Michigan: Income tax cut proposal triggers fears of Kansas-like problems

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Lawmakers recently introduced House Bill 4001 (HB 4001), which would reduce the state income tax rate over time until it reaches zero in the year 2057. The current rate of 4.25 percent would drop to 3.9 percent on January 1, 2018, and continue falling at the rate of 0.1 percent each year.
In addition, HB 4001 would eliminate existing provisions that call for an automatic decrease in the income tax rate when General Fund (GF) revenues increase from one year to the next by more than inflation, effective in 2023. 
The fiscal analysis projects a reduction in net income tax revenue by approximately $680 million in fiscal year 2017-18, and $1.12 billion in fiscal year 2018-19. After that, the ongoing 0.1 percent reductions would cause revenue to fall by $400 million per year. The GF would bear all of the reduction in tax revenue. 
The analysis also estimates that the plan would have no impact on refundable credits like the Homestead Property Tax Credit, and the Earned Income Tax Credit. Thus, an eligible taxpayer could still claim these credits despite paying no income taxes. For the tax year 2015, claims were $511.1 million and $109.5 million for these two credits, respectively. 
Last week, the House Tax Policy Committee approved of the legislation, sponsored by Rep. Lee Chatfield. MLive reported that Rep. Chatfield’s goal is to pass the state’s economic successes of the past two years down to the working people. Estimating that “a household with two working Michiganders could see a savings of around $200 on its tax bill,” he further reasoned that the cuts would boost the economy by “growing the state's workforce and giving people disposable income.” 
Michigan’s senate is considering a similar graduated income tax reduction measure, by way of Senate Bill 004 (SB 004). On January 1, 2018, the income tax rate would drop from 4.25 percent to 4 percent, and it would drop again by 1.0 percent annually each subsequent January 1 until it hits zero in 2022.
Not everyone thinks this is such a wise move. For example, the Michigan League for Public Policy (League) warned that 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.” This is because income tax revenue accounts for 44 percent of the state’s GF and School Aid Fund. The House’s fiscal analysis notes that body’s proposal “holds harmless” the School Aid Fund, so the GF would sustain the entire loss. 
As importantly, the League argued: 
[T]here’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.
The League looked at what happened in Kansas as a cautionary tale:
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.
We have addressed the Kansas problem at length, most recently in January, when Rise Up Kansas put forth its plan for tax reform intended to modernize the tax code and broaden the tax base. 
In a piece titled “In bid to eliminate Michigan income tax, fears of another Kansas,” Crain’s Detroit Business suggested that although Gov. Brownback expected his “pro-growth tax policy [to] be like a shot of adrenaline into the heart of the Kansas economy,” the “economic jolt that ensued was perhaps not what Brownback envisioned.”
Instead, Crain’s contended, the Sunflower State’s GDP grew at less than half the national rate, and revenue deficits forced K-12 schools to close early and led to funding reductions for universities. Gov. Brownback had to siphon hundreds of millions of dollars from state highway funds, and Moody's downgraded the state's bond rating twice. Last November, Kansas still had a $345 million budget hole. 
The latest in Kansas is House Bill 2178, which passed last week and provides that beginning in tax year 2017, the individual income tax rates mechanism would be altered to utilize a three-bracket system of 2.70 percent, 5.25 percent, and 5.45 percent, which would implement a tax increase for some. Current law contains a two-bracket system with rates of 2.70 and 4.60 percent. Also beginning with tax year 2017, HB 2178 repeals the exemption for non-wage business income that has been in effect since tax year 2013, and permits itemized deductions for medical expenses. Last week, the Senate passed the measure by a vote of 22-18. 
Despite the failure of Kansas’ tax cut strategies, some still want to see similar efforts in Michigan. The Crain’s piece pointed to one supporter who opined that the cuts are “responsibly phased in over a long period of time." 
Indeed, Crain’s recognized that disagreements continue to fester. The Mackinac Center for Public Policy, a free-market think tank, likes the cuts because “Michigan is still taxed too much. We should be a leader in efficient government. There is a very large body of academic literature on the link between taxes and economic growth. The literature almost always shows the negative link between high taxes and growth." On the other hand, a Michigan State University economist blamed the lead poisoning crisis on tax cuts, contending additionally that “tax levels are less important to determining economic growth than other factors, including the skill and education level of the workforce.”
As for the tax cuts currently at issue, Crain’s quoted a spokesperson for Gov. Rick Snyder, who asserted that “[t]here would need to be concrete data to demonstrate that there is adequate revenue from sources besides the income tax to ensure services for residents and investing in our statewide infrastructure would not be adversely affected.”

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