There is one basic test for fairness of a tax system: whether it reflects “ability to pay.” Using this measure, Michigan fails: The more you have, the LESS you pay, according to an analysis by the nonprofit, nonpartisan Institute on Taxation and Economic Policy.
“The very families which are struggling the most to cover basic needs are paying the highest share of their income in state and local taxes. This is upside-down,” said Gilda Jacobs, the former state senator who heads the Michigan League for Public Policy.
Michigan’s tax unfairness isn’t America’s worst, falling short of making ITEP’s “Terrible Ten” where “their poorest residents ... pay up to six times as much of their income in taxes as they ask the wealthy to pay.”
In Michigan, the gap is smaller, but still an eye-opener.
The bottom 20 percent — those with incomes under $16,000 — pay 9.7 percent of their income in state and local taxes. The top 1 percent — with incomes above $331,000 — pay just 5.8 percent of their income to support state and local services.
Former House Fiscal Agency Director Mitch Bean reports that, over the last decade, Michigan has seen a major shift away from income and business taxes to sales and property taxes, which places more of the tax load onto lower-income individuals. During that time:
• Property taxes went from 20.6 percent to 25.9 percent of total state/local tax collections.
• Sales and excise taxes — the most regressive general tax — grew from 21.5 percent to 23.5 percent.
• State and local income taxes, which most closely reflects ability to pay, dropped from 21.9 percent to just 11.8 percent of total revenues.
This “make-the-poor-pay-more” tax structure adds onto growing income inequality. Michigan State University economist Charles Ballard notes that “while the incomes of the top 1 percent have skyrocketed, the median worker who works full time year-round in the U.S. is less now than it was in 1973, if you adjust for inflation.”
“Before we even consider taxes, the standard of living of those at the top has pulled away from the standard of living of those in the middle and the bottom. When we pile a regressive tax system on top of an income distribution that is becoming more and more unequal, it adds up to an especially hard double whammy for everyone except those at the top,” Ballard said.
Snyder’s 2011 tax-shift package raised taxes on just about all low- and middle-income families. It included a pension tax, a 70 percent cut in the Earned Income Tax Credit, cuts of homestead property tax credits and elimination of multiple tax credits used by low- and middle-class families. His budget also slashed revenue sharing for local governments, forcing many to raise property taxes, which fall most heavily on middle-income families.
Michigan is one of just seven states with a flat-rate income tax, which ITEP says adds to tax unfairness. Ballard said moving to a graduated income tax would improve fairness with a bonus impact.
“If we were to adopt a graduated income tax that raises the same amount of revenue as the current income tax, Michigan residents would receive a net tax cut because more would come back to us from Washington, D.C.,” Ballard said. “The more heavily we rely on the income tax, the more we get back from the feds because income tax can be deducted on the federal returns of those who itemize,” which generally includes higher income bracket filers.
ITEP sounds a warning as Michigan debates transportation funding. Snyder and legislative Republicans are looking at a billion-dollar-plus sales tax increase.
Meanwhile, “Sales and excise taxes are the most regressive,” according to ITEP.
Michigan sales/excise taxes eat up 6.7 percent of the income of families in the bottom 20 percent, but only 0.9 percent of the income of the top 1 percent — a 633 percent difference.
A sales-tax-funded transportation program would mean the bulk of costs for fixing Michigan’s roads and bridges would fall on lower-income families, with a virtual free ride for businesses and the economic elite.
Short of a graduated income tax, Ballard said the next-best option would be extending the sales tax to cover most services. It would broaden the tax base and allow a reduction in the current 6 percent rate, while at the same time raise more money.
Most important, Ballard said a broad-based sales and use tax is far less regressive than the current sales tax: “Many of the items that are currently excluded from the sales tax are luxury items. When I use my untaxed Spartan football and basketball tickets, I don’t see a whole lot of poor folks in the crowd.”