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Michigan Considering Replicating Kansas’ Failed Tax Cut “Experiment”

February 16, 2017 at 10:45 AM

Michigan lawmakers are seriously considering bills to start phasing out the state’s income tax sooner than scheduled under current law. Both proposals would likely force some combination of deep cuts in critical services like education, health care, and infrastructure and increases in sales and other regressive taxes. And, just as Kansas learned from its disastrous “experiment,” cutting personal income taxes won’t likely boost the state’s economy in any meaningful way.

Under current law, the income tax could begin phasing out in 2023, with small tax cuts taking effect (or “triggering”) any time annual revenue growth exceeds roughly one and a half times the inflation rate. Triggers like this, however, don’t make large tax cuts fiscally responsible, as our recent report explains.

Now, some lawmakers want to scrap even this inadequate trigger and start phasing out the income tax next year. The House bill would cut the flat-rate income tax from 4.25 percent to 3.9 percent next year and by 0.1 percentage points every year thereafter until the tax disappears on January 1, 2057. The Senate bill would cut the rate to 4 percent next year and then by 1 percentage point per year until it disappears in 2022.

The House bill would cost $680 million in the nine months of fiscal year 2018 in which it would be in effect and $1.12 billion the following year, official estimates say. There’s no official estimate for the Senate bill.

The income tax will supply an estimated 44 percent of the total tax revenue for Michigan’s General Fund and School Aid Fund combined next year. Eliminating such a large revenue source — no matter when it occurs — could decimate the state’s ability to provide critical services.

Moreover, there’s ample evidence that cutting income taxes won’t boost Michigan’s economy. Six years ago, Michigan cut business taxes by $1.6 billion annually, yet the rate of private sector job growth fell in each of the next four years. And if a state’s income tax rate significantly affected its economic growth, Michigan’s economy would already outperform the vast majority of states, since its top income tax rate is already the fourth-lowest of any state with an income tax.

More evidence comes from Kansas. In one fell swoop in 2012, Kansas cut its top individual income tax rate by 29 percent and eliminated income taxes on small-business income. Governor Sam Brownback predicted the tax cuts would “be like a shot of adrenaline into the heart of the Kansas economy,” but Kansas has badly lagged behind the nation as a whole — and most neighboring states — in job creation, economic growth, and small business formation since they took effect (see graph).

 

The cuts have also caused an ongoing fiscal crisis, forcing large increases in sales and other taxes, substantially draining Kansas’ financial reserves, and resulting in two downgrades to the state’s bond rating.

Michigan ranks 32nd among the states in the share of adult residents with at least a bachelor’s degree. Its K-12 students generally rank well below national averages in National Assessment of Educational Progress tests. And yet the state has cut per-student K-12 spending by 11 percent since 2008, after adjusting for inflation, and per-student aid to higher education by 21 percent. Also, the Flint water crisis shows why investing in infrastructure is critical to residents’ well-being.

If Michigan policymakers want to help revive the state’s lagging economy, they should focus on providing the educated and healthy workforce, and the good roads, bridges, snow removal, and other services, that businesses need — not on cutting the state’s already low taxes.