Enough is Enough: Business Tax Cuts Fail to Grow Michigan s Economy, Hurt Budget

Transcription

1 November 2015 Rachel Richards, Policy Analyst Alicia Guevara Warren, Kids Count Director Enough is Enough: Business Tax Cuts Fail to Grow Michigan s Economy, Hurt Budget C u ng business taxes has not been an effec ve way to grow jobs and the Michigan economy as promised. This is par cularly true when combined with increased taxes on individuals, dispropor onately affec ng low- and middle-income people and families. In 2011, the Legislature and governor gave businesses a generous $1.6 billion tax cut by repealing a business tax paid by all types of businesses and levied on gross receipts and income, and replacing it with a flat 6% income tax on C Corpora ons. At the same me, the state raised taxes on individuals by about $1.4 billion. Instead of business tax cuts, we need investments in educa on, transporta on and infrastructure, local communi es and job training to create an economy that works for all in Michigan. The current road funding dispute and other budget dilemmas were caused by these business tax cuts, and Michigan has not reaped any economic rewards from them. Change in Contribution Businesses Contributing Less to Total State Revenue; Individuals More % 30% 0% -30% -60% -90% Source: House Fiscal Agency Brief History of Business Taxes in Michigan 1975 Single Business Tax The Single Business Tax (SBT) replaced a corporate income tax in Michigan and was based on a benefitsreceived principle rather than the ability to pay. A stable revenue source, it was cri cized as being a job killer during a down economy. While the Legislature began reducing the tax rate, it was ul mately repealed through a ballot ini a ve and then replaced with the Michigan Business Tax Michigan Business Tax The Michigan Business Tax (MBT) was built more on the ability to pay while also maintaining a stable revenue source. It was based on income and gross receipts less purchases. The law provided various tax credits, relief from personal property taxes, and special provisions to help reduce taxes for small businesses. Important to note is that the MBT fully replaced revenues from the SBT Corporate Income Tax The MBT became widely unpopular and was considered to be very complicated. The Corporate Income Tax (CIT) was promoted as a simple tax that would create job growth. It is a flat income tax that applies only to C corpora ons, elimina ng business taxes on about 95,000 businesses and reducing business taxes by 83%. The change was es mated to reduce business tax revenues by $1.6 billion. Even coupled with increased taxes on individuals, it was es mated that in total the tax shi would reduce revenue to the state. Net business tax revenue collected for Fiscal Year 2016 is es mated to be less than 2% of total state revenue. PROMOTING ECONOMIC SECURITY THROUGH RESEARCH AND ADVOCACY 1223 TURNER STREET SUITE G1 LANSING, MICHIGAN P: F: A UNITED WAY AGENCY

2 UNIQUE SITUATION IN MICHIGAN RECOVERY NOT TIED TO BUSINESS TAX CUTS With a decade-long downturn that began well before all other states, Michigan lost approximately 850,000 total jobs, saw personal income decline and poverty increase. Since coming out of the Great Recession, all states, including Michigan, have seen their economies improve and job growth return. However, although Michigan has returned to pre-2008 job levels, it has not recovered to its peak, and the evidence does not support that the business tax cuts in 2011 facilitated economic growth. In fact, a leading economist at the University of Michigan maintains that the improvement in the job market can almost en rely be a ributed to the effects of a na onal recovery and the improvement of the auto industry. 1 Following the Great Recession, Michigan s employment rebounded sharply but has grown at about the same rate as na onal employment since 2012, which is when the business tax cuts took effect. In fact, an argument can be made that the economic recovery in terms of job crea on, employment and personal income growth would have been faster without cuts to business taxes, which ul mately led to both increased taxes for individuals and steep cuts to public services. Number of Jobs (in thousands) 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 Source: Bureau of Labor Statistics state. Minnesota s unemployment rate is the lowest of the region, and its private job growth is the highest. Ohio, which gave major tax breaks to businesses just before the onset of the recession, 2 has a lower unemployment rate than the na onal average but has barely seen any private job growth. The only state in the region to have a higher unemployment rate than Michigan is Illinois. While all Midwest states except Illinois have seen net job growth since the Great Recession, Michigan, along with Ohio and Illinois, has seen net job losses since its 2000 peak. In fact, Michigan is more than 7.5% below its private job peak. Michigan s job situa