Greater Economic Efficiency and Benefits for the Affluent
by Charles L. Ballard
March 19, 2011
Before Rick Snyder took office as governor, the people of Michigan knew a few things about him. We knew he had used intellect and hard work to take himself from modest beginnings to a multi-million-dollar fortune. We knew he wanted to make Michigan a friendlier place for businesses. But many details remained to be filled in.
Nothing fills in the details like a budget proposal. His budget proposal, issued on February 17, gives us a much clearer picture of Governor Snyder’s values, priorities, and style.
Governor Snyder is an accountant and an executive. Accountants and executives, like economists, like things to be streamlined and efficient. The desire for efficiency is one of the hallmarks of Snyder’s tax-policy proposals. For example, the proposal to eliminate the Michigan Business Tax will move us toward a simpler system of business taxation. It is also a move toward a more “level playing field” among different sectors of the economy.
Similarly, the proposal to tax some retirement income will create a more level playing field between retirement income and income from working. Yet another idea in this vein is the proposal to limit some of the special tax breaks that have been handed out to businesses. This would reduce our unfortunate tendency to have high taxes on some businesses along with subsidies for others.
If passed into law, these proposals would allow us to collect some of our tax revenues more efficiently than we do now. I will discuss some shortcomings of Snyder’s tax proposals below. But if we just focus on the economic-efficiency aspects, Gov. Snyder’s proposed tax policies look pretty decent.
These tax proposals also make clear that Gov. Snyder is not afraid to tackle big challenges in a bold way. Lots of folks have said they want to eliminate the surcharge in the Michigan Business Tax. Snyder trumped that, by proposing to eliminate the MBT entirely.
The proposal to tax certain types of retirement income is even bolder. In American politics, no cow is more sacred than our exceptionally generous treatment of the affluent elderly. It’s easy to understand the politics of this — well-to-do old folks are more likely to vote than other groups in the population. But our policies toward the affluent elderly are very hard to justify on economic grounds.
I applaud the governor’s courage in taking on this issue. Michigan’s seniors make net payments of less than zero in the state income tax. The revenue loss from these tax laws is pushing toward $1 billion per year. As our population gets older, the revenue losses get larger every year.
It would be OK if the legislature modified Gov. Snyder’s proposal in order to provide some additional protections for low-income seniors. But most of the tax breaks in today’s tax system go to seniors who are not poor. It would be a crime if the legislature rejects the entire proposal.
Although Gov. Snyder’s proposal would increase the taxes paid by affluent retirees, most other parts of the budget proposal are quite friendly to those at the top of the income scale. Thus, in addition to revealing a penchant for efficiency and a willingness to act boldly, the Snyder budget also reveals a lot about the governor’s views toward income inequality.
In Michigan, as in the U.S. as a whole, the biggest economic story of the last 35 years is the phenomenal increase in income inequality. The college-educated upper middle class has done very well. The income and wealth of CEOs and others at the very, very top have increased to an extent that is unprecedented in human history. But many folks who fall below the median income are little better off than those who were below the median in the 1970s.
Against this background, Gov. Snyder proposes to allow the income tax rate to drop from 4.35 percent to 4.25 percent, thus costing the state another $150 million per year. Most of the resulting tax reductions will accrue to high-income households. (To his credit, Snyder says he wants to stop there, and not allow the scheduled decrease to 3.9 percent.)
Gov. Snyder also proposes large reductions in education funding. These cuts also tilt in favor of the affluent. Those at the top of the income scale can more easily afford to send their children to private schools and universities. If they do send their children to public institutions, the affluent can more easily offset K-12 program reductions by providing enrichment activities outside of school. They are also better able to absorb the tuition increases that are the result of dwindling state support for higher education.
Moreover, although the proposed reduction in business taxes would help create a more efficient tax system, a large chunk of the immediate benefits of the business tax cuts will be received by affluent people. Also, the budget proposal does not touch the mother of all inefficiencies in our tax system — the non-taxation of services and entertainments in the sales tax. Large parts of the untaxed services and entertainments are purchased by affluent folks.
The percentage of the economy going into the state’s coffers was lower in 2010 than in 2000, by the equivalent of about $9 billion per year. This helps to put the $1.8 billion deficit into perspective. If we had avoided even a small fraction of the tax reductions of the last 10 years, we would not have any budget deficit at all. Most of the tax reductions have benefited affluent residents. If the tax cuts received by affluent Michigan residents had been just a little smaller, there would be much less pressure to cut funding for education, or to eliminate the EITC.
Thus, one of the most persistent themes of the budget proposal is that Gov. Snyder appears to be willing to accept the degree of inequality that we have now, even after one-third of a century of massive increases in income inequality. To the extent that he is not fully comfortable with the current degree of inequality, his proposals appear to indicate that he is willing to accept some further widening of the gap between rich and poor.