I ask a few questions when analyzing tax policy: Are tax revenues sufficient to fund services that provide a high quality of life? Does Michigan’s Tax Structure Make Michigan Uncompetitive with Other States? Does the tax burden cause individuals or businesses to change their economic decision-making?
Despite the windfall in new federal revenues from pandemic relief and infrastructure investments, Michigan’s ability to fund services has become strained. State taxes generate decreasing income relative to personal income, as the link between Michigan’s economy and the state government’s tax structure has weakened since the late 1990s.
Sales tax provides an example of this strained relationship. The service sector of Michigan’s economy has grown faster than other areas. Individuals spend a growing share of their income on services and a smaller share on goods. But sales tax was designed at a time when people bought goods and most services were untaxed.
Most of the tax rates levied by the state and its subdivisions are competitive with other states. The property tax is a tax for which it is not, and the system opposes the reduction of this burden.
The source of the problem is that Michigan local governments rely heavily on property taxes. Few jurisdictions levy taxes at high rates, but the taxpayer levy is on cities or townships, counties, schools, libraries, and other purposes. Property taxes represent around 94% of the cumulative tax revenue of local authorities.
Michigan’s relatively high tax burden has been a long-standing problem, but rather than alleviating it with the power to raise alternative taxes, as most other states have done, Michigan has attempted to limit the growth of the economy. tax burden.
The tax limits adopted in 1978 and 1994 cumulatively limit the extent to which the appreciation of property values influences the property tax burden. While they protect taxpayers against ever higher property tax bills, they have created other negative tertiary effects impacting both taxpayers and local governments.
First, we have controlled the growth of the tax base, but we have pressured many local governments to increase tax rates. The net result is that the property tax burden as a percentage of personal income has not been reduced.
In a pending report, we’ll show that since 2004, nearly 80 percent of counties and 50 percent of townships, and over 60 percent of cities in the state have increased their tax rates. This is especially true in southeast Michigan, where two-thirds of local governments in Macomb County, 73 percent in Wayne County, and 76 percent in Oakland County have raised tax rates.
Long-time property owners enjoy the benefits of tax limitations, but individuals and businesses who buy property are burdened with higher tax burdens as the restrictions on tax limitations are lifted when the property is sold.
In addition, it prompted local governments to seek new developments. With little land to develop in Michigan’s inner ring suburbs, development is pushed further into rural areas. This is not good for the environment and it increases the cost of living in the state, as the townships, previously called upon to provide minimum services, have assumed the role of full service providers.
Many other states have responded to these pressures by reducing reliance on property taxes. They allowed local option income (which is limited to Michigan cities), sales, fuel, alcohol, or tourism taxes.
The authority to levy these alternative taxes on local options in Michigan is lacking for political reasons. Sales tax has the greatest potential, but it has several constitutional restrictions that dictate the tax rate and the use of income.
Local option taxes would allow geographically and economically diverse parts of the state to benefit from an economic activity that makes them unique, such as tourism along the shores of the lake or trading in our urban areas.
Finally, events have caused cumulative tax burdens – including income, sales, property, and auto taxes – in Michigan’s major cities to become among the highest in the country. As middle- and high-income residents and businesses have shifted from the big cities to the suburbs, low-income residents have become increasingly important parts of the city’s tax base.
We have placed many barriers in the path of low-income working adults – poor transit systems, inadequate child care, inadequate affordable housing, etc. Imposing relatively high tax burdens on our urban residents consumes a large part of their income and journeys. against aspirations for economic growth and economic opportunity.
Despite all their problems, Michigan’s major cities are the economic engines that propel the state’s economy.
By imposing the heaviest tax burdens on urban residents and failing to develop a true urban strategy to address the loss of people and businesses over the past decades, the tax system is hampering economic growth.
Eric Lupher is president of the Michigan Citizens Research Council.