Rick Haglund: Lots of ideas to overhaul Michigan’s tax system, but little agreement on what to do ⋆ Michigan Advance

I’m sorry, but this column is about tax policy. 

Bor-ing, right? Maybe so, but how state lawmakers design a tax structure can have a significant impact on the finances of residents and businesses, and on the state’s economic competitiveness.

Lansing has been consumed by dealing with hateful social media posts by state Rep. Josh Schriver, R-Oxford, and an interminable fight over who is running the state Republican Party. But several proposals that could radically change tax policy in Michigan are floating around the Capitol.

Gov. Gretchen Whitmer’s Growing Michigan Together Council, an initiative aimed at boosting the state’s stagnant population, has triggered a debate over the role of taxes in attracting more people to Michigan.

Republicans complained the council’s report was a surreptitious plot to raise taxes to pay for favored Democratic programs that wouldn’t increase the state’s population. 

Council members, including Republican Co-Chairman John Rakolta, denied that, saying the council’s six-month work schedule left no time for a discussion on taxes.

Rakolta, speaking at the Detroit Regional Chamber Detroit Policy Conference last month, said there should be no talk about new taxes until the state develops a tax structure that’s “appropriate for the 21st century.”

But critics of the council’s report are “afraid to go down that path,” he said. Dismissing the council’s work is an “easy way to throw a red herring into the mix and distract everybody and the press that it’s all about taxes. It isn’t about taxes. It’s about: the state of Michigan is broken.”

Rakolta, chairman of industrial construction giant Walbridge, offered no specifics about what he thought a modern tax policy should look like. He said Michigan should implement “zero-based budgeting,” which would require the state to annually justify every program expense.

But some of his fellow business leaders are anxious for tax cuts. The West Michigan Policy Forum, a group of business executives that includes such heavy hitters as Amway Co-Chairman Doug DeVos and office furniture executive Matthew Haworth, is calling for the state to eliminate the personal income tax.

Backers of the idea claim states with no income taxes, including Texas and Florida, have among the fastest-growing populations. But states with no income tax make up lost revenue with other taxes.

The policy forum didn’t offer ideas for replacing Michigan’s $8 billion in annual income tax revenue, nearly two-thirds of state’s general fund tax revenue, but said there should be a “responsible transition” to its elimination.

Meanwhile, a group called AxMITax is seeking to place a proposal on the November ballot that would eliminate residential and business property taxes, the primary source of funding for local governments and a significant revenue pot for local schools.

The summary language of proposal was approved last month by the Michigan Board of State Canvassers, but  the board has yet to approve the ballot form. 

AxMITax said the measure would end the growing problem of property tax foreclosures. Any new local taxes would require 60% voter approval under the proposed ballot issue. Raising state taxes by more than .1% would require a two-thirds vote of the Legislature.

Karla Wagner of AxMITax said if eliminating property taxes results in libraries and museums closing, so be it. 

Another group says Michigan’s tax system must change to support the investments needed for Michigan to thrive in an economy that requires higher levels of education in its workers and make the state more attractive to new residents.

The Michigan League for Public Policy has long called for a graduated income tax system in which those with higher incomes pay a larger percentage of their incomes in taxes than lower-income residents. 

Thirty states and the federal government have graduated income taxes. Michigan has a flat income tax rate of 4.05% that will return to last year’s rate of 4.25% in the 2024 tax year because of a court order in a dispute over whether this year’s rate was a permanent or temporary cut.

The MLPP, citing a report by the Institute on Taxation and Economic Policy, said that the top 1% of Michigan earners pay an effective income tax rate of 5.7% while those with the lowest incomes pay an effective rate of 7.1%.

Michigan’s tax system is “upside down,” said Rachel Richards, MLPP’s fiscal policy director, in a Michigan Advance guest column.

While the state’s budget remains stable after billions of dollars in federal COVID-related programs have been exhausted, future state revenues will not be sufficient to “prevent us from returning to the decades of disinvestment in Michigan workers, families and children that we saw prior to the pandemic,” Richards said.

Implementing a graduated tax system would be extremely difficult. It would require voters to change the state constitution and would be vigorously opposed by business lobbying groups. 

But eliminating property and income taxes is an irresponsible, dangerous idea that, rather than make Michigan a more vibrant state, would likely bankrupt it.