Let taxpayers keep more of what they earn

James M. Hohman, Mackinac Center for Public Policy

Michigan lawmakers passed a temporary income tax hike in 2007 that’s still with us. Despite the COVID-19 pandemic and the governor’s insistence on raising taxes, Michigan’s finances are looking good. Lawmakers can afford to lower the income tax if it is important to them.

Lowering the income tax rate makes Michigan more competitive for businesses. It lets residents keep more of what they earn, further encouraging growth. And letting taxpayers control more of what they earn is the fair thing to do if the state can operate on less.

Lowering the income tax rate would be fair for residents for another reason: The last tax hike was supposed to be temporary. Lawmakers were dealing with projected overspending and found that raising taxes was going to be easier than cutting the budget. The tax hike was going to boost revenue by $700 million for the year and the rate increase would phase out annually afterward. (Gov. Gretchen Whitmer voted for the tax hike when she was in the Legislature.)

The tax increase didn’t solve Michigan’s fiscal problems. The national economy tanked and took plenty of Michigan jobs with it. State revenue fell by over $3 billion — 11% — from fiscal year 2007-08 to 2010-11, though federal bailouts pushed state spending to new highs and extra federal money lingered well into the state recovery.

State revenue has increased since then, jumping from $25.2 billion in 2011 to $35.4 billion budgeted for the current fiscal year, a 17% increase when adjusted for inflation. Part of this increase is because lawmakers stopped phasing out the income tax hike and made the “temporary” tax increase permanent. The growth of the state budget means that the temporary problems from 2007 are long gone and the state can afford to lower taxes.

Cutting taxes back down to what they were before 2007 would decrease state revenue by about $870 million. However, even if lawmakers made a substantial reduction to the income tax rate, state revenue would still increase due to overall growth. In other words, the state could lower the income tax rate and still have more to spend next year than they did this year.

The affordability is clear when considering some other spending priorities. Senators expressed interest in approving $300 million in select business subsidies. Michigan’s cities asked for $250 million. Some lawmakers want to subsidize film production again, apparently not having learned the lesson from the $500 million spent on it previously — it’s a net loser for both taxpayers and the broader economy.

There are a lot of decisions that get built into budgets. The increase in demand for Medicaid during the pandemic cost more than $870 million — federal support included — and perhaps a recovering economy will put less strain on Medicaid rolls.

It simply comes down to whether lawmakers make reducing taxes a priority. The state can afford it. And it’s only fair to taxpayers to let them keep more of what they earn if lawmakers can work without it.

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James M. Hohman is the director of fiscal policy at the Mackinac Center for Public Policy.