More Bad Tax Policy from Michigan

May 24, 2007

Michigan lawmakers, already busy attempting to replace the revenue from the $2 billion a year Single Business Tax (SBT) scheduled to be repealed at the end of the year, are currently scrambling to plug an alleged $800 million budget deficit.

Their focus is currently on raising the state’s individual income tax from 3.9 percent of adjusted gross income to a rate somewhere around 4.5 percent.

From the WOOD NBC 8 Grand Rapids:

The Democrat-controlled state House could vote as early as Thursday on whether to raise the state’s income tax. One version would boost the current income tax rate of 3.9 percent to 4.4 percent. Yet another version, this one formally introduced in the House, calls for temporarily raising the income tax to 4.6 percent.

Michigan’s individual income tax is the 12th best in the country according to our 2007 State Business Tax Climate Index, and helps moderate Michigan’s overall business tax climate which ranks 27th overall. A higher income tax rate would drop Michigan’s ranking and make it a less business-friendly state.

Raising the state’s income tax would not only hurt the state’s business tax climate and raise its tax burden, but it would also provide more incentive for people to leave Michigan. Michigan is one of only five states to have lost population between 2005 and 2006, and only two states lost people at a faster pace, Rhode Island and Louisiana, according to the Census Bureau. Louisiana at least has the excuse that it was devastated by Hurricane Katrina.

Michigan can ill afford to create more incentives for people to flee the state. Even temporary tax hikes to close the deficit will drive people away, and temporary tax increases often end up being permanent. Just ask the taxpayers of North Carolina, where temporary hikes in the income and sales tax passed in 2001 that were supposed to expire in 2003 are still in effect. North Carolina’s tax burden has risen rapidly since the “temporary” hikes were instituted.

Michigan could do its taxpayers and businesses a favor by avoiding tax hikes to close the budget deficit and focus their attention on cutting spending. There might not be enough revenue to buy all Michigan kids an iPod, but even with less revenue there should be enough money to bury the dead.

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A 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.

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.