A12 SUNDAY, APRIL 18, 2010 THE GRAND RAPIDS PRESS

CONTINUED FROM A1

“The numbers are horrible,” said Jeff Guilfoyle, president of the Citi-zens Research Council of Michigan. “The state has lost one in six jobs over the last 10 years ... and that is showing up in tax revenue collections.”

In their turn, state and local govern-ments are under signifi cant stress; that is less visible than the Legisla-ture’s inability to pass a budget by 11:59 p.m. on Sept. 30.

Some examplesIn part because of cuts in Medicaid, the federal health care program for the poor, OB/GYN units in smaller rural hospitals in Clare and Cheboy-gan have closed. If the hospital in West Branch follows suit, 16 contigu-ous counties in the northern Lower Peninsula will lack a hospital that delivers babies.Ever watch those crime shows where the lab guys take an hour to solve a murder? Prosecutors complain that, with the closure of the city of De-troit’s crime lab, it takes Michigan State Police criminologists a year to process DNA evidence.The City of Saginaw, which lost $10 million in revenue between 1997 and 2007, saw its police force reduced by a third in that time, despite having one of the highest crime rates for its size in the nation. Statewide, there are 2,035 fewer law enforcement per-sonnel in 2010 than in 2001.Dozens of school districts in Michi-gan will be essentially insolvent if lawmakers pile a fi scal year 2011 cut on top of the $165-per-pupil reduc-tion approved for fi scal year 2010.Public university tuition has dou-bled over the decade, as per-student state aid fell from $7,412 in 2001 to $5,752 this year.A Michigan Merit award that pro-vided $2,000 to a qualifi ed student in 2001 (refashioned into a $4,000 Michigan Promise scholarship) was eliminated.Greater shares of tax revenue are being devoted to services more dif-fi cult to cut. The Medicaid caseload is up 70 percent in 10 years, and pris-ons consume nearly a quarter of the general revenue Lansing collects.Other revenue is being forgone

through the multitude of breaks baked into Michigan’s tax code. Sales tax breaks equaled sales tax collections in 1997. This year, those breaks are double what the state takes in. Simi-larly, the value of income tax breaks is 40 percent higher than collections.

A fragile balanceLawmakers have been able to keep

the state’s books in balance in the past two years only through the infusion of billions in federal stimulus dollars. The budget for fi scal year 2011 will rely on nearly $1 billion in such fund-ing, but still falls $700 million short.

“The revenue line is declining as a share of personal income over time, and the spending line is greater,” said Timothy Bartik, senior economist at the W.E. Upjohn Institute for Employ-ment Research in Kalamazoo. “That situation can’t continue.”

If the revenue and spending lines do not start moving in the same direc-tion, “every two years for the next 10 years, there is going to be a big debate in state government that we’re short $2 billion.”

Republicans are seeking to force down spending, in part by having pub-lic employees pay more of their health insurance. Gov. Jennifer Granholm wants to pump up revenue by expand-ing the sales tax to services.

Doug Roberts, state treasurer in the Engler administration, said only a combination of cuts and increases can put the state on stable fi scal footing.

Lawmakers in both parties should get the state’s defi cit number on the table “as quickly as possible and de-cide how much of this number we can do with revenue and how much we can do with expenditure cuts,” said Roberts, now the director of Institute for Public Policy and Social Research at Michigan State University.

S pending from state taxes and fees is $1.43 billion less in fi scal year 2010, when no taxes were raised, than it was in fi scal year 2009. If lawmakers want to take a serious look at raising rev-enues, there is no shortage of ideas.

Income taxMichigan’s income tax rate was 4.4

percent in 1994. Legislative deal-mak-ing reduced it to 3.9 percent by 2003 before it was hiked back in 2007 to 4.35 percent in a deal to end a govern-ment-stalling budget impasse. That is where it stands today, but it will revert to 3.9 percent by 2015.

About a third of the income tax funds K-12 education. The rest helps pay for general services, including nursing home care, aid to universi-ties and community colleges, prisons,

human services, the Legislature, the governor’s offi ce and the judiciary.

Michigan is one of seven states (out of 41 with an income tax) with a fl at rate. Michigan State University econ-omist Charles Ballard said Michigan’s income tax is among the most regres-sive in the nation. The rate on high-income earners is one of the lowest among states. The rate on low-income earners is one of the highest.

One idea for adjusting that is a structure proposed by the Michigan League for Human Services:

3.9 percent on the fi rst $40,000 of adjusted gross income.4.35 percent on the next $40,000 to $120,000.6.9 percent on $120,000 and above.Implementing it would deliver a tax

cut to 90 percent of income-tax payers and generate an additional $600 mil-lion in revenue, Ballard says.

East Lansing economist Patrick Anderson counters the plan would eliminate one of the state’s few com-petitive tax advantages.

“Going to a graduated income tax is like mooning entrepreneurs across the country,” he said. “It’s beyond rais-ing their taxes. It is insulting them and telling them not to come.”

But Ballard said 21 states with graduated rates tax more income than Michigan does and have better econo-mies . They include Big 10 states like

Ohio, with a top rate of 5.9 percent; Wisconsin, 7.75 percent; Minnesota, 7.85 percent; and Iowa, 8.9 percent.

“Let’s think about the entrepreneur who is just starting up,” Ballard says. “He/she hopes eventually to be a huge success, but most entrepreneurs are not a huge success overnight and many never make it big. The startup entrepreneur would face a lower mar-ginal tax rate.”

Any change would require a vote of the people. Putting it to a vote would require a two-thirds vote of the Legis-lature or a successful ballot drive.

Income treatmentWhile Michigan taxes income at the

same rate, it taxes different types of income differently.

Public pensions have been exempt since the income tax was implement-ed in 1967. Thirty years later, lawmak-ers approved an exemption for private pensions and retirement investment income, and then indexed it all to infl ation.

Now as much as $100,000 in retire-ment income reported by a couple fi ling a joint return is exempt from Michigan’s income tax. It’s the most generous senior tax break in the na-tion, worth about $700 million this year. That value is expected to nearly double in the next two decades .

“As more people move into

retirement, we’re going to see less income being taxed,” Guilfoyle said.

And, said the Upjohn Institute’s Bartik: “Why should someone who’s working, supporting a family and earning $40,000 a year pay Michigan personal income tax when a couple who has $80,000 in retirement income essentially pays nothing?”

Roberts said such a change would likely be challenged in court . And if you aren’t going to tax the pension of a school teacher, it’s not fair to tax the pension of an autoworker, he said.

Besides, he said, “why do you want to drive Grandma and Grandpa away to Florida?”

Sales taxIn early 2007, Granholm proposed a

new 2 percent tax on every consum-er and business service provided in Michigan, health care and education excepted. It went nowhere, and that year’s debate over how to tax services descended from there.

Months later, in the scramble to pass a budget, lawmakers did approve sales tax expansion to some services. Among them: Investment advice (but not accounting), landscaping (but not lawn mowing), personal care (but not hair styling), skiing (but not golfi ng), bail bonding, baby-shoe bronzing and balloon-o-grams.

And lobbying, too.

After much ridicule, not to mention pressure from lobbyists, the law was repealed before it took effect. Now, the idea of taxing services is back.

Granholm’s 2011 proposal to lower the sales tax rate from 6 percent to 5.5 percent and extend it to nearly all consumer services is almost identical to a proposal by the CEO-led group Business Leaders for Michigan.

The difference is that in the fi rst year, Granholm would take 75 percent of the $728 million in net new reve-nue to balance K-12 aid fund. The rest would begin to pay for a three-year phaseout of the 2007 Michigan Busi-ness Tax surcharge that replaced the ill-fated tax on baby-shoe bronzing.

The CEOs’ measure, however, would use all the sales tax proceeds to fi nance in the fi rst year a $1 billion business tax cut that Granholm’s plan delivers by year three.

Both plans are a variation on the so-called Fair Tax, which in Michigan would hike the sales tax to almost 10 percent and collect it on just about every service, including health care and home sales.

Granholm says her proposal refl ects a changing economy. When voters approved a sales-tax increase in 1994 as part of the Proposal A school fi -nance changes, taxable sales totaled 45 percent of personal income. In fi s-cal 2009, that was down to 35 percent. The governor says school funding would stabilize if the main revenue source more closely matched changes in the economy.

Anderson, who helped craft the Business Leaders plan, says respon-dents polled on the issue saw “cutting the rate and extending it to goods and services as a fair way to tax consump-tion. And they considered many of the services it would affect as things they could control.”

A sales tax that currently applies to home heating bills, but not cable TV, is seen as regressive.

Some economists say cutting the rate and broadening the base makes it more progressive. Lower and middle-income households are more likely to make their own home repairs and, under this plan, would receive a tax break on the parts they buy.

By contrast, “lots of services and entertainments that are given the privilege of not having a sales tax are consumed disproportionately by high-income people,” Ballard says.

David Littmann, an economist with the Mackinac Center for Public Poli-cy, says an expansion of the sales tax base would be an “add on” that would merely provide more revenue to a “drunken public sector.”

