
Republican committee members argued the richest people are also some of the most mobile people and raising their taxes could mean they just would stop filing any of their returns in Michigan. They also said it could impact those people’s ability to invest in jobs in the state, but Ms. Parks countered 34 other states have a graduated income tax, which drew a response that some states have no income tax.
Rep. Brian Calley (R-Portland) expressed concern that a graduated income tax could hurt small business owners who don’t hit the threshold to pay the MBT, but would see higher costs under a graduated system. Mr. Ballard contended it would depend on what the rate is on that business owner compared to what they’re paying now.
Rep. Arlan Meekhof (R-West Olive) also cautioned that if all of the tax increases were to be adopted, that would change how people make decisions about their money and business. Ms. Parks said the League was presenting options for lawmakers and expected a blend of the proposals would address the various spending demands on the state.
Ballard said any tax can be viewed as a disincentive to something, but the goal is to strike the right balance.
“I suggested increasing my taxes. I’m a creative person. I’m not leaving,” he said.
As each of the presenters laid out their proposals, lawmakers questioned how much uncertainty the process of going through wholesale tax changes, particularly for the business side, would create.
Johnston argued while there is uncertainty in changing the tax code, and the state witnessed that by instituting the MBT two years ago, Michigan has a structural gap that needs to be addressed.
“There’s some fundamental things that are broken in Michigan that absolutely need to be fixed,” he said.
As legislators debate any potential tax changes, Mayes said it’s critical to keep in mind that some of the problems facing the state are related to the economic crisis the world is going through and how much the state has tied itself to the auto industry.
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