BY RICK HAGLUND
All of the seven candidates for governor are vowing either to cut taxes or at least not raise them.
No surprise there. Promising to restore Michigan to fiscal health by hiking taxes is considered political suicide at a time when voters have an especially dim view of government.
“It’s pretty clear there’s no appetite for raising revenues to balance the budget,” said Craig Thiel, director of state affairs at the Citizens Research Council of Michigan.
But Thiel and other budget experts say it will be nearly impossible to close budget gaps in coming years without finding additional revenues or cutting spending in ways citizens might find untenable. Tax revenues aren’t keeping up with spending on ballooning costs for Medicaid and state employee benefits, including pensions and health care. The lack of funding has resulted in the state cutting areas considered key to making Michigan a desirable state in which to live, including universities and revenue sharing with local units of government. And the state likely will lose federal stimulus funds that support about $1 billion in spending in the current fiscal year.
“Whoever is elected governor at some point absolutely needs to be talking about a rate increase, or a graduated income tax and some kind of expansion of a tax on services,” said Doug Drake, a senior policy consultant at Public Policy Associates in Lansing.
But few of the candidates are proposing any of those things at this point in the campaign, at least in a way that would increase tax revenue overall.
Lansing Mayor Virg Bernero and House Speaker Any Dillion, who are seeking the Democratic nomination for governor, ignore any discussion of tax policy on their campaign websites.
Bernero says he has balanced the city budget in Lansing for five years running without raising taxes or laying off workers and suggests he would somehow do the same as Michigan’s governor.
Dillon, in response to a questionnaire from The Center for Michigan, says he would consider expanding the sales tax to services but only if “we reduce the tax burden for working families.”
That could be accomplished, he said, by switching Michigan’s flat-rate income tax of 4.35 percent to a graduated income tax, a move requiring voter approval to change the constitution.
The Michigan League for Human Services has proposed a graduated income tax plan it says would result in a tax cut for 90 percent of individual taxpayers while raising an extra $600 million a year to fund government services.
Under its plan, the first $20,000 of income would be taxed at 3.9 percent. Income between $20,001 and $60,000 would be taxed at the current rate of 4.35 percent, while income above $60,000 would be taxed at 6.9 percent.
Dillon also says he would eliminate the Michigan Business Tax surcharge of 21.99 percent and replace the lost revenue by eliminating loopholes and tax expenditures deemed ineffective by annual audits.
Tax expenditures are revenues the state gives up through exclusions, exemptions, deductions and credits built into the tax code. Some critics refer to them as loopholes.
Those expenditures totaled $35.8 billion last year, about $10 billion more than the state collected in tax revenue, according to the Senate Fiscal Agency.
Cutting Business Taxes
The five Republicans running for governor say they would cut taxes generally and the Michigan Business Tax specifically.
Oakland County Sheriff Mike Bouchard, Attorney General Mike Cox and U.S. Rep. Pete Hoekstra also have signed the Americans for Tax Reform pledge to not raise any taxes.
State Sen. Tom George calls for the elimination of the MBT surcharge, which was enacted in 2007 as part of a deal to head off a sales tax on services and balance the state budget.
The surcharge is expected to raise about $523 million in the 2011 fiscal year starting Oct. 1.
George says he would pay for the tax cuts by cutting state Medicaid spending and seeking more Medicaid revenue from the federal government.
But Michigan could lose as a much as $560 million in federal Medicaid funds next year if Congress doesn’t renew funding for economically hard-hit states.
Ann Arbor entrepreneur and venture capitalist Rick Snyder says he would replace the MBT with a 6 percent corporate income tax that would result in a $1.5 billion tax cut for businesses.
Snyder says some of the lost revenue would be replaced by cutting a number of business tax credits and reducing the use of tax incentives to attract new businesses.
He also claims the simplified corporate tax would stimulate the economy, resulting in more tax revenue in the long term.
Bouchard told the Detroit News he would lower the MBT rate and broaden its base in exchange for scrapping target tax incentives the state offers to lure new business investment and jobs to the state.
He also said he could support overall tax reform that would extend the sales tax to services, as long as it resulted in flat or reduced tax revenues.
But in a statement to The Center for Michigan, Bouchard said his preference on business taxes is to scrap the MBT.
“We must eliminate it and move toward a more competitive and stable system that is easy to follow and allows businesses to easily comply,” he said.
Cox says he would cut taxes overall by cutting the MBT by 50 percent and rolling back the personal income tax to 3.9 percent from the current 4.35 percent.
He says he is opposed to a sales tax on services to help balance the budget, which faces an estimated deficit of about $1 billion next year.
On his campaign website, Cox has identified about $1 billion in spending cuts, including putting teachers in a single health care plan, making state employees pay more for health insurance and reducing Medicaid benefits.
Cox says the state could save another $2 billion by renegotiating contracts with vendors that provide services to state government.
He also says he would eliminate business tax credits that fail a benchmark test for effectiveness.
Hoekstra says he would overhaul the tax code to give business and families a net tax cut.
“Raising taxes is not the answer for job growth,” he said.
Hoekstra says he would eliminate the MBT and personal property tax, and cut personal income and property taxes. But he supports extending the sales tax to services.
George has said in debates that his Republican rivals are promising tax cuts they can’t deliver when costs, most notably Medicaid, are rising.
“Saying you’re going to eliminate the Michigan Business Tax in your first month is a pipe dream,” he said in the last Republican debate. “Businesses won’t come to a state that can’t pay its bills.”
But George would cut the MBT surcharge, making up the revenue by spending cuts in health care or with new tax revenues as the economy improves.
Tax experts say, though, that revenues are unlikely to rise much because of the way the state’s tax system is structured.
Michigan’s tax code is designed mainly to tax goods and manufacturing, both of which are shrinking in an economy now dominated by services.
“The tax structure is heavily weighted to things that aren’t likely to grow very fast,” said Drake, a former state budget official. “There has been a shift from goods to services and a shift to Internet buying,” which largely evades the state sales tax.
And the various exemptions in the income tax, many of them indexed for inflation, prevent the state from collecting hundreds of millions of dollars it would otherwise receive.
Exemptions for pension income alone cost the state more than $700 million a year, according to the House Fiscal Agency.
None of the candidates are talking about eliminating those pension tax breaks, which could cost the state even more as the huge baby boom generation retires.
Cox told the Center for Michigan he is opposed to taxing pensions and other retiree income.
“Even if economy turns around, we foresee don’t see revenues keeping pace with economic growth,” Thiel said.
Many of the candidates say this is no time to raise taxes. That’s understandable at a time when the unemployment rate stands at 13.2 percent and the state is just starting to emerge from a huge economic hole.
But experts say the candidates, particularly the Republicans, are falsely claiming Michigan needs to cut taxes because it is a high-tax state.
In 2000, the state slightly exceeded the tax revenue limit imposed by the 1979 Headlee Amendment. Today, the state is $9 billion below the cap, set at 9.49 percent of personal income.
Adjusted for inflation state tax revenues are 5 percent below the revenue level in the 1968 fiscal year, according to the Senate Fiscal Agency.
Michigan ranked 28th in overall tax burden in 2007, the latest year available, down from seventh highest in 1999, the agency said.
One economist says cutting taxes further, as most of the Republican candidates for governor would like, would seriously harm the state’s ability to fund even basic government services.
“There’s been no maintenance of state park campgrounds in 10 years, and the roads are turning to gravel,” said Michigan State University economist Charles Ballard.
“As long as the public thinks taxes are high, then it’s very difficult to even talk about stabilizing revenue,” he said.