Michigan, as everybody knows, is a depressed state these days. High unemployment, high foreclosure rates, and even the Red Wings can't win it all. As two of the Big Three auto companies go into bankruptcy, Michigan is shedding jobs as fast as ice melts on a sidewalk on a hot summer day in Mississippi. Michigan, in other words, has real problems, and real needs that the state government should address.
My suggestion? It's time to change Michigan's income tax. Michigan has its share of very wealthy people--just look at the millionaires' homes in the wealthy suburbs of Detroit, from the Grosse Pointes to those new 'burbs to the Northeast. But the wealthy in Michigan pay the same flat income tax rate that the middle class pays--4.35%. A family of four starts paying that on wages above the personal exemption of $13,200 (after other deductions, if any). But a family of four with a salary of $500,000 pays the same rate.
Obviously, those few dollars mean a lot to the poor family and hardly anything to the wealthy one. That's why the federal income tax has had a progressive rate structure since its inception (and, of course, why the wealthy capitalist class has pushed back, especially lately, with demands for zero taxation on capital gains and lower rates with fewer brackets for ordinary income--much of which was handed to them by the Bush Congress in the major tax bills of 2001-2003). It's also why all but seven states with a broad-based income tax have a progressive tax rate strcuture, generally ranging between 3 and 8 or 9% of adjusted gross income (sometimes as modified under state rules). See this chart from the Federation of Tax Administrators for a synopsis of state rate structures and exemptions.
Michigan should revamp its tax system--instead of serving the wealthy, with a relatively low, flat tax rate, Michigan should enact a progressive rate structure. How about a zero bracket for the first $25,000 in income, and then a progressive rate structure moving from the current 4.35% on the first $100,000 above that, to 5.35% on the next $200,000, to 6.35% on the next $400,000, to 7.35% on the next $2 million, to 8.35% on anything above $2,725,000. (Look at this study, which has information on city and state tax burdens, including income, property and sales taxes, and you'll see that Detroit has very high tax burdens--because of the flight of its industrial base and the white flight to the suburbs; so most of the wealthy who work in Detroit don't live in the city and don't pay those higher taxes--they live in the surrounding suburbs that can't be annexed to the city.)
Would people move out of Michigan because of the income tax change? Sure, some in the upper brackets would. (They're already doing so, of course, because of the Great Recession, which has hit Michigan particularly hard.) But most other states already have a progressive income tax, often reaching 6% on fairly low incomes--so many of those states' effective tax rates would be much higher than Michigan's current flat rate and maybe higher than the proposed change. So those that move because of the tax would have to choose a state that had a lesser tax than Michigan's new one. If they move, they might have done so sooner or later anyway, since that group is by definition adequately resourced to live wherever they want to live and can probably find new jobs (to the extent their income is wages and not capital gains) fairly easily as well. But a tax of less than 7% on the first $725,000 is very reasonable, and would make a difference in the ability of the state to do more to create a sustainable economic environment through expenditures for human capital infrastructure (i.e., for K-12 through university funding) and public infrastructure of all other varieties. Not to mention that it would also be much fairer, by taxing people on their ability to pay.
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