Editorial: Graduated income tax wrong plan for Michigan

Gov. Jennifer Granholm's solution for a bad business tax is to replace it with an even worse income tax. If she succeeds, Michigan will forfeit one of the few tax advantages it holds and become even less attractive to entrepreneurs, small business people and retirees.

The governor suggests that she would be willing to relinquish the 22 percent surcharge on the Michigan Business Tax if the state changed its Constitution to move from a flat income tax to a system in which residents pay a higher rate as income rises.

Even after a 20 percent hike in the income tax a year ago, Michigan's 4.35 percent flat rate remains among the more competitive of those states that have an income tax. Thirty-six of the 43 income tax states have graduated tax rates, with the top rate topping out at anywhere from 4.54 percent to 10.3 percent.

Giving up that tax edge will make Michigan less appealing to those looking for places to start businesses and to residents with the flexibility to live anywhere. Small business owners would be hit particularly hard. And since the higher rates are likely to kick in starting around $60,000 of annual earnings, if other states are a guide, middle-income workers and retirees would see their tax burdens increase as well.

The seven states that have no income tax include Texas and Florida, places Michigan frequently competes with for jobs. The state's fixed income retirees would have one more reason to pack up and make Florida their official residence.

A debate on the income tax surcharge distracts from the real challenge -- dealing with the state's spending problem.

The business tax surcharge was adopted with very little debate to keep the government from shutting down in the fall of 2007. As it turns out, the surcharge wasn't needed. The business tax, which was supposed to be revenue neutral, produced a $400 million surplus last year, roughly the amount raised by the 22 percent surcharge.

Instead of scrapping the surcharge, its was built into the budgets for this year and next, turning what was billed as a temporary tax into a permanent piece of the revenue stream.

The surcharge has been blamed for some businesses pulling out of Michigan and others choosing not to expand here. It has to go. But the best way to get rid of it is not to create an additional tax burden for residents.

The only acceptable solution is to reform spending. Business groups have offered ideas for $1.5 billion in government reforms, more than enough to cover the repeal of the surcharge and wipe out the budget deficit.

But Granholm and the Legislature have not honestly debated those proposals, aside from suggestions that Corrections Department spending be cut.

An aggressive discussion of spending reform should occur before talk turns to messing up one of the few taxes that Michigan actually gets right.