Michigan fared like much of the rest of the country in the 2010 elections--moving to a GOP-controlled state house and legsilature. It lost a Democratic governor and put in a pro-business GOPer, Rick Snyder (former CEO of the Gateway computer company), with majority votes in almost every county except Detroit's Wayne County. Similar lopsided votes put the GOP in many of the Michigan seats in the House of Representatives, including re-election of rightwinger and pro-business conservative Dave Camp, who now holds an influential tax writing chairmanship, and new Tea Party favorite Dan Benichek in the Upper Peninsula, who took the seat held by Democratic representative Bart Stupack for 18 years. Returning Democrats in the House included veteran reps like Sander Levin, John Conyers, and John Dingell, along with freshman rep. Hansen Clarke and returning freshman Gary Peters. For 2011-12, the GOP has a firm grip on the Michigan legislature, with 26 of the 38 State Senate seats and a clear majority (61 out of 110) of the State House seats.
What can we expect on taxes from this GOP-dominated state? Bad news, I fear. Gov. Snyder has already shown his support for expanding the GOP control of governmental functions through support of the recently passed financial manager legislation, allowing him to replace elected local officials with his appointees who will have enormous power, including the ability to break union contracts. This legislation is of a piece with the union-busting, anti-public employee movements in Wisconsin, Florida and Ohio,and augers ill for sustainable democracy. As already noted in the context of the Wisconsin debacle, the aim here is to weaken state government by targeting public employees to create divisive jealousies from workers who haven't fared well under the anti-union sentiment now dominanting the private marketplace. Instead, we should be celebrating the willingness of public servants to accept do sometimes thankless government work, often for less than they could make in the private sector. One likely result, as public employees lose job security and the benefits that partly compensated for the higher workloads and graver responsibilities of their jobs, is that state governments will suffer and state agencies will be "captured" by the businesses they regulate. That will be detrimental to the economies and political communities of the states.
Snyder's tax proposals--set forth in the Feb. 17, 2011 document Reforming Michigan's Tax Structure--are in line with the general trend in the GOP to reduce the tax burden on businesses and allocate it towards individuals, especially vulnerable groups such as seniors and retirees, with the (unsupported) claim that business tax "simplification" and cuts will lead to economic growth and job creation.
- Snyder proposes significant tax cuts for businesses through the elimination of the Michigan Single Business Tax and replacement with a flat 6% tax that would only be paid by businesses that operate in corporate form. Partnerships and other types of business would be exempt, with the only Michigan tax collected that which is paid by the individuals who own the business equity. The net cost is expected to be about $1.8 billion. This is huge in a state that already plans drastic cuts to higher education based on revenue shortfalls, another case where self-created deficits are being used to lay a foundation rationale for ideological spending reductions that devalue public institutions and overvalue so-called "free market" alternatives.
- Snyder would also ultimately eliminate the film incentives that have helped develop a burgeoning southeastern Michigan film industry: critics charge that this is foolhardy, since independent studies demonstrate the effectiveness of the film incentives in bringing new industry and jobs into the state, resulting in six dollars of new expenditures in the state for every one dollar of tax incentives. See, e.g., Dave Krieger, How we all benefit from film incentives: an industry insider weighs in, Model D Media, Mar. 1, 2011. Krieger notes that the expanding film industry in Michigan has been particularly successful because of the generosity of the credit and the variety of locales that Michigan offers for the film industry, from gritty city to idyllic countryside. The new business brought in by the credit has had an impact, he claims, in many ancillary areas. Drivers, electricians, caterers, hotels, sign companies, antique stores, and many other industries and professions benefit, and much of the hiring has provided new jobs for laid off auto workers and others hit hard by the recession. Community colleges even developed training programs for movie production and opened new opportunities for unemployed workers to retrain in a new industry.