on began to turn around in mid-2010 with the improvement of the auto industry aided by federal assistance. Michigan actually saw a few private Michigan s Unique Recession and Recovery Private Job Trends in Neighboring States Michigan s recession was unique, and its recovery has been as well. The na on slipped into a short, eight-month recession in early While most states recovered a er this downturn, the Midwest struggled. Four of the six Midwest states Illinois, Indiana, Michigan and Ohio actually had private job figures peak during 2000 rather than late 2007 to early 2008 as most of the na on. However, of these states, Michigan was alone in that it never even par ally recovered before bo oming out in Coming out of the recession, Michigan s economy has made strides, as has the rest of the na on. However, no state in the Midwest, even Ohio or Indiana which are considered low-tax states, has recovered faster than Minnesota, a high-tax Regional Recovery Private Job Gains/Losses and Unemployment: September 2015 Source: Bureau of Labor Statistics; Joint Economic Committee MICHIGAN LEAGUE FOR PUBLIC POLICY NOVEMBER 2015 PAGE 2

3 jobs return in 2010, with 3,900 in private job growth. In 2011, before the business tax cuts occurred, 106,600 jobs were added, the most per year of the recovery. In 2012, the first year that business tax cuts went into effect, only 90,500 jobs were added and even fewer new jobs were added in 2013 and 2014 (86,000 and 73,500, respec vely). Over the past year, Michigan businesses reported adding 84,600 jobs, 3 but total Michigan private employment is s ll roughly 7.5% below January Had the business tax cuts truly spurred job crea on in the state, we should have seen more jobs being added in 2012 and Instead, job growth actually slowed following the tax cuts. 120, ,000 80,000 60,000 40,000 20,000 0 Michigan s Private Job Growth Slows After Tax Cuts Source: Bureau of Labor Statistics Even with employment increases expected, the unemployment rate is projected to drop mostly due to a shrinking workforce. Michigan s workforce par cipa on rate, which measures the percentage of working-aged persons who are employed or looking for work, peaked in 2000, and has stagnated around 60-61% since 2011, below the na onal average. As of July 2015, Michigan ranked 40 th in the na on. Also of concern is long-term unemployment, with Michigan s unemployed workers being out of a job for approximately 37 weeks on average in And Michigan s labor underu liza on rate was 13.9% in 2014, the 5 th highest in the na on. This includes the total unemployed, those who are not looking because they believe there are no jobs, those that want a job but have not looked in four weeks for any reason, such as lack of transporta on, and those employed part- me for economic reasons. The evidence does not suggest that implemen ng cuts for businesses has improved the job market in Michigan. Michigan s per capita income, another indicator of economic recovery, while growing, has lagged behind both the U.S. and regional averages. In 2014, Michigan s per capita income level was $40,740, 11.5% lower than the U.S. average and 5.9% lower than the average for the Great Lakes Region, which includes Michigan, Ohio, Indiana, Illinois and Wisconsin. The gap between Michigan and the na onal average has been rela vely stable since 2007, varying only a li le over a percentage point during that me frame. When Minnesota is included in this region, the gap between Michigan and the regional average grows to 7.1%. Michigan s per capita personal income ranking was 38 th in 2010, improved to 36 th in 2011, and then slightly worsened to 38 th in 2012, a er the business tax cuts occurred. But overall, our ranking has been rela vely stagnant. 4 The last me Michigan ranked be er than 30 th in per capita personal income was over a decade ago. Even more startling is wage growth, where Michigan is also failing. Between 2011, the last year of the MBT, and 2012, the first year of the CIT, the average weekly wage of an employee of a private employer grew by just over 2%. This was the slowest growing state in this period in the region. In comparison, Minnesota s average weekly wage grew by almost 3.5%. The rate of wage growth beginning with the period just prior to the enactment of cuts to business taxes through 2014 shows Michigan is one of the slowest growing states in the Midwest, ed with Indiana. Percent Growth Rate Michigan Private Wage Growth Slower than Neighboring States Illinois Indiana MICHIGAN Minnesota Ohio Wisconsin Source: Bureau of Labor Statistics, Quarterly Census of Employment and Wages MICHIGAN LEAGUE FOR PUBLIC POLICY NOVEMBER 2015 PAGE 3

