Feel overtaxed? Michigan $10B below tax, fee limit

Jonathan Oosting
The Detroit News

Lansing — As Gov. Gretchen Whitmer pushes for a $2.5 billion fuel tax increase, new data from non-partisan fiscal agencies shows Michigan residents and businesses are paying $10 billion less in state taxes and fees than they did in 1977 when measured as a percentage of total personal income.

The Whitmer administration argues stagnant state revenues make it nearly impossible to fix Michigan’s crumbling roads without some form of new taxes or fees, but critics fear any significant increase could derail the state’s ongoing economic recovery.

Michigan Budget Director Chris Kolb

“The reason that we have these needs is that we have not provided the resources that we need to be able to fix our roads, to improve our schools and protect our water,” Budget Director Chris Kolb told reporters Friday after a bi-annual Consensus Revenue Estimating Conference.  

Michigan voters in 1978 approved a constitutional amendment that limited the amount of tax and fee revenue state government is allowed to collect in any given year, establishing a cap of 9.49 percent of total personal income — the same ratio as 1977.

For 2019, Michigan residents are expected to earn a collective $460.3 billion, according to the U.S. Department of Commerce Bureau of Economic Analysis. That means the state could impose as much as $43.7 billion in taxes or fees on residents and businesses under the so-called Headlee Amendment.

But the state is projected to collect $33.4 billion in taxes and fees this year, $10.3 billion below the cap, according to the nonpartisan House and Senate fiscal agencies. The gap is expected to grow to $12.1 billion by 2021 as personal income growth continues to outpace tax and fee revenues.

State Treasurer Rachel Eubanks attributed the growing disparity to tax cuts and other policy changes in past decades and previous administrations.

“We certainly haven’t seen major state revenues grow in quite some time, so I think that calculation is a reflection of that,” Eubanks said.

There are also some “structural” factors that limit Michigan tax growth, said Deputy Treasurer Jeff Guilfoyle. Health care is a growing sector of the economy but is not subject to the state sales tax, he noted. Proposal A of 1994 also capped annual growth in taxable property values at the rate of inflation.

“$10 billion in a population of 10 million is a big number,” Guillfoyle said. “It’s sort of a shrinking of the public-sector share of the economy. And it’s not a one-year thing. It’s an ongoing trend in Michigan.”

Michigan ranked 13th in the national Tax Foundation’s 2019 business climate index, which measures state tax burdens. Michigan ranked 11th lowest for corporate income taxes, 12th for individual income taxes, 11th for sales tax and 22nd for property taxes.  

While the state has not passed any major individual tax cuts in recent years, former Gov. Rick Snyder and the GOP-led Legislature in 2011 slashed business taxes by $1.8 billion while scaling back exemptions for individuals. In 2015, Snyder and lawmakers agreed to restore some of the Homestead Property Tax Credit that had been cut.

The State Treasury projects Michigan will collect $10.3 billion in personal income taxes this year, $8.3 billion in sales taxes, $1.8 billion in use taxes, $914.1 million in tobacco taxes, $553.7 million in general business taxes and $117.5 million in casino tax revenues.

Senate Appropriations Chairman Jim Stamas, R-Midland, said any significant tax increases could jeopardize the state’s ongoing and prolonged recovery from the Great Recession.

Michigan lost 859,133 thousand jobs between 2000 and 2009, according to University of Michigan economists, who project the state will have replaced 687,600 of those jobs — or roughly 80 percent — by the end of 2021.

“We’ve not even reached the actual recovery of growth,” Stamas said. The state revenue cap gap “probably becomes a more substantial factor once we’ve actually achieved getting back to where we were from the" Great Repression.

State officials on Friday agreed to modest revisions for revenue estimates that will guide ongoing budget negotiations with the Democratic governor and GOP-led state Legislature. They raised projected revenue estimates for the current year by $83.3 million but decreased projections by $27.8 billion for 2020 and $17 billion for 2021.

“Revenues are going to be essentially flat,” Eubanks said.

Overall, revenues for the state General Fund and School Aid Fund are projected to climb 1.2 percent in 2020 and 2 percent in 2021, from $24.3 billion to $25 billion. Those gains would roughly match the rate of inflation.  

Michigan also collects restricted revenues — including gas taxes — that are not included in those totals. Combined, the state collected an estimated $32.9 billion in taxes and fees in 2018 and is projected to collect $34.7 billion by 2021.

Whitmer in March proposed a $2.5 billion increase in fuel taxes, to be phased in over two years through three separate 15-cent per-gallon increases totaling 45-cents. Michigan’s infrastructure is in a state of “crisis,” the governor said Thursday after touring the decrepit Miller Road Bridge in Dearborn.

But Republicans have scoffed at her proposal, which would give Michigan the highest fuel taxes in the nation. The state Senate this week approved a budget that does not include the fuel tax revenue but is expected to present longer-term road funding alternatives in coming weeks and months.

Stamas said any proposal for higher taxes or fees should take into account the potential impact on disposable income growth for Michigan residents, which is projected to jump roughly 2 percent this year, in part because of low inflation.

“It’s slow and steady growth,” Stamas said. “I think we have to be careful how we affect that.”

Whitmer’s $60.2 billion budget proposal — which includes federal funding sources and the first phase of the gas tax hike — would represent a 3.6 percent spending increase over the current year. The Senate's $58.2 billion budget plan proposes $971.7 million in new spending, but most of that is restricted federal Medicaid funding.

The state is required to balance its budget by Oct. 1 or risk a government shutdown. The governor's fuel tax plan would generate $1.9 billion a year for roads by 2021 but also free up $600 million to boost funding for K-12 schools and other top priorities.

“There is no huge pot of money out there that’s going to help us make some decisions,” Kolb said. “So we need to come together and make the decisions that the people are really depending on to meet the critical needs here in the state of Michigan.”