“The problem with the tax system is the spending system,” he said. “Any tax system works if you have spending under control. All tax systems fail if you don’t.”

Property taxMost municipalities rely on two

sources of revenue, property taxes and state revenue sharing.

As Granholm and lawmakers grap-pled with budget trouble this decade, they have shorted local governments of billions state law says they are owed — nearly $500 million alone in the current budget year.

Throughout much of the decade, the revenue-sharing loss was offset by a rising property tax base, even given Proposal A’s taxable value cap.

In 2001, statewide assessed value grew 10 percent, while taxable value grew 7.1 percent. In 2009, after the housing market crashed, assessed value was down 5.4 percent, while tax-able value dropped just 0.8 percent.

When Proposal A was crafted, one concern was eventual inequities in property tax liability. The 14-year owner of a house valued at $200,000 in 2008 would have a tax bill that was $1,200 less than the owner of a simi-lar house across the street who had purchased it that year. Those gaps, however, are being erased as home values plummet.

Michigan State economist Mark Skidmore said he thinks the foreclo-sure crisis is peaking, which should stabilize prices. Still, “I don’t see pric-es coming up at a brisk pace .”

Even if they did, taxable value can only rise at 5 percent annually or the infl ation rate, whichever is lower. “Lo-cal governments are going to really feel it,” he said.

Roberts said it’s up to Michigan residents to decide what combina-tion of revenue increase and spending reduction makes sense.

Local governments can ask voters for more. School districts under Pro-posal A can structure a countywide, intermediate district approval.

Lawmakers in Lansing, too, have it within their power to restructure Michigan’s tax code on their own or ask voters to approve an overhaul.

“We still live in a democracy,” Rob-erts said. “Either a percentage of our overall income that goes to taxes is going be higher or we’re going to have the same tax base. Then we’ll decide what services are going to go away.”

E-mail: pluke@boothmichigan.com

PAYSTATE BUDGET SAVED ONLY

BY FEDERAL STIMULUS

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MI

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OH

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IL

IN

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CABLE SPORTING EVENT CAR REPAIR HAIR STYLING ELECTRICITY DRY CLEANING CAR RENTAL

Getting a passServices such as cable television, sporting events and haircuts are not taxed in Michigan, although some of our neighboring states do tack a fee on those services.

Comparing per-capita tax burdens around the region

Relative to its neighbors, Michigan’s tax burden has been declining for 20 years. Michigan’s per capita state and local tax collections were at the top end in 1987 compared with

other Big 10 states. By 2007 Michigan was second from the bottom ahead of only Indiana.

Michigan per-capita tax collections were $136 behind Minnesota in 1987. Two decades later, the gap had grown to $868.

MICHIGAN

STATE

PENNSYLVANIA

OHIO

WISCONSIN

IOWA

ILLINOIS INDIANA

MINNESOTA

1987 2007

$1,774

$3,691

$4,173

$3,996

$4,166

$3,670

$4,310

$3,327

$4,559

$1,570

$1,477

$1,800

$1,576

$1,657$1,322

$1,910

MICHIGAN106% MICHIGAN

87.3%

U.S. AVERAGE1987 2007

Meanwhile, our income lagged ...In 1987 Michigan’s personal income was 106

percent of the national average. In 2007, it was 87 percent of the national average.

Income tax: Flat rate vs. graduatedIncome tax rates vary among states in the region. Some use a graduated structure, meaning high-income earners pay a higher percentage, and others, including Michigan, charge a flat rate.

Michigan: 4.35 percent

Pennsylvania: 3.07 percent

Ohio: 0.618 percent to 6.4 percent

Wisconsin: 4.6 percent to 7.55 percent

Iowa: 0.36 percent to 8.98 percent

Illinois: 3 percent

Indiana: 3.4 percent

Minnesota: 5.35 percent to 7.85 percent

IS THE TAX ALWAYS GREENER ON THE OTHER SIDE?

STATE OF THE STATESA LOOK AT HOW MICHIGAN TAXES STACK UP WITH OUR NEIGHBORS

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0.5

1.0

1.5

$2.0

Cigarette tax per pack Beer tax per gallon

$2$1.35 $1.25 $1.23 $1.36

$0.98 $0.995$1.23

$0.2 $0.08 $0.18 $0.06 $0.19 $0.19$0.185 $0.11

MI PA OH WI IA IL IN MN

Taxing vicesMichigan’s $2-per-pack tax on cigarettes is by far the highest

among states in the region. We also top neighboring states in

taxes levied on beer.