Published in Economic Development
Top left to bottom right: Rich Studley, Eli Isaguirre, Paul Isely, Eric Lupher, Branden Snyder, Top left to bottom right: Rich Studley, Eli Isaguirre, Paul Isely, Eric Lupher, Branden Snyder, COURTESY PHOTOS

Michigan Chamber prepares for ‘war’ over graduated income tax proposal

BY Sunday, March 15, 2020 07:30pm

As progressive political advocates seek lower state income tax rates for most Michigan residents while higher earners pay more for infrastructure needs, the state’s leading business group is bracing for a highly contentious political campaign.

Organizers behind the Fair Tax Michigan campaign, which was announced in late February, are seeking a constitutional amendment to change Michigan’s flat 4.25 percent income tax to a graduated structure based on income. The Board of State Canvassers is expected to decide in the coming weeks whether organizers can collect signatures in hopes of putting the question to voters in November. 

“If this qualifies for the ballot, frankly, it would be war,” said Rich Studley, president and CEO of the Michigan Chamber of Commerce.

For years, the Chamber has opposed efforts in the state Legislature for a graduated, or progressive, income tax. The Democratic-backed proposals have failed to gain traction in the Republican-held state House and Senate.

In the late 1960s and 1970s, Michigan voters by wide margins rejected ballot proposals for a graduated income tax. Such a change would require a constitutional amendment.

However, supporters say growing income disparities and declining public services have shifted public opinion. The Fair Tax Michigan plan would raise $1.5 billion in additional revenue for schools and road and water infrastructure starting in 2022. The plan would reduce the state income tax rate for individuals with income of $175,000 or less and joint filers with income at or below $350,000. According to organizers, 95 percent of Michigan residents would pay a lower state income tax rate than they do now.

Of the 41 states with income taxes, 33 have a progressive structure. Federal income tax also follows a graduated model.

Building a campaign

The Fair Tax Michigan plan was announced in late February, creating a relatively tight timeline for collecting signatures if the petition language is approved by the Board of State Canvassers. The group would need 425,059 valid signatures by July 6.

Fair Tax Michigan campaign manager Eli Isaguirre said the coalition of grassroots groups across Michigan has been focused on education policy and responding to a lack of legislative action on a graduated income tax.

Detroit Action, a community action group of “black and brown working-class Detroiters,” says education funding is a key need reflected in the plan. Detroit Action is a member of the campaign’s steering committee.

“We need a tax system that isn’t flat but that’s fair,” said Detroit Action Executive Director Branden Snyder. “A number of our communities are really struggling with a lack of resources that come from years and years and years of divestment and years of tax breaks going to billionaires and corporations. It’s a vision of abundance versus a vision of scarcity and fear constantly pushed down our throats.”

Snyder expects the Michigan Chamber to “use all of its weight to stop this. They believe in the status quo.”

Studley confirmed the expectation, calling it an “urgent priority” for the Chamber if it moves forward. He said it’s too soon to tell how much the Chamber would spend fighting the effort. 

He called the current flat tax “fair and relatively simple” because the more you make, the more you pay.

“The fact is, every day in Michigan our cities and state are in a fierce competition with other cities and states for jobs. Our flat-rate income tax has proven to be a competitive advantage,” Studley said, calling the graduated income tax plan “especially poorly timed and counterproductive” amid national and global economic uncertainty.

“The last thing in the world we need now is an unforced error to inflict this self-inflicted wound on Michigan’s taxpayers and job providers,” he said. “This proposal, if it qualified for the ballot and is approved, would be economic development suicide.”

While Michigan’s income tax is flat, supporters of a graduated structure say inequities come as higher earners receive various exemptions.

Isaguirre countered that there’s no data to support the notion that people or companies would leave Michigan. He added that Michigan’s crumbling roads and lack of education funding are already keeping companies from locating here.

Experts weigh in

Public policy and economic experts have expressed mixed reactions to the campaign. While he supports the concept of a progressive income tax, as is done at the federal level, the Fair Tax Michigan proposal as drafted could have unintended consequences, said Grand Valley State University economist Paul Isely.

“Generally, economists like progressive tax systems. Having a graduated income tax is a stabilizing policy,” said Isely, who is also associate dean of undergraduate programs at GVSU’s Seidman College of Business. 

The structure is counter-cyclical, meaning if incomes drop during a recession, individuals could pay less in taxes as a percentage of their income. However, as written, the proposal would lead to a roughly 20 percent increase in taxes for higher earners — “not a small amount,” Isely said. And it would happen quickly.

“That’s a big enough change that it will generate activity toward tax avoidance,” Isely said, “particularly given the states that border us.”

The increase, he added, could lead to a roughly 6 percent state income tax rate for some earners, higher than Indiana’s flat 3.23 percent rate and Illinois’ flat 4.95 percent rate. However, Illinois voters will decide on a graduated income tax in November. The Illinois plan would raise rates up to 7.99 percent for the highest earners.

“Am I against a graduated income tax? No, but it has to be thought out,” Isely said, noting that a phased-in approach would be crucial. “There’s unintended consequences that are very very dangerous as you change taxes. Will it cause the earth to crumble? No. Will it make it harder for our economic development people? Yeah.”

Eric Lupher, president of the nonpartisan Citizens Research Council, noted state income tax makes up about one-third of all state revenue, but almost 75 percent of it goes to the general fund budget. While the revenue as proposed would go toward “two significant shortfalls” in school aid and road funding, “it would create a budget nightmare as we try to deal with those other functions” included in the general fund.

Lupher also noted that 33 of the 41 states with an income tax have a graduated structure.

“If you drive them out of Michigan, where are they going to go? The odds are pretty good that if you leave Michigan because you don’t like this tax system, you’re going to end up in another one with a similar tax system,” he said. 

While Michigan voters rejected graduated income tax proposals decades ago, the state’s economic environment has changed, Lupher said.

“Michigan then was a high-tax state, and the idea that we’d be an even higher-tax state for some didn’t play well,” he said. Michigan is now a low-tax state and residents frequently cite failing schools and infrastructure.

“If the proponents of this can clearly draw a line between our contributions to government through the tax system and what you get for it, there might be an appetite for it,” Lupher said. “On the other hand, tax is still a four-letter word in this state, and it’s an uphill climb.”

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