Wrong Turns…

…on the Path to ProsperityDouglas C. Drake

October 2014

First, A Quiz…

• Are Michigan taxes:– A. At or near historic highs? Y_ N_– B. Compared to other states, are Michigan

total state and local taxes:» Among the Highest 10? Y_N_» Among the Lowest 10? Y_N_» Above average? Y_N_» Below average? Y_N_

Why Is This Presentation and the study Important? - 1

• Michigan has been “reforming” its tax structure for decades—some increases, more “reforms” and cuts—personal and business

• Michigan is NOT a high tax state

• Michigan has mostly been an average state, sometimes a little above, now below average & has been over a decade

Recurring Themes of Michigan Tax “Reform”

• “Big” vs “Small” Business– Large Corporations vs Others

• Business vs Individuals

• Michigan vs Other States

• Lower taxes will bring prosperity?

Why Important 2

• Over this whole period, dozens if not hundreds of targeted business tax incentives- on top of big changes

• Individual breaks as well…exemption of large portion of private pension income to match public pension exemption-Repealed under Snyder “reforms”

Proposal A 1994

• Hope was to address relative equity of school finance & it did improve things

• Provisions for assessment freeze and cap on parcel by parcel assessment increases

• Tax cuts and limits on growth for both business and individuals

The Perfect Storm

• 1. 2008 Great Recession a “gift” from Wall Street that still keeps giving.

• 2. Autos, & lots of others, collapsed

• 3. Property values fell nationwide as well as in Michigan

• 4. We are “recovering” but it will be years before we are “recovered” and fully back

Tax Cuts & Investment

• 40 years since PA 198 of 1974, and..• 39 yrs since Milliken SBT “reform”• 20 yrs since Prop A• We’re still dominated by a shrunken auto

industry• We’ve not maintained K-12 and Higher Ed

investment• We’ve not maintained water & sewer

systems, electric grid, and roads

Forty Years of Aggressive Tax Cuts

• Haven’t given us prosperity

• The more we’ve cut taxes, the less prosperous we’ve become as a state

• Taxes lower now, probably lower than at most times in modern Michigan history for businesses and many individuals

• Let’s look back now at some of those changes and benchmarks of burden

Michigan’s Constitutional Revenue Limit1978 “Headlee” Amendment

Figure 2 $ Amounts Over / Under Michigan's Constitutional Revenue Limit

-$526.7

-$1,172.7

-$1,414.1

-$1,321.4

-$244.6

-$6.1

-$844.7

-$1,349.9

-$1,351.6

-$2,150.3

-$3,039.5

-$3,687.3

-$3,148.5

-$2,151.0

$109.6

-$183.2 -$977.9

-$640.1

$21.7

$159.7

-$2,407.8

-$3,917.1

-$4,181.5

-$4,440.7

-$4,215.5

-$4,946.2

-$5,322.3

-$4,651.7

-$7,986.1

-$7,605.7

-$5,580.8

-$5,230.4 -$6,407.8

-$7,039.3

-$373.5

State Fiscal Years

Figure 1 Cumulative Impacts of Major Tax Cut Policies on SAF Revenue, 1994-2012

Income, -$2,271.8Sales, -$2,393.9

Use, -$771.3

Property, -$2,056.1

Assmt Cap, -$8,822.4

AssmtFreeze, -$18,897.6

Initial Prop A Cut, -$9,961.3

Comparing Michigan & US Personal IncomeMichigan and U.S. Per Capita Personal Income 1929 - 2012

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

1929

1931

1933

1935

1937

1939

1941

1943

1945

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Michigan Per Capita Personal Income US Per Capita Income History

Remember The Good Old Days?

Total Michigan Population, Income and Per Capita Income: % Changes by Decades, 1929 - 2009

-50%

0%

50%

100%

150%

200%

250%

29-39 39-49 49-59 59-69 69-79 79-89 89-99 99-09

Total Mi Pers Income Total Pop Per Capita Pers Inc

Total U.S. Vehicle Sales & Big 3 Share

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

16,000,000

18,000,000

20,000,000

Sal

es L

evel

40.0%42.5%45.0%47.5%50.0%52.5%55.0%57.5%60.0%62.5%65.0%67.5%70.0%72.5%75.0%

Mar

ket

Sha

re

Total U.S. Sales Light Vehicles Big 3 Share of Total Sales

Michigan & US Avg Tax Burden As % Of Income

State and Local Taxes As % of Personal Income

9.00%

9.25%

9.50%

9.75%

10.00%

10.25%

10.50%

10.75%

11.00%

Data Source: Tax Foundation Michigan US Average

Michigan & US AVG Tax Burden -Per Capita

Per Capita Taxes, US and Michigan 1977 to 2010

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: Tax Foundation US Avg Michigan

Changing Taxes Over Time

• On a Per Capita Basis– From 1977 to 2011, Michigan had THE lowest

increase in burden of all states. (Full report Table 3A)

• On a Percentage of Personal Income Basis– From 1977 to 2011, Michigan had the 42d smallest

increase in burden, DECLINING by 8.1 % from 1977 even though our incomes collapsed more than many in the Great Recession with its impact on autos. (Full report Table 3B)

What About Business Taxes?

• Despite popular belief, our business taxes are far from the highest, and by one measure that accounts for benefits to business we’re among the best deals in the country.– TAX FOUNDATION

• 14th overall 2014, 2d best in Great Lakes,

– ERNST & YOUNG/COST- includes benefits• Only 2 states a better deal (CT & MD)

Comparisons to other States-1

• Be Careful! This is almost always apples and oranges!

• Walmarts and McDonald’s everywhere don’t mean economies and political cultures are the same

• Big differences come from:– Population size & geography– Agriculture– Mining (including oil)– Manufacturing-lots of different stuff gets made, with

differing economic cycles (oil refining is manufacturing in the data)

Comparisons to other States-2

• Size of federal government presence in some: MD,TX(bases and NASA) and VA-and Gov contractors, esp in MD & VA

• Overall size of economy—small states are different than big states

• Mich is still the primary home of autos

Comparisons to other States-3

• Political cultures are also different

• Local governments vs state government

• Degree of local control of schools and state share of financing

• See pages 26-31of the full report and especially Tables 6 &7 for more on some of these differences

What About Michigan’s Future? I

• Proposal A and the entire school finance system is broken. Time for a re-do!

• I’ve often said that school finance systems are “generational” in the sense that they only seem to work for about 20 years or so

• Then they need major tweaking to address demographics, economic changes, and the relative roles of state and local control

What About Michigan’s Future-2

• We’re on the wrong path if we want to get to a more prosperous future.

• We need a long term commitment to INVESTMENT – not disinvestment

• We should look at states like Minnesota, which is one of the highest tax state in the region, and the most prosperous…….

• See many excellent articles on Minnesota and other related materials at: www.michiganfuture.org

• Also recent 10 part series on Michigan taxes the Center for Michigan’s Bridge Magazine: www.cfmbridge.org