- Snyder's proposal makes up for the $1.8 billion annual loss in income from lower business taxation by increasing the tax burden on individuals--especially the middle and lower income classes because of pension taation and elimination of the Michigan earned income tax credit. The proposal moves towards the ideologically motivated flat tax being pushed by ultra-right wing groups that want to eliminate progressive taxation. Snyder would lower the rate to a flat 4.25% and "broaden the base"--eliminating most of the credits and deductions that currently apply. Public and private pensions would become taxable, reducing the income of vulnerable retirees who live on fixed incomes and cannot easily bear the increased tax burden, while simultaneously reducing the value of the benefits that have been bargained for as a substitute, in many cases, for the higher wages that would be merited for public employees. Snyder also proposes eliminating the Michigan earned income tax credit, ostensibly saving the state about $331 million, but ultimately costing it more in services and assistance needed for the vulnerable working families that currently receive the credit. Changes listed in the proposal include the following:
- Earned income tax credit
- Energy efficient home improvement credit
- Historic preservation credit
- Film production wage withholding credit
- City income tax credit
- Gifts: public art, radio, colleges, universities, archives, museums, libraries credit
- Community foundations, food banks and homeless shelters credit
- College tuition and fees credit
- Automobile donation credit
- Family/Individual development accounts credit R
- enewable energy surcharge credit
- Medical care savings accounts credit
While elimination of some of the credits may make sense, many of these are of substantial importance to middle class Michiganers--especially the credit for college tuition and fees in an era when state support for public universities is trending ever downward, or the credit for city income taxes in places like Detroit with a substantial city tax burden. Overall, the substitution of individual taxes for the $1.8 billion in business taxes lost in the pro-business tax proposals will shift the tax burden to people much less able to bear it compared to the elite who tend to own business equity. These changes can be expected to have a deleterious effect on Michigan's economy.
What should be done instead? Michigan should retain a substantial tax on businesses operating in Michigan, so that profitable businesses (including sole proprietorships and partnerships) pay their fair share to support the state benefits that they receive (roads, court systems, communications and other utilities, police and fire protection, etc.). Instead of a reduced-rate flat income tax without reasonable deductions and credits for the kinds of major expenses that can break a family, Michiganders should push for a constitutional amendment permitting a progressive income tax and should then enact such a tax with a maximum rate around 7 or 8% applicable to those with $1 million or more of annual income. Although eliminating some of the incentive credits for businesses and individuals may make sense, the decisions should be made after independent study of the success or failure of the incentives in achieving their objectives. It appears that the film incentives, for example, have been extraordinarily efficient in bringing a new industry into the state to take advantage of particular assets that Michigan offers. While retaining those incentives long-term is likely not a wise approach, it may well be reasonable to retain the credit system for a sufficient start-up period for the industry, perhaps 10 or 15 years to ensure that workers, facilities and procedures can be established strongly in the state. Credits like the earned income tax credit are vitally important to lower-income Michigan workers: a still recessionary economy is not the time to remove this lifeline for them. Removing it will just cost the state more in the long run, as health care and other services must be provided to these vulnerable groups even when they cannot afford to pay. Michigan should use the resources from the reinvigorated business tax and progressive income tax to substantially increase its funding for higher education and for special programs for disadvantaged schools, such as the schools in Detroit's inner city neighborhoods, and to continue building ways for vulnerable Michiganders to retrain for new employment opportunities.
Snyder and the Michigan GOP are proposing short-sighted tax policies that will do actual harm to Michigan. They are relying on the same old ideologies of the GOP that protect business owners and the wealthy while pushing the tax burden (and the absence of needed services because of insufficient funding) onto the middle class and poor. This classical "free market" ideology has a record of consistent failures. Broad based economic growth that builds a strong middle class is best supported by progressive tax policies that provide sufficient funding for physical infrastructure and human capital development. It looks like Michigan is going to be yet another testing ground for these failed Chicago School "free marketarian" policies. So perhaps the best news is that the people of the state may be waking up. See Andrew Leonard, Red vs. Blue: The Great Midwestern Backlash, Salon.com, Mar. 18, 2011 (noting that support for the newly elected GOP governors in Wisconsin, Michigan and Ohio appears to be plummeting, in part because of their harsh budget cut policies coupled with corporate-friendly tax policies).