While Michigan families were sound asleep in the early hours of February 23rd, and MSU students were finishing up their last round of shots at Rick’s, Michigan legislators were hard at work. The House finally came to a decision to vote down the first bill of the year, House Bill 4001 at 1:45 a.m. Republican State Representative Lee Chatfield of District 107 introduced the billon January 11th. In its original form, the bill would have rolled back the state's income tax to 3.9% in 2018, and decreased it by 0.1% each year beginning in 2019 until it reached zero. The bill lost the record roll call vote 52-55 on Thursday, February 23 in the early morning.
The Republican bill received much criticism from Governor Snyder and 12 other Republicans in the House.. The state income tax was responsible for bringing in 9.8 billion dollars in state revenue last year as displayed in figure 1 below. 72% of the income tax is used for the General Fund and 28% is used for the School Aid Fund. The repeal and eventual cut would strip the School Aid Fund of 2.8 billion dollars and the General Fund of 6.9 billion dollars. The 2018-2019 fiscal year would have been the first fiscal year of the bill’s implementation. The House Fiscal Agency and Treasury Department projected a 1.1-billion-dollar loss in revenue for that year.
Figure 1. The state income tax was responsible for $9.8 billion of generated taxes in 2017. 72% went to the General Fund and 28% went to the School Aid Fund.
Figure 2. The state income tax has been a vital part of keeping the School Aid Fund stable.
One of the main problems with this legislation was that the Republicans failed to suggest a substitute for the loss of revenue created by the bill and failed to answer the question of how the General Fund would make up the 6.9-billion-dollar loss. The General Aid Fund is responsible for funding Health and Human Services, Corrections, the State Police, Higher Education, Debt Services, and many other departments. Without a serious reallocation of funds, this legislation could lead to cuts in Medicaid, Public University Operations & Financial Aid, Public Assistance, and Child Welfare.
Figure 3. The General Fund has been flat in actual terms of growth and has declined in inflation adjusted dollars since 1990.
What was the incentive behind House Bill 4001 and who would have benefited? Representative Chatfield and other House Republican supporters believe the bill would increase economic development by keeping money in family’s pockets. The Institute on Taxation and Economic Policy discovered that after 10 years or a 3% reduction rate Representative Chatfield’s legislation would save families who earn $0-$21k only 56 dollars a year and families that make $39k to $62k, 295 dollars a year. As noted earlier, the effect of the cuts from the income tax repeal on Medicaid could easilybankrupt those families in paying for healthcare and would not even cover the cost of a checkup. Because of the increase in the cost of higher education resulting from this bill, higher education would be less accesable. The few hundred dollars saved each year would not make up for potentiallythousands of dollars in increased tuition costs and cuts made to financial aid.
So, who does this bill benefit? The top 1% of incomes after 10 years would save $13,573 a year. These are families who are making $472,000 or more. Two-thirds of the tax break would be received by the wealthiest 20%. While, on the other hand, the working poor or bottom 20% would receive a meager 2%. With that 2%, these families would be expected to use those funds to cover their loss of health care and food and nutritional assistance. Low-and-middle-income families (the bottom 60% of households), would receive only 16% of the tax savings.
Figure 4. An income tax rate cut to just 4.15% shows dramatic gains for the top 1%.
The state of Kansas provides an interesting example of what can happen when a state drastically reduces its income tax. Kansas passed legislation in 2012 to gradually reduce its state income tax in hopes of growing their economy. Initially, the bill lowered the top personal tax rate to 4.9% from 6.45% and eliminated income tax on profits for owners of limited liability companies, subchapter S corporations and sole proprietorships (Michigan Future). This legislation resulted in arguably the worst state economic performance since the Great Recession. After revenue plunged as expected, the government was forced to dip into its rainy-day fund. Roads and schools were dramatically impacted. The overall business climate declined rather than improving as lawmakers had expected. Kansas’ gross state product fell behind the six-state region and the nation for three straight years, leading to a loss of population for the state.
Cutting the state income tax is not an effective way to grow the state economy. Michigan is still recovering from the Great Recession and is in no position to repeal tax laws. Infrastructure is still very poor, schools are struggling, and residents in Flint still do not have drinkable water. House Bill 4001 was not an investment in the hardworking Michigan families, it was a tax cut for the wealthy. Thanks to the majority of Democrats, and 12 Republican representatives who voted no, this bill failed and Michigan was saved from the potential negative impacts.
Glazer, L. (2017). Egads! Michigan wants to be like Kansas. Michigan Future Inc.. Retrieved 5 March 2017, from http://www.michiganfuture.org/01/2017/egads-michigan-wants-to-be-like-ka...
Institute on Taxation and Economic Policy,. (2017). Who Benefits from HB 4001. Lansing: Michigan League For Public Policy.
Khouri, N. (2017). Michigan's State and Local Tax System. Presentation, Tax Policy Committee Room 521, House Office Building, Lansing, MI.