Non-Partisan Study Packs a Surprise
Michigan’s taxes are unbalanced, not high
July 5, 2006 | By Charlene Crowell
Great Lakes Bulletin News Service
Citizens Research Council of Michigan President Earl Ryan (left), seen here with a college administrator and Robert Queller, former CRC head, says that many Michigan taxes fall below the national average.
LANSING—Faced with rapidly approaching fall elections, Governor Jennifer M. Granholm and state legislators are pushing hard to complete crucial budget negotiations. But before they hit the campaign trail in earnest, candidates should read a new, nonpartisan report that reaches some surprising conclusion about Michigan’s tax policies: Contrary to some lawmakers’ frequent claims, Michigan is far from a tax-gouging state. Instead the report, prepared by one of the state’s most esteemed research organizations, concludes that Michigan has a severe tax imbalance.
The independent Citizens Research Council of Michigan, an organization noted statewide for its impartial studies, compared Michigan’s taxation and revenue sources to national averages. The CRCM analysis, released on June 12, offers both good and bad news for a state suffering from high unemployment, job losses, and state and local budget deficits.
The report’s good news is that Michigan’s taxes on general sales and personal income are lower—not, as is so often claimed, higher—than the national average. When CRCM compared all 50 states, Michigan ranked 36th on individual income taxes and 29th for general sales taxes. The state was ranked even lower on motor fuel and selective sales taxes—42nd and 41st, respectively.
According to the CRCM report, “Revenues from selective sales taxes in Michigan were 20 percent below the U.S. average on a per capita basis, and 18 percent below the U.S. average on the basis of personal taxes.”
But, with property taxes, the picture changes dramatically. The state’s repeated cuts to its revenue-sharing program have forced local governments, which depend so heavily on the program, to raise property taxes to pay for the services they provide.
The result, according to the study, was that in 2004, “Michigan’s per capita property tax burden was nine percent above the U.S. average and … per $1,000 of personal income was 13 percent above the average.”
According to the CRCM, state laws leave municipalities no choice.
“Michigan local governments are almost entirely dependent on property taxes for their own-source revenues,” the report said. “Where other states authorize their local governments to levy local-option sales, income, motor fuel, or payroll taxes, local governments in Michigan rely on state aid and property taxes ...”
The study also pointed out that, because Michigan re-assesses property values annually, property taxes rise more quickly here than they do in other states. Those states, the report found, “allow several years to pass between reassessments, resulting in slower growth of their property tax base.”
Recently, Earl Ryan, who has led the CRCMM for the last 12 years, granted an interview to the Great Lakes Bulletin News Service. Mr. Ryan pointed out that, for the past 90 years, the Citizens Research Council of Michigan has provided factual, unbiased, independent information on significant issues concerning state and local government organization and finance, in the hope of helping policymakers make sound, rational public policy.
Mr. Ryan has led the CRCM since 1994, directing research, public information, and educational activities from offices in Lansing and Livonia. Earlier in his career, he was the organization’s research director.
Mr. Ryan also served as the first-ever president of the Indiana Fiscal Policy Institute. From 1984-1987 he was president of the Public Affairs Research Council of Louisiana. In 1991 Wayne State University’s Graduate Program in Public Administration honored him with its Distinguished Achievement Award.
Great Lakes Bulletin News Service: What prompted the Citizens Research Council to study the differences between Michigan’s taxation and the rest of the nation’s?
Mr. Ryan: One of the principal concerns was how competitive Michigan was in the economic arena. One of the elements of that is in the tax arena. We also thought that using census bureau information is about as accurate as is available. So using their data, we attempted to provide some perspective in terms of how Michigan’s taxes fit with the rest of the nation.
GLBNS: A major premise for your new report is that the tax system works best when revenues are balanced among three major sources—property, income, and sales. But your report says that Michigan’s three revenue legs are unbalanced. 1994’s Proposal A was intended to bring property taxes in balance with income and sales taxes, so why have property taxes returned to pre-Proposal A levels? How can we prevent further increases in property taxes?
Ryan: Proposal A did bring property taxes down very close to the national average when it was first adopted. But it controlled taxes for school operations, and did not control taxes for capital costs.
A number of school districts since then have used that loophole to expand their capital programs. And its use has been interpreted broadly. So the tax rate for school capital has gone up.
Another part is that the increase is relative to other states. In other states, reassessment may not happen for 10 or 15 years. But Michigan’s assessed values are visited more often.
Thirdly, Michigan’s per capita income has also eroded compared to the rest of the nation.
One related problem that has occurred over the last several years is the reduction of state revenue sharing to local communities. Many local communities have tried to recover lost revenue-sharing funds with property taxes. A larger appropriation for revenue sharing would bring about greater equity among communities and also help to reduce the incentive to increase property taxes.
