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Higher Individual Taxes Could Slow Mich. Recovery

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LANSING (AP) – Michigan may be lucky to see much of an economic boost from new tax laws that take effect in 2012, according to a report evaluating the changes put into place by Republican Gov. Rick Snyder and the GOP-controlled House and Senate during the first half of the year.

The nonpartisan Citizens Research Council’s report says it expects a business tax cut will have a positive effect on business investment and Michigan’s reputation in the business community. But it sees potential pitfalls as individuals pick up the tab for higher income tax payments, reducing their ability to spend in ways that would spur the economy.

“The tax reforms enacted in 2011 have positives and negatives for economic growth,” it said. “However, because of the offsetting nature of these effects, any overall effect on growth, positive or negative, is likely to be small.”

That could be disappointing news not only for residents hungry for the state’s return to stronger economic health but also for politicians’ 2012 re-election hopes. While University of Michigan economists expect the state to add 53,200 jobs next year, it will be difficult to sort out how many of those come from dropping business taxes by $1.1 billion.

“If we add 30,000 jobs next year, there’s no way to know how much of that is attributable to the tax cuts,” said CRC President Jeff Guilfoyle. The tax cuts – which increase to $1.7 billion the following fiscal year – will definitely help spur business investment, but “it’s not something you would see bear fruit in the next six to eight months.”

The report gives the governor and Legislature credit for ending the state’s reliance on one-time fixes to balance the budget, tackling a structural imbalance between revenue and spending that had been ignored for years and putting aside money for the state’s rainy day fund and retiree health care costs.

Those changes are just as important as the tax changes to getting Michigan back on track, Snyder spokeswoman Sara Wurfel said Friday.

“The budget and tax plan was a comprehensive approach to hit the `reset’ button and tackle the state’s structural deficit once and for all, grow Michigan’s economy for more and better jobs, ensure core and safety net services and still build a strong foundation for the future,” she said in response to the report. The governor “is confident that these reforms will help fuel Michigan’s turnaