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Chad Selweski

Chad Selweski

Tax Rearrangement

February 24, 2017

Republicans in the Legislature engaging in internecine warfare over slashing the state income tax may be stunned to learn the ideas expressed by the architect of this transformative idea.

State Sen. Jack Brandenburg, a Macomb County Republican, sparked controversy in Lansing last month when he first raised the prospect of entirely eliminating the income tax. GOP House members followed through with a proposal of their own – phasing out the income tax over 40 years. That bold plan was substantially abandoned on Tuesday in favor of legislation to lower the 4.25 percent tax to 3.9 percent, but the bill came up three votes short on Thursday.

A 1:30 a.m roll call in the House defeated the legislation, 52-55, with 12 Republicans joining all but one Democrat in voting against the cut.

The Senate legislation introduced by Brandenburg is far more dramatic – incrementally shutting the lights on the income tax over just five years to boost the Michigan economy. Critics say that means big budget cuts for K-12 schools and basic government services. But the senator from Harrison Township told Dome Magazine in an interview that he has no intention of blasting a $1 billion hole in the budget by failing to replace much of the income tax revenue.

Brandenburg suggests that a rearrangement of the Michigan tax system – with families paying less and businesses paying more – serves as his goal in this high-octane exercise.

Nobody gets hurt

“Whether the business community likes it or not, or school superintendents like it or not, we can do this,” the senator said. “Nobody’s going to get hurt. Nobody’s going to get banged. Some people might have to ‘take a haircut.’ That’s all.”

Since raising the issue in the state Capitol, Brandenburg, a longtime small business owner, has seemingly experienced an epiphany after examining data that shows working families contribute far more to the state’s general fund than corporations and the overall business community.

The back story here is that the governor’s office is angrily pushing back on any proposal that makes balancing the state budget much more difficult. Gov. Snyder publicly chastised the House Taxation Committee last week for passing long-term income tax elimination without providing replacement revenues.

Behind the scenes, Snyder apparently was so dismayed by the House approach that he forcefully issued an order to Senate Majority Leader Arlan Meekhof that no fellow GOP senator should publicly praise the House committee’s actions.

Obviously, a similar hardball approach by the governor’s office caused the rogue House leadership to backpedal. In addition to abandoning the idea of a phaseout, House leaders tacked on a sweetener that said the gradual reduction to 3.9% would proceed annually only if the state maintained a $1 billion or more rainy day fund.

It would drop the levy by one-tenth of a percentage point annually from 2018-20. At that point, a cut of 0.05 of a percentage point in 2021 would be adopted to reach 3.9%. That is a far cry from making Michigan a state with no income tax.

The governor is concerned about budget deficits, maintaining funding for universities, and, in the wake of the ongoing Flint water crisis, engaging in a long, hard slog to fix the state’s embarrassingly bad infrastructure – roads, bridges, water mains and sewer pipes.

Michigan no longer a high-tax state

The irony here is that overly eager ideologues in the Legislature seem oblivious to the reality that Michigan’s prior reputation as a high-tax state is long gone.

For the fifth consecutive year, Michigan ranks near the top of the nonpartisan Tax Foundation’s business tax climate index, which measures the degree to which a state’s tax system is friendly to employers. Michigan’s 12th-place ranking is largely due to an extraordinarily low corporate income tax, plus individual income and sales tax levies that outshine many other states.

What recently caught Brandenburg’s eye are stats similar to these: The nonpartisan Tax Foundation reports that individuals paying income tax finance 23 percent of the Michigan budget, while businesses paying the corporate income tax pitch in just 2 percent. In terms of dollars paid, the average family kicks in $794 per capita but the typical company offers $89, on a per capita basis.

Advocates of eliminating the income tax say that seven states levy no income taxes and Michigan should become the eighth. What these partisans don’t consider is that some states without an income tax, such as Florida, enjoy huge tax revenues based on tourism. Others, such as Alaska, receive considerable state funds from the oil and gas industry. In South Dakota, a bank franchise fee finances a significant amount of that barren state’s small budget.

“I’m a pro-business guy but there’s a big discrepancy between business and the average taxpayer. Working people need a break,” Brandenburg said.

“… When I ‘dropped’ this bill, I was very clear that everything was on the table. If we could not fill that $900 million hole (in the budget) – or close to it – then I’d forget about the whole idea.”

No economic growth explosion

At its core, the argument for less – or no — personal income tax is based on the fallacy that a relative explosion of economic growth would result. Considering common-sense calculations of economic incentives, the initial big cut in the tax, from 4.25% to 3.9%, would grant the average family earning $50,000 annually a break that would amount to about $3.50 a week. That’s roughly the price of a latte at Starbucks.

Voters are not fooled. A new poll shows that eliminating the income tax, at the expense of the state budget, is highly unpopular. That survey seems to have forced panicky state lawmakers to reconsider.

Some of this is just silliness. As House Republicans retrench, scrambling to find a new anti-tax equilibrium – one that will portray them as loyal patrons of the taxpayers – portions of their new proposal are little more than a marketing pitch. For example, take a look at the 0.05% tax cut now planned for 2021.

That amounts to tax relief of approximately 80 cents annually for the average family. Yet, it allows Lansing lawmakers to declare that they provided several consecutive years of tax cuts to Michigan’s struggling workers.

Sometimes it seems the only time the Legislature is transparent is when its election-obsessed members demonstrate transparently political motives to hoodwink the voters.

A freelance writer from Macomb County, Chad Selweski was the political reporter at The Macomb Daily for nearly 30 years. At the Daily he earned 50 journalism awards and in 2014 he was named by Politico as one of the “Media Stars” in seven political battleground states. He can be reached at chad.b.selweski@gmail.com.

February 23, 2017 · Filed under Chad Selweski



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