4 INCREASED DEMAND, NOT INCREASED PROFITS, CREATES JOBS Michigan s business tax cuts have not produced the promised jobs. Signing the new law in 2011, Gov. Rick Snyder stated, the overhaul of our tax structure lets job providers na onwide know that Michigan is the place to be. 5 Theore cally, in the majority of policymakers perspec ves, cu ng taxes would a ract new businesses to create jobs in the state and put more money in the hands of current Michigan employers to enable them to hire addi onal workers. Indeed, many state business climate rankings seem to argue that low tax burdens make the state more a rac ve to job creators. 6 In actuality, businesses do not hire or expand unless there is an increased demand for their goods or services. According to the Congressional Budget Office, a nonpar san policy agency for Congress, increasing a er-tax income of businesses in the form of tax cuts does not create an incen ve to hire or produce more, because adding more goods and services depends on their ability to sell them. 7 A company will not need addi onal workers if there is not a need for more of its goods or services. Instead, those extra profits are pocketed. In the most recent Michigan Future Business Index, a survey of small- to medium-sized business owners in Michigan, the number of respondents hiring more individuals follows more closely along with the number expec ng increased sales than with those expec ng increased profits. This correla on is even stronger when looking at the years immediately following the enactment of the Corporate Income Tax. Therefore, we can see that an cipated increases in sales do more to drive business hiring prac ces than profits, which have been helped by recent business tax cuts. MICHIGAN S NEW JOB MARKET Prior to the recession, manufacturing jobs related to the auto industry were the largest share of Michigan s job market. And while manufacturing jobs have made a comeback, accoun ng for over 35% of the total jobs gained since June 2009, Michigan s economy needs to diversify. Almost every industry in Michigan has seen growth since the bo om of the recession, with significant Increased Hiring Tied to Sales Source: Michigan Future Business Index, June 2015 gains also in professional and business services, educa on and healthcare services, and leisure and hospitality, with jobs in the first two sectors an cipated to dominate job growth long term. Low-wage, low-skill jobs are s ll the predominant employment opportunity for Michigan residents, making up 46% of Michigan s employment by occupa on skill level. 8 Middle- to high-skill jobs, which provide the opportunity for higher wages, 9 generally require postsecondary educa on or training, and are being threatened by the state s lack of a skilled workforce. Low-Wage Jobs Dominated Post-Recession Low-wage jobs dominate Michigan s economy. Currently, 10 63% of all Michigan jobs pay less than $20 per hour, which is approximately $40,000 annually for a full- me job. 11 It is projected that most new jobs will be in the service industry with wages below $15 an hour and will only require a high school diploma or less. 12 Addi onally, it is es mated that new hire wages were approximately half of what incumbent workers made between 2002 and 2014, 13 which makes it even harder for new employees in low- to mid-wage jobs to make enough to meet basic needs. Over the past 35 years, wages for low- and middle-income workers have dropped significantly. From 1979 to 2013, real hourly wages for low-income workers fell by 13.4% and 12.7% for mid-wage workers. 14 When compared to other Midwest states, Michigan s wages fell the most (12.7%). Minnesota, considered a high-tax state, experienced an increase of 11% and Indiana, a low-tax state, had an almost 1% decrease in real median wages over the same me period. 15 MICHIGAN LEAGUE FOR PUBLIC POLICY NOVEMBER 2015 PAGE 4

5 Many families are struggling to make ends meet because of low wages. The con nued upsurge in these types of jobs will not benefit the state economy. The most recent U.S. Census data show that from 2009 to 2013, the share of households making less than $10,000 a year grew the fastest. Very simply, when wages are low, workers are unable to meet basic needs, let alone save, o en leaving them one financial emergency away from slipping into poverty, which harms the economy. Talent Disconnect Hurts Growth Higher wage, higher skill jobs, including jobs in the fastgrowing high-tech area, are le unfilled in Michigan due to a talent or skills gap. These are the types of jobs that once supported the middle class; however, they require educa on and training beyond a high school diploma. A recent report determined that the metro Detroit area has jobs for these middle-skilled employees but many go unfilled for weeks or months due to the lack of a skilled workforce, which needs to be changed in order to grow our economy. 16 In Michigan, about 1 in 3 people are employed in a middle-skill job. An analysis of projec ons from the Economic Modeling Specialists Interna onal shows that demand in Michigan for jobs in the health profession is expected, with nurses, medical secretaries, dental hygienists, paramedics and lab technicians topping the list. 17 Generally, these jobs pay between $30,000 and $80, Although a bachelor s degree may not be necessary for these posi ons, addi onal training and educa on beyond high school, such as an associate s degree or cer fica on, are required. A recent study determined that by 2020, 70% of jobs in Michigan will require some postsecondary 40% educa on, with 37% of these in middle skills % 20% Jobs in Michigan s hightech fields have grown in every year since the end of the recession, at mes faster than na onwide. A now rebounding industry, manufacturers are crea ng 10% Source: American Community Survey, 2014 high-tech jobs that also require more than a high school diploma. In 2014, automo ve manufacturing contributed the most jobs in high-tech employment followed by engineering and other consul ng services. 20 Wages for high-tech jobs average around $82,180 in Michigan 21 and all will require workers to obtain more than a high school diploma at least a bachelor s degree in some cases. Michigan s workforce, however, is lagging behind other states in educa onal a ainment, crea ng a drain on economic growth both in terms of business expansion leading to new hires and in companies ability to fill current and future openings. Former president and COO of Alro Steel Corp., Mark Alyea, cites the lack of skilled workers as the reason their manufacturing customers are limited in growth and also why the state has been unable to raise per capita income. 22 Compared with other states considered to have low business taxes, such as Indiana and Ohio, Michigan has about the same percentage of its popula on 25 years or older with postsecondary educa on. However, when compared with Minnesota, a high-tax state with low unemployment and high per capita income, there is a significant difference in educa onal a ainment. In 2013, Minnesota spent about $242 per capita on higher educa on while Michigan spent only $172 per capita. 23 Minnesota s decision to invest in higher educa on and retain those graduates has clearly helped grow its skilled workforce, and fill and grow jobs in a knowledge-based economy. It is this workforce investment that helped Minnesota secure the No. 1 slot in a recent state economic climate scorecard. 24 "High-tax" States Produce More College Graduates 0% High School Associate Bachelor s Graduate or Graduate Degree Degree Professional (includes equivalency) Degree MICHIGAN LEAGUE FOR PUBLIC POLICY NOVEMBER 2015 PAGE 5

6 There is a talent disconnect in our state resul ng from a lack of educa on a ainment: 16% of small- and midsized Michigan businesses recently surveyed reported that this is their No. 1 concern, 64% say they have had difficulty filling open posi ons, and 69% of those hiring say there are not enough qualified applicants. 25 For the first me since the start of the survey in 2006, there were more nega ve responses than posi ve when asked to rate access to qualified personnel. This has been a significant concern for the past few surveys. In a survey from a year earlier, one business owner responded that Michigan has systema cally underfunded schools, municipali es and infrastructure to the point that young people and talented people are unlikely to make Michigan their first choice to live and locate their families. 26 This lack of skilled talent contributes to the drag on our economic recovery. 20% 15% 10% 5% 0% Source: House Fiscal Agency Contribution of Business Taxes to General Fund Declines profits, but it resulted in disinvestment in the resource that businesses rely most upon: people. BUSINESS TAX CUTS HURT ROADS, SCHOOLS, COMMUNITIES AND MICHIGANIANS When the governor and Legislature reduced taxes on businesses, it created a significant hole in the state budget. Some of this lost state revenue was replaced by increasing taxes on individuals; however, not all of it was recovered which led to cuts in other programs and services for people. Cu ng business taxes through the repeal of the Michigan Business Tax and phase-out of the Personal Property Tax le fewer funds available for Michigan to invest in our people through educa on, transporta on and public safety, stun ng economic growth and recovery from the Great Recession. While businesses benefit from state investments in schools, roads and local services, the share contributed by businesses to support these programs has dropped significantly. Historically, under the Single Business Tax (SBT) business tax revenue as a propor on of General Fund dollars varied from a low of 14% to a high of 26%. 27 Likewise, the short-lived Michigan Business Tax (MBT) made up between 15% and 19% of GF/GP funds. 28 It is es mated that the new Corporate Income Tax (CIT) will only contribute around 10% to 11% of GF/GP revenues. 29 Since Fiscal Year 2010, the amount of net business taxes going to state General Funds has been cut nearly in half. Cu ng business taxes may have cushioned $7,500 $7,400 $7,300 $7,200 $7,100 $7,000 $6,900 $6,800 $6,700 There have been many disputes over whether Michigan has cut funding for educa on; however, there have been significant disinvestments in K-12 educa on which are only exacerbated by the business tax cut. The MBT contained a $600 million School Aid Fund earmark that dedicated business tax revenue to schools and the CIT did not carry it forward; without the business tax cut, the School Aid Fund would have had more to spend on educa ng students. Per-pupil K-12 spending declined significantly following cuts to taxes for businesses. Per-pupil spending through the founda on allowance, the largest unrestricted funding source for school districts, in 2011 was $7,146 dropping to $6,846 in 2012, and has slowly climbed. 30 It took seven years for per-pupil funding to fully rebound as it will finally be above the 2009 peak in Per-Pupil Funding Drops After Business Tax Cuts Source: Senate Fiscal Agency MICHIGAN LEAGUE FOR PUBLIC POLICY NOVEMBER 2015 PAGE 6 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY2016

7 Compared with other states, Michigan ranked 13 th worst in the country for the amount of spending per student that decreased over Fiscal Year 2008 to Fiscal Year Minnesota, the Midwest state that has experienced the most job growth and lowest unemployment rate over the same me period, has invested the most in educa on in the region and is 4 th best in the country in terms of dollar increases. There have been clear consequences from Michigan s decision not to invest more in educa on. Schools have been forced to cut spending on programs that are beneficial to student learning, reducing the number of teachers and support staff, thereby increasing classroom sizes and inhibi ng student progress. Na onally, Michigan students are falling behind their peers in math, reading and science the core areas needed by employers to fill jobs and grow their businesses in a global economy. 32 As much as people do, Michigan businesses also rely on the state s roads as a way to transport their goods. According to a na onal report on Michigan s roads, in 2009, trucking accounted for 67% of the freight tonnage moved while rail (19%), water (14%) and air (<1%) were used much less. 33 Michigan is at the bo om of the Midwest states in per capita spending on roads, making road condi ons unsafe, causing unnecessary damage and was ng fuel. Michigan lawmakers have struggled for the last decade to solve the transporta on funding shortage. Business tax cuts have only added to the problem. Good, safe roads are cri cal to helping people get to work, children to school and products delivered. Increased revenue rather than cu ng revenue is needed, because one- me funding solu ons are not working. Michigan Lawmakers Divert Revenue Sharing to Balance State Budget FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 $360 million $393 million $543 million $544 million $551 million $560 million $585 million Also suffering from a lack of state revenue and investment are Michigan s local communi es. Over the last 15 years, statutory revenue sharing to Michigan s ci es, villages and townships has declined from over $600 million annually to approximately $250 million. 34 Coun es have experienced reduc ons in state aid in recent years as well. These revenues are used to support local services, such as public safety, water and sewers, and roads. The last year Michigan fully funded statutory revenue sharing was budget year The Legislature s constant diversion of revenue sharing to fill the state s budget holes has caused local governments to postpone capital projects, scale back or eliminate recrea onal and library programs, and significantly reduce police and fire protec on. An educated workforce, good roads and local services are things that businesses rely upon to not only be successful and grow, but also in deciding where to locate. Michigan lawmakers may believe that providing tax cuts to businesses is the only incen ve needed; however, without an investment in its people and communi es, the state will con nue to experience slower economic growth. Businesses need to know that they can rely on high-quality, welladministered public services to facilitate the conduct of their enterprises. Snow removal and flood control must be reliable and timely; roads, bridges, and highways must be maintained in good repair; fire protection and police services must be there when needed; the justice system must be professional, impartial, and quick to resolve contract disputes; and the schools and colleges must help to generate a skilled and well-trained workforce. Robert G. Lynch, economist Source: House Fiscal Agency MICHIGAN LEAGUE FOR PUBLIC POLICY NOVEMBER 2015 PAGE 7

8 INCREASED TAXES AND POVERTY FOR THE REST In their effort to promote business growth and job crea- on, Michigan lawmakers and the governor significantly shi ed taxes to individuals. In 2011, taxes on individuals were increased by 23%, or $1.4 billion, while taxes for businesses were cut by 83%, or $1.6 billion. Several tax credits that were intended to provide tax relief for Michigan s lowest earners were either reduced or eliminated. These tax increases on people came at a me of high poverty, high unemployment rates and a s ll recovering economy, making it even more difficult for people to make ends meet. Billions of Dollars $9 $6 $3 $0 Individuals Pay More While Business Taxes Plummet life me limits and asset limits to crea ng bureaucra c barriers to receive aid have reduced caseloads, but not poverty. In the most recent Kids Count Data Book, Michigan falls behind all other Midwest states on child well-being; Minnesota is ranked first in the na on while Michigan s overall rank is 33 rd. In 2013, 1 in 4 Michigan children lived in poverty, and 1 in 3 children lived in a household where neither parent held a full- me job or they were forced to piece together part- me jobs that do not provide stable employment. 36 Research shows that reducing income for already struggling families can have a par cularly nega ve effect on children related to their educa onal a ainment, future earnings and health, and thereby driving down economic growth. 37 Policymakers in the state have shi ed taxes onto working families. They have asked individuals to pay more, businesses to pay less, and have not chosen to use state revenues to invest in people. These decisions have led to families having smaller amounts le of their earnings, causing them to spend less and struggle more, all of which nega vely impact the economy. Raising taxes on low earners slows economic growth; for every dollar lost due to a tax increase, total spending drops by about a dollar. 38 RECOMMENDATIONS Source: House Fiscal Agency In general, most people believe that low- and middleincome people should not have to pay more of their income in taxes than others. However, the tax increases in Michigan have dispropor onately harmed low- and middle-income people. With the changes fully implemented, the lowest income taxpayers (annual incomes under $19,000) experience the largest tax increases: 1% of their incomes; top earners (annual incomes $392,000 or more) experience no increase. 35 With high poverty and unemployment levels, families were already struggling before their taxes were increased to benefit businesses. Poverty remains high in Michigan with nearly 1 in 6 living below the poverty level ($24,000 a year for a family of four). Deep spending cuts over the last decade, exacerbated by decisions to cut taxes for businesses, have taken a toll on the people in this state who need the most help. Since 2011, significant policy changes to public assistance ranging from implemen ng Michigan has had a much larger climb out of the recession than other states. At its worst, Michigan had the highest unemployment rate in the na on. Michigan has s ll seen lags in personal income gains and poverty rates stagnated. Tax cuts for businesses have not proven to be a wise investment, especially in a state budget environment with historically low revenues, and have slowed the state s economic recovery. To restart Michigan s economic growth, lawmakers should: Resist the tempta on to cut business taxes even further. The recent tax cuts for businesses went too far and have not been the drivers for new job investment. Addi onally, as part of the tax shi in 2011, businesses that had entered into agreements to receive generous tax credits for retaining and crea ng jobs and making capital investments in the state were allowed to keep these agreements. These credits have provided some uncertainty and instability in our budge ng and revenue streams, in terms of both amounts of the credits and when the credits are going to be claimed. While the state MICHIGAN LEAGUE FOR PUBLIC POLICY NOVEMBER 2015 PAGE 8

9 is a emp ng to provide some clarity to these credits and to be er es mate revenue losses due to them, these credits will con nue to reduce available revenue for investments in things that will grow our economy for decades. Addi onal tax cuts would mean less revenue available for the state, which either means increasing taxes on families again or decreasing spending, hindering both the crea on of communi es that people and businesses want and the development of a workforce that can compete in a global economy. As costs of providing vital state services, such as Medicaid and the Healthy Michigan Plan, grow, lawmakers are already faced with a ght budget situa on. Further cuts would only exacerbate that problem. Instead, policymakers should revisit the 2011 tax shi to ensure the state has enough revenue to invest in Michigan s priori es. Explore new avenues for revenue to invest in things that people and businesses value. The state must invest in its people, workforce, infrastructure and communi es. If Michigan is to truly recover it needs to become a place where people want to stay, live and raise families. Businesses use these factors much more when determining where to locate as do recent college graduates when determining whether to leave or relocate