GLBNS: Let’s shift to sales taxes. Your report indicates that Michigan’s per capita sales tax revenues were about 6.5 percent below the U.S. average. On selective sales taxes, Michigan ranked 39th. Considering the state’s chronic deficit, would taxing many of the services Michigan currently exempts from sales taxes alter the state’s budget picture?
Ryan: This, I think, is the largest potential tax issue in Michigan. Michigan does not tax a very wide range of services. With the changing economy over the last 30 years, services are where growth has been greatest.
But there are a lot of questions that swirl around this issue: Should the state tax health care, or only some elective health care services? Should the state tax business-to-business services?
These are difficult decisions; but there is no better way. The potential tax base for services is larger than that currently subject to the sales tax. So alternatively, Michigan’s tax rate could be broadened and stabilized.
GLBNS: As you know, there’s lots of discussion in Lansing about eliminating the Single Business Tax. You found that Michigan’s corporate income taxes in 2004 were among the nation’s top ten. Is it fair to blame Michigan’s Single Business Tax as the reason for the state’s economic woes?
Ryan: SBT may have played a small part in the problem. But it is unlikely that it has been a major part. If it were to be eliminated, the overall impact on employment in Michigan would be slightly negative. We would probably lose more public employees than we would gain in the private sector.
The real question is if you get rid of the SBT, what do you do to replace the revenues? One obvious answer is a sales tax on services. Another would be a corporate income tax.
GLBNS: The Detroit Regional Chamber recently offered an alternative to the SBT, one based completely on sales. The chamber proposes capping fees at $1 million, and exempting poorly performing small businesses when their taxes fell below $350,000. Would this approach make Michigan more competitive economically? And would this approach generate adequate replacement revenues?
Ryan: The chamber’s proposal could be adjusted to produce varying levels of revenue. The cap might have to be raised; but the adjustments could be easily made.
There are so many things that go into making a state economically attractive. What we’re talking about is a half-billion dollars in a $300 billion economy—less than one percent of the total economy. To say that a SBT change alone would be the ultimate solution is an overstatement.
GLBNS: Some people question whether specific business incentives really help the state. Have specific tax breaks—say renaissance zones or brownfield tax credits—been a benefit or a burden to Michigan?
Ryan: I can’t really give an answer to that. I strongly suspect that every governor in the U.S. would gladly get out of the economic development game if all others would. It has come to the point at which none of them can really unilaterally disarm themselves. The competition is too steep.
GLBNS: In spite of these incentives, the state’s structural deficit remains the critical issue. Are Michigan’s revenue sources economically obsolete for a 21st-century economy? Or, to put it another way, does Michigan have too much government for the 21st century?
Ryan: Michigan is about in the middle of the pack in terms of revenues and expenditures. One place where Michigan definitely is out of line with respect to surrounding states is the area of corrections. Back in the 1980s, Michigan adopted a program of sentencing guidelines, and that led to a higher rate of incarceration than in other states.
Our incarceration rate is now very similar to southern states—Louisiana, Alabama, or Texas. If the rate of incarceration were the same as the other Great Lakes states, we could reduce spending on corrections by a half-billion dollars a year. That change by itself would eliminate the structural deficit without hurting roads or education.
But corrections reform—reducing the level of incarceration—gets to be a political problem. It suggests that politicians are soft on crime.
GLBNS: Michigan once had many good-paying jobs. With service-related jobs largely replacing manufacturing, how can Michigan recapture its prosperity?
Ryan: A recent report by Lou Glazer, president and co-founder of Michigan Future Inc., argues that Michigan must create a larger base for a knowledge-based economy with a heavier emphasis on higher education. Instead, many of Michigan’s recent budget cuts have been in higher education. There is a high correlation between the number of college graduates and strong economic performance. The evidence is very compelling.
GLBNS: Considering the scope of your research in recent years, what are the most critical elements of Michigan taxation that citizens need to better understand?
Ryan: One certainly would be the issue of expanding the sales tax base to a broader range.
A second would be the problems created for units of local government by the interplay between Proposal A and the Headlee Amendment.
Proposal A’s limitation on the property tax was premised on a parcel by parcel limitation on growth in the property tax base. However, the Headlee Amendment was aimed at controlling the tax rate when the assessed value grew faster than inflation.
The thought for Proposal A was that the controls would largely eliminate the need for Headlee rate rollbacks because the constraints of Proposal A would hold down the growth in the property tax base.
But what has really happened is that the controls on the individual parcels of property go off when that property is transferred, and then the taxable value rises to the assessed value. The resulting pop-up can be extremely significant. It can cause the tax base of the unit to rise and trigger a Headlee rollback on the rate, in many instances thereby depriving the local unit of the benefits of property value increases.
Consequently, you see cities even like Grand Rapids suffering serious fiscal stress. It’s an untenable situation for most local governments.
Charlene Crowell is the Michigan Land Use Institute’s state policy director. You can reach her at email@example.com.