James M. Hohman, Mackinac Center for Public Policy
Under current policies, Michigan’s taxes are lower than the average state’s, but not quite in the lowest tier among states. Lawmakers can do more to make Michigan a low-tax state.
The Census Bureau publishes a finance report that covers the total collections of taxes at the state and local government level. These can be compared to other states by dividing total revenues by population, employment and GDP. Michigan has lower taxes than the average state but is not quite in the top tier.
• Michigan collects the 17th-lowest taxes as a percent of GDP at 8.3%.
• Michigan averages tax collections of $10,625 for every job in the state, 17th-lowest in the country.
• Michigan collects $4,263 in taxes per person, 12th-lowest in the country.
These numbers are roughly where they were in 2010, though Michigan’s rank among the states has improved over this time.
These figures are just total revenue divided by GDP, population and the number of jobs in a state. If a state has high taxes but grants a lot of exemptions and other favors, then it may appear that the state has low taxes. Another way to check is to use a report from the Tax Foundation. It ranks states based on their tax structures in its State Business Tax Climate Index, and rank states higher when taxes have a broad base and low rates. It ranks Michigan as the 12th-best state for business taxes. The state gets higher grades for its unemployment insurance tax and flat-rate state income tax.
Again, lower taxes than average but not quite in the top tier.
Michigan’s taxes generate a lot more revenue than they used to. The state spends $18 billion more from state taxes than it did a decade ago, a 26% increase above inflation. And if lawmakers passed a Sustainable Michigan Budget, they could let people keep more of what they earn.
Many other states find themselves in a similar position and have lowered tax rates recently. Over the past two years, 21 states have lowered their income tax rates.
State lawmakers don’t even have to do anything and the income tax will fall. There’s a mechanism in statute right now that requires income tax rates to fall when revenue collections exceed inflation. It’s a modest reduction that would lower the income tax rate from 4.25% to 4.05%, and it will let taxpayers keep over $650 million of what they earn. It’s unfortunate that some lawmakers are trying to avoid this tax cut.
That’s not going to improve Michigan’s rank among the states much or bring the state into the top tier of low-tax states. Still, it’s an affordable improvement to the state’s business climate, and lawmakers should want to let it happen.
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James M. Hohman is the director of fiscal policy at the Mackinac Center for Public Policy.
