March 16, 2007

Michigan can’t tax its way to prosperity

(This commentary appeared in the Detroit News on March 16, 2007.)

With the recent announcement of Comerica’s relocation to Texas, the hemorrhaging of Michigan businesses continues. Astonishingly, instead of taking bold steps to make Michigan more competitive and attract investment, Gov. Jennifer Granholm’s plan to end the mass exodus of employers is to raise taxes on them.

Basic economics says that to become more competitive, you don’t raise your prices, you lower them. Since taxes are the price of living and working in a state, they are a direct cost for businesses and influence business investment decisions.

It is pure nonsense to think Ford or General Motors would attract customers by raising the price of cars. The same goes for raising Michigan’s tax burden to compete for business investment

As an economist, I have to shake my head in disbelief at the willful ignorance displayed by Granholm’s economic team. But as a Michigan native, it is also frustrating to see the community I grew up in suffer for it.

Comerica is only the latest is a string of high-profile departures by major Michigan employers. The companies slink out of town, claiming that it has nothing to do with Michigan’s punitive business climate, The fact is that money talks, so companies walk.

Michigan is indeed in a debilitating economic crisis, but no state has ever taxed its way into prosperity. Unfortunately, with a new, “stand alone” tax on business services and anew gross receipts tax, the governor hopes to be the exception to the rule. I wouldn’t advise anyone hold their breath.

In her State of the State Address, the governor called for “new investment” in the people of Michigan. Her priorities for this new investment, she said, will be education, health care and infrastructure. The hope is that higher spending on these initiatives will attract businesses back to Michigan.

But has a lack of spending been the problem?

According to Census Bureau data, Michigan spending grew more than 22 percent in inflation-adjusted terms from 1997 to 2004 — which exceeded the national average. Spending on health care and transportation grew faster in Michigan than any other state in the region.

If increasing government spending was all it took to create jobs, Michigan would have all the jobs it needs — instead of the frightening 7.1 percent unemployment rate.

Quite the contrary, the reason for the budget crisis in Lansing is that spending has outpaced tax revenue.

“When our Michigan economy falters, state revenues decline,” the governor said. That’s true. So why promote poor tax policies that will drive the economy further into the ground?

States can have a great public education system and the best roads in the country, but if a state’s tax system hinders growth and job creation, Michigan’s highly educated graduates are going to use the well-paved roads to drive to job opportunities in other states.

If the governor wants to raise revenue, then a rational tax system that will attract business investment should be the first step. Extracting heavier sums from the businesses that remain in Michigan will only give them the incentive to follow those that have already escaped.

Jonathan Williams is a Michigan native and an economist at the Tax Foundation in Washington, D.C.