TAX NEWS - June 2010

Michigan Tax: Focus on building a more effective, balanced tax structure for Michigan

It's a big difference, too -- one that will bear repeating many times this year, as candidates for public office conflate the two in stump speeches and debates.

A graduated income tax? Extend the sales tax to services? No way, say many Republican candidates; those are tax increases.

But the picture is much more complicated than that.

A graduated income tax to replace Michigan's current flat tax, for example, could be structured to yield more revenue for the state and increase taxes for only a small minority of filers. A study last year by the Michigan League of Human Services focused on a model for a graduated income tax that would produce $600 million more in revenue, but increase the tax bills for only 1 in 10 Michigan families who file a tax return. Other variations could be concocted to spare most earners a larger burden.

Extending the sales tax to services could also result in a more complex result than the anti-tax forces suggest. One proposal would lower the sales tax rate substantially, from 6% to 4%, and expand the base to pick up a majority of services that are currently untaxed. Depending on how that's structured, most payers -- and especially lower- and middle-income earners -- could see their tax burdens decrease. If the tax is weighted more toward financial services and other high-end services those earners don't typically engage, it could mean a tax cut for a lot of people.

That fuller picture is missing from the bumper-sticker rhetoric against tax reforms. Which is a shame, because it's key to understanding the state's troubles. Without a doubt, costs need to be contained, and public employee compensation needs to be brought in line with other states and the private sector.

But doing those things without fixing the revenue picture won't solve Michigan's problems. The current sales tax misses revenues from growth sectors that aren't paying their fair share for services like education or public safety. The income tax allows the state's top earners -- those whose incomes continue to grow the fastest -- to enjoy a static rate while college tuition skyrockets, health clinics shut their doors and cities teeter at the edge of bankruptcy. And both taxes could be fixed without an increased tax burden for most Michigan residents.

A more balanced tax structure will produce, over time, the revenues Michigan needs to invest in its future -- not just fix the current budget. Candidates should be focused on that, rather than pithy anti-tax slogans.