Michigan Passes Tax Hike

October 01, 2007

In what could be the final nail in the coffin for the Michigan economy, lawmakers passed a tax hike of $1.35 billion by expanding the sales tax to some services and increasing the income tax from 3.9 percent to 4.35 percent. See articles here, here and here.

Governor Jennifer Granholm, who pushed the hardest for the substantial tax increase, said the following:

This budget agreement is the right solution for Michigan, Gov. Jennifer Granholm said in a news release after the vote. We prevented massive cuts to public education, health care and public safety while also making extensive government reforms and passing new revenue. With the state back on solid financial footing, we can turn our focus to the critical task of jumpstarting our economy and creating new jobs.

Governor Granholm and the legislature fail to understand that governments cannot create jobs, only private industry can.

When a government expands its size by collecting more tax revenue, it takes money out of the hands of people and businesses that would have otherwise invested or spent it. The increased tax revenue is money taken from its most productive pursuit and put in the hands of lawmakers who cannot possibly know the best use of the money, since that can only be determined in the open market.

Ultimately, the tax hike will lead to a higher unemployment rate in Michigan since higher taxes will drive companies and people away from the state, which already has the highest unemployment rate in the nation.

The only potential bright spot in the budget plan was the expansion of the sales tax to services. However, this was also bungled in two ways.

First, only certain services were chosen to be taxed—see list here. The best sales tax base includes all user-end goods and services. But because not all services were added to the sales tax base, neutrality was not increased. Second, any expansion of the sales tax base to services should be coupled with a cut in the sales tax rate. Of course, this was out of the question since the base was not expanded to include the chosen services for reasons of policy, but because Michigan is in desperate need of revenue.

Michigan's economy is in dire condition, but lawmakers continue to put in place policies that will ensure its continued hardship. If Michigan lawmakers were running the automotive companies that made their state famous, they would increase the price of cars in the face of foreign competition that offered more affordable prices. Until Michigan figures out raising prices does not increase demand, the state's grim economic conditions will persist.

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