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Michigan: Bad Tax Policy, Bad Economy

2 min readBy: Joseph Bishop-Henchman

Blogger WizardKitten joins the rest of the Michigan establishment in blaming the state’s very real economic woes on underfunded state government:

We are not properly funding our government to provide the services we need. And as far as the Republican claim that we need low, low, low business taxes to attract economic growth, a report by the conservative TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Foundation shows that Michigan is currently at #17 for the “best business tax climate in the nation, up from 28th in 2006”, beating out all out Midwestern neighbors except for Indiana, which came in at 12th.

First, it is true that Michigan scores #17 in our new State Business Tax Climate Index report. However, the structure of their business taxes, including the awful Single Business Tax or whatever they call it now, is much worse than average: 48th out of the 50 states. Michigan also has worse-than-average property taxes. Michigan’s sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. isn’t too bad in that they don’t let local sales tax jurisdictions define their tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. .

Second, the Index measures how a state raises revenue, and our State-Local Tax Burdens report looks at how much. As of last year, Michigan had the 27th highest state-local tax burden in the country, higher than Illinois and (of course) Indiana. Further, some states have improved their tax burden and Index score over time, while Michigan just languishes. Not exactly an inducement for investment.

Third, Michigan’s “Midwestern neighbors” that it “beats out” are the anemic rust belt states of Wisconsin, Illinois, and Ohio. Michigan shouldn’t rest in knowing that it has a better business tax climate than that group.

WizardKitten not only praised the Index but also tries to bury it:

Adding them up, it found South Dakota has the best business tax climate in the country.

But businesses aren’t exactly flocking there. South Dakota has attracted 94 new or expanded corporate facilities in the past three years, according to Site Selection magazine.

That’s just a fraction of Michigan’s 731 new corporate investments in the same time period.

Given that Michigan has twelve times as many people than South Dakota, that’s not too bad. Michigan has 0.07 “new corporate investments” per 1000 people while South Dakota has 0.11 per 1000 people. Of course, more important is how much new investment it represents, and the costs that the state incurred achieving it. Michigan, with its failed MEGA program, spends oodles trying to convince (and offering goodies to) businesses to locate to Michigan. South Dakota mostly rests on its tax climate to do the selling.

Michigan’s strategy for decades has been to spend tons of money on world-class higher education and superior infrastructure like roads, parking, and even a PeopleMover. But with a terrible business tax climate and an uncompetitive tax burden, there are no jobs. Most people will just take their diplomas and use those roads to drive to other states that have economic opportunities to earn a living.