to a state. To do so will require raising addi onal state revenue. Op ons include: Reviewing and elimina ng ineffec ve tax expenditures. A tax expenditure is a broad term for preferen al tax treatments, such as credits, deduc- ons and exemp ons, that reduce tax revenue. In other words, it is spending through our tax code. In Michigan, tax expenditures cost the state roughly $34-35 billion per year. While some of these con nue to suit the purpose for which they were intended, many go unchecked and simply cost the state money. The state already provides a thorough list of tax expenditures, but does not have a process for reviewing these spending measures to ensure that they accomplish set goals. Increasing the Corporate Income Tax rate or expanding the base. Michigan s Corporate Income Tax (CIT) rate is below the na onal average and if increased, could help to recover lost revenue that occurred with the change. 39 While the move from the Michigan Business Tax to the CIT was to eliminate the double taxa on of pass-through en es, such as LLCs or partnerships, currently the business income of business en es is taxed at different rates depending on how they are formed. This le a highly vola le revenue stream from business taxes. If the base were broadened, the rate could be lowered and s ll bring in more revenue. Adop ng a fairer income tax structure. Michigan is one of only seven states that s ll relies on a flat income tax structure, which leaves low- and middleincome families having to pay a greater share of their incomes for taxes than the wealthy. Modernizing the income tax structure to a graduated tax could generate addi onal revenue and ensure more fairness for all earners. Diversifying our sales tax base. Michigan s sales tax is levied on the purchase of goods. Economists and policy experts have long argued that as the economy evolves from a goods-based economy to a service-based economy, sales and use taxes should reflect those changes. Otherwise, sales and use tax revenues will be con nually reduced because they only capture a shrinking por on of economic ac vity. In addi on, taxing goods and not services creates an unfair advantage for service-based sectors of the economy. Expanding the sales or use tax base to services also makes the tax more progressive because wealthier individuals tend to spend a greater percentage of their income on services. Restore tax credits that help low- and middle-income people, and the economy. In the great tax shi of 2011, policymakers reduced the Michigan Earned Income Tax Credit (EITC) by 70%, increasing taxes on the workers earning the least in Michigan by $261.6 million. The EITC is one of the most effec ve ways to support working families and li them from poverty. The EITC has a twogenera on benefit, helping children in these families become healthier, do be er and stay longer in school, and earn higher wages in adulthood. Research shows that the budgetary savings from cu ng low-income tax credits has significant economic costs, making it more difficult to develop the highly skilled workforce needed in today s economy. However, lawmakers should not take this recommenda on to support a broad based income tax rate reduc on. While the EITC provides targeted relief to the working families who need it most, a rate reduc on dispropor onately benefits those who make the most while hur ng Michigan s budget. MICHIGAN LEAGUE FOR PUBLIC POLICY NOVEMBER 2015 PAGE 9

10 ENDNOTES 1. Lester Graham, How much can a governor really affect job creation?, Michigan Radio, October 13, In 2005, the Ohio Legislature eliminated its Corporate Income Tax and began to phase out local taxes on business tangible property. These were replaced with a Commercial Activity Tax (CAT) on gross receipts. The CAT has collected approximately half of the revenue of the taxes it replaced. The evidence does not support any economic benefit for the state or individuals. (Michael Mazerov, Cutting State Corporate Income Taxes is Unlikely to Create Many Jobs, Center on Budget and Policy Priorities, September 14, 2010.) 3. Joint Economic Committee of the United States Congress, Vice Chair, State-By-State Snapshots, October Michigan Department of Technology, Management & Budget, Bureau of Labor Market Information & Strategic Initiatives, Michigan Economic and Workforce Indicators and Insights, Summer Snyder signs tax reform bills to fuel state s turnaround, Press Release, Office of Governor Rick Snyder, May 25, The Tax Foundation s 2015 State Business Tax Climate Index looks solely on various tax systems in ranking states. Indiana and Michigan are the two top ranked Midwest states, coming in at 8th and 13th respectively, while Minnesota ranks 47th. (Scott Drenkard, Joseph Henchman, 2015 State Business Tax Climate Index, Tax Foundation, October 28, 2014.) ALEC s state economic outlook weighs 15 different policy variables equally, but 8 of those 15 deal with taxes or tax changes. For the most recent document, Indiana, a low-tax state, is the top ranked Midwest state at 3rd, and Minnesota comes in at 48th (Michigan at 24th). Interestingly, when looking how states have performed over a 10-year period in terms of GDP, domestic migration, and non-farm payroll, Michigan and Ohio come in 50th and 49th in each ranking over the past 8 editions, while Minnesota has been the top performing Midwest state. (Dr. Arthur B. Laffer, Stephen Moore, Jonathan Williams, Rich States Poor States, American Legislative Exchange Council, April 2015.) 