Talking taxes with Lt. Gov. Brian Calley, part I

By Susan J. Demas

As Michigan has struggled with both a deep economic downturn and a structural budget deficit this decade, the biggest question has been how much money does it really take to operate state government.

Lt. Gov. Brian Calley said the Snyder administration does not have plans to modify Proposal A or seek a graduated income tax as it reviews Michigan's overall tax structure. (Courtesy photo -- state of Michigan)

Lt. Gov. Brian Calley said in an interview this month that the fiscal 2012 budget signed into law last month, which featured deep cuts to K-12, public universities and human services, is the new normal.

“For 2012, I think the budget that we just passed is a reasonable level,” he said.

Calley sat down with the Center for Michigan this month and talked about the big changes to the state’s income tax, a graduated income tax and whether Proposal A needs to be reformed.

Q: You’ve made some pretty significant changes to the income tax this year, between the pension tax, ending the child tax credit, ending the charitable deduction, freezing the income tax rate at 4.35 percent, scaling back the homestead property tax credit and ending the personal exemption for taxpayers over a certain level ($75,000 single and $150,000 for married couples). So given all of this, isn’t it true that most individual taxpayers will be paying more in taxes next year than they did this year?

A: Every taxpayer will have a different, depending on their experiences, result from this. We looked at the effective tax rate differences for different groups. It is true that most will see a modest change in the overall effective tax rate that they pay because the credits go away — which, of course, goes to our mantra all along, which has been not picking so many winners and losers. The group that is effected the least are current retirees. … Moderate retirees, the only one that hits that group is the homestead property tax credit changes — that’s the only significant changes. … And then your everyday working person that has a job, it does depend on how many kids you have, how many charitable contributions you have, perhaps and whether or not you’re saving for college.

It’s kind of interesting, though. So many of the credits that we have to lower tax burden were only, as a practical matter, available to people with a high disposable income. And that’s kind of a bizarre tax system to where you would build a system of credits around giving tax breaks to people with high disposable income. I can see why there’s a good political angle why you’d do that. But I can’t see a policy objective that you’re trying to achieve from that.

Q: Budget Director John Nixon has talked about balancing out revenue for the General Fund and the School Aid Fund. What direction might you go in?

A: We’ve made some significant steps toward that already. I think there’s a big misconception by a lot of folks that Proposal A is the majority of the School Aid Fund. It’s really not even half of the School Aid Fund that come(s) from Proposal A. The majority of the School Aid Fund is from statutory earmarks — just what the Legislature and the governor have decided to put in it. That’s over half. And then the other half being constitutional.

When you are responsible for education and everything else that state government does, it is necessary to consider all decisions in the context of things, so part of that is having the ability, for example, to make sure that, as we did this year, to make sure that poor kids have access to health care (through Medicaid). Education is part of what we do for kids, but only part of it. We really do have to meet all of those bases. I think we took significant steps to balancing out the revenue streams so that we have structural alignment in the future without significant, dramatic changes.

Q: Is the administration interested in restructuring Proposal A?

A: No. We’re open to hearing ideas on a whole range of issues, so we’re not the type to close the door on anybody who has an idea on how to make state government better. But for our part, I don’t think it’s one that would merit a lot of discourse or effort from the administration to change.

Q: How much money does Michigan have to raise to operate the general fund and the School Aid Fund at a reasonable level?

A: For (fiscal) 2012, I think the budget that we just passed is a reasonable level. Going forward, we do expect that as we have more experience and time in management of state government that we will find additional savings. … And then all the other levels of government, when we find the savings and best practices here, we would share that experience as well to try to make all levels of government operate more efficiently. It’s important that we benchmark ourselves to both the private sector and other states, other local governments and local schools around the country. Those benchmarks are an important indicator of whether we’re doing the best we can.

… So I’d say, for example, with education. We’re a top 20 funder of education still in Michigan and yet the budget problems and the cost pressures within the system make life very difficult for those who are trying to operate schools now. It’s the sort of thing we just need to get to the bottom of it. We fall into the trap of measuring our commitment to education based on number of dollars that are appropriated, but we can’t really find a strong correlation between dollars spent and how well kids get educated.

Q: What’s the administration’s philosophical position on a graduated income tax? What are the pros and cons of that approach?

A: Yeah, we do oppose the graduated income tax. What we’re trying to do is create an environment that’s more conducive to job growth. And it’s important if you want to do that to understand where your jobs are going to come from. And most of our job growth, particularly in the last 10 years, has come from the smaller, closely held companies. What happens with those companies even when the owner doesn’t take a salary … all the business profit shows up on the individual tax return.

So essentially, a graduated income tax would be inordinately paid by small business owners because of the pass-through feature of the federal tax code. And that’s exactly the segment that we expect significant attention toward job growth in. so we look at as very counterintuitive to have a graduated income tax when our goal is to create an environment that makes it easier for that exact population to be successful entrepreneurs.

Q. Weren’t there some concerns that with some of the income tax changes you made for fiscal 2012, especially with the pension tax, that that was essentially creating a graduated income tax?

A. We decided to phase out some of the credits at higher-income levels. And there is a lot of Michigan court experience on such things that our constitution, which prohibits a graduated income tax as to rate and base, that the use of credits does not constitute a graduated income tax. As a practical matter, our tax system today does carry a higher effective rate on younger people. It carries a higher effective rate on higher-income people. Through effective tax rates after all credits, Michigan’s system has graduated to that extent. But it’s not been as to rate and base.

… Take for example, the homestead property tax credit. That’s always had an income tax cap on it, so at high-income levels, you don’t get it. And it’s really viewed as a property tax subsidy, not an income tax break. That might seem like just semantics, but it’s like there’s a different policy being pursued by the existence of the credit itself. The delivery system happens to be the income tax, but that’s not the purpose of the credit. The purpose of the credit is not to graduate the rate up or down; the purpose of the credit is to provide a subsidy or assistance in paying property taxes. So there is a legal distinction there — one that we’re very comfortable making.