State tax structure under fire

November 7, 2009
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Economists and many local public officials feel the state’s budget problem is structural, ingrained into a model of doing business that time and the globalized economy have passed.

Most of them also feel that the single biggest structural problem the state has is how it collects revenue, which is falling far short of meeting expenses because of job losses and home foreclosures.

“They’ve come to an impasse when it comes to revenue. They’re not even talking about revenue,” said Becky Bechler of state lawmakers.

Bechler is an associate with Public Affairs Associates, the county’s Lansing lobbyist, and she addressed the county’s Legislative Committee ahead of the final budget approval by the legislature and governor.

Bechler told committee members that the budget items Gov. Jennifer Granholm was expected to veto from the current general budget are favorite programs of Senate Republicans, who oppose any new taxes. She said Granholm has targeted those items in an effort to get Republicans to the revenue table.

But Bechler didn’t feel that the current group of legislators would agree this year to any of the new taxes proposed by Granholm or members of the state House, which is controlled by Democrats. Nor did she think much work regarding new revenue would get done next year, which is an election year in Michigan.

“It will be extremely difficult to do anything significant in an election year,” said Bechler to the committee.

“I think everybody agrees that we need to restructure our tax system,” she told the Business Journal after the committee meeting.

But restructuring an out-of-date tax system won’t be easy when lawmakers refuse to discuss it and industry groups raise a fuss over small hikes, such as a two-cent tax on a bottle of beer. What makes it even more difficult is that many groups feel taxes in the state are higher than nearly anywhere else.

Two recent reports, however, add uncertainty to that sentiment. When compared to other states, one put Michigan near the middle of the pack for business taxes, while the other put Michigan near the bottom for income taxes.

The Anderson Economic Group, based in Lansing, released a report earlier this year that ranked Michigan 22nd of the 50 states in terms of business taxes as a share of company profits. Using tax data from 2006, when the much-maligned Single Business Tax was still being used, the study reported that business taxes in Michigan were 14.9 percent of profits. The national average was almost two points higher at 16.7 percent of profits.

Another comparison published last month by AARP ranked Michigan at 37th of the 50 states in individual income taxes collected on a per-capita basis. Of the 13 states listed below Michigan, six don’t have an income tax and two only tax dividends and interest. Using 2007 tax data, the report showed Michigan’s per-capita tax was $639. Connecticut had the highest income tax at $1,811 per person.

“Raising taxes is very difficult, especially right now when I think everybody is struggling economically. This is the worst time to start asking people to pay more. This is a difficult time to ask legislators to go back to their districts and say, ‘Now I’m going to ask you to pay more,’” said Bechler.

“I think that’s the biggest struggle we have right now, especially after raising the income tax two years ago. I think they’ve agreed in their minds that I’m not going to do that again,” she added.

Bechler said the state budget would still need significant spending reductions, even if the revenue increases proposed by the governor and the state House would have been adopted. She said the tax structure in the state has been molded around the manufacturing industry, but Michigan is no longer a manufacturing state.

“I think our biggest problem is our manufacturing business and our auto companies have struggled so mightily, and Michigan hasn’t recovered from that. We have struggled in so many different ways,” she said.

Bechler wound up her address to the committee by telling members that the state is looking at “tremendous” spending cuts for at least the next two years, and that both of those years are likely to be worse than this year.

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