7. Congressional Budget Office, Options for Responding to Short-Term Economic Weakness, January Michigan Department of Technology, Management & Budget, Bureau of Labor Market Information & Strategic Initiatives, Michigan Economic and Workforce Indicators and Insights, Winter Michigan residents with postsecondary education or training, such as an associate s degree, have significantly higher earnings and are less likely to be in poverty. (Peter Ruark, Willing to Work and Ready to Learn: More Adult Education Would Strengthen Michigan s Economy, Michigan League for Public Policy, March 2015.) 10. ALICE Asset Limited, Income Constrained, Employed Michigan: A Study of Financial Hardship, Michigan Association of United Ways, September Ibid 12. Ibid 13. Michigan Department of Technology, Management & Budget (Summer 2015), op. cit. 14. Yannet Lathrop, Labor Day in Michigan Report: Pay Falls for Low-Wage Men yet Women Still Far Behind, Michigan League for Public Policy, August Ibid 16. JPMorgan Chase, Driving Opportunity in Detroit: Building a Middle-Skill Workforce to Strengthen Economic Recovery and Expand the Middle Class, April John Wisely, What will the future of Michigan s job market look like?, Detroit Free Press, October 1, According to a recent analysis, over 40% of those employed in a middle-skill job make a median wage of $15 to $19 per hour, and one-third make between $20 and $30 per hour. (Michigan Department of Technology, Management & Budget, Bureau of Labor Market Information & Strategic Initiatives, Michigan Economic and Workforce Indicators and Insights, Winter 2015.) 19. Anthony P. Carnevale, Nicole Smith and Jeff Strohl, Recovery: Job Growth and Education Requirements through 2020, Georgetown University Center on Education and the Workforce, June Michigan Department of Technology, Management & Budget (Summer 2015), op. cit. 21. Cyberstates 2015: The Definitive State-by-State Analysis of the U.S. Tech Industry, Tech America Foundation, John Wisely, op. cit. 23. Rick Haglund, State Policies Matter: How Minnesota s Tax, Spending and Social Policies Help It Achieve the Best Economy Among Great Lakes States, Michigan Future Inc., June Never since we began rating the states in 2007 has a high-tax, high-wage, union-friendly state made it to the top of our rankings. But Minnesota does so well in so many other areas like education and quality of life that its cost disadvantages fade away. (Scott Cohn, Minnesota is 2015 s Top State for Business, CNBC, June 24, 2015.) 25. Michigan Future Business Index, Phoenix Innovate, Michigan Business Network, and Accident Fund Insurance Company of America, June Michigan Future Business Index, Phoenix Innovate, Michigan Business Network, and Accident Fund Insurance Company of America, June Senate Fiscal Agency, General Fund/General Purpose Revenue: FY to Estimated FY , January 16, 2015 Consensus Revenue Estimates, Ibid 29. Ibid 30. Pat Sorenson, Preschool Boosted, Per-Pupil Funding Increased in Education Budgets Signed by Governor, Michigan League for Public Policy, July 23, Michael Leachman and Chris Mai, Most States Still Funding Schools Less Than Before the Recession, Center on Budget and Policy Priorities, October 16, Based on 2013 National Assessment of Education Progress data on fourth and eighth grade reading, math, and science scores as outlined in Stalled to Soaring: Michigan s Path to Educational Recovery State of Michigan Education Report, The Education Trust-Midwest. 33. TRIP, Michigan Transportation by the Numbers: Meeting the State s Need for Safe and Efficient Mobility, January Jim Stansell, Revenue Sharing, House Fiscal Agency Budget Background Briefing, October Impact of 2011 Personal Income Tax Changes Enacted into Law, if Fully Phased-in for Tax Year 2013, All Michiganders, 2013 income levels, Institute on Taxation and Economic Policy, January Annie E. Casey Foundation, Kids Count 2015 Data Book, August Kate W. Strully, David H. Rehkopf, and Ziming Xuan, Effects of Prenatal Poverty on Infant Health: State Earned Income Tax Credits and Birth Weight, American Sociological Review, XX(X)1-29, Nicholas Johnson, Budget Cuts or Tax Increases at the State Level: Which Is Preferable When the Economy Is Weak?, Center on Budget and Policy Priorities, Andrew Phillips, Caroline Sallee, Katie Ballard, and Daniel Sufrankski, Total State and Local Business Taxes. State-by-State Estimates for Fiscal Year 2013, Council on State Taxation, August 2014.