A Michigan House panel took just 90 minutes this week to pass legislation to eventually wipe out the state’s $9.7 billion personal income tax. It was a bold move, for sure. Unfortunately, it wasn’t followed by even a semblance of a plan for either replacing the revenue or cutting that much in spending.
That’s why Gov. Rick Snyder chided the Republican-controlled Tax Policy Committee for a lack of “deliberation” and “thoughtful discussion.” Translation: Send this reckless mess to my desk and I’ll veto it.
A bill that eliminates the income tax without dealing with the subsequent revenue shortfall will never get through a governor who prides himself on fiscal realism.
Bill sponsor Rep. Lee Chatfield, R-Levering, declined to offer his thoughts on spending cuts. He argues that the economic stimulus of such a major tax cut would make up for the lost income tax revenue.
There is merit in the idea that cutting taxes spurs economic growth. But that’s a delicate balancing act that can easily go the other way if it plunges a state into budget deficits, or results in deep service cuts that hurt competitiveness.
States with no income taxes, including Florida, Tennessee and Texas, have enjoyed stronger growth. But for the most part, they have not entirely forfeited the revenue. They’ve simply collected it in different ways.
Tennessee, for example, has the highest sales tax in the nation, an average of 9.5 percent when state and local sales taxes are combined. Washington state has the highest gasoline tax in the nation, with a portion of that revenue used to fill its general fund.
Texas has property tax rates above the national average.
Michigan may decide that shifting from the income taxes to other levies — raising the sales tax, for instance — would make the state more attractive.
That’s a decision that should come after much study and debate that includes real proposals for budget priorities. And it should be part of a comprehensive review of taxes aimed at coming up with the most desirable mix to raise the revenue the state needs.
The House legislation bypasses those steps.
As the Snyder administration noted, Michigan is hardly rolling in dough. Over the next three years, the state has to cover $2.1 billion in tax and fee cuts approved by previous administrations.
And meeting its infrastructure needs will take $4 billion a year in new money the state hasn’t found yet.
Snyder has used tax cuts and code changes effectively to ease Michigan’s competitive disadvantages. They’ve resulted in a stronger recovery.
But the governor has never been reckless in slashing taxes.
It could be great to see Michigan join the no-income tax club. But no one should pretend that such a move won’t result in higher taxes elsewhere and/or require a massive re-prioritization of spending.
The House should sit on this bill until it is willing to address the consequences of eliminating the income tax in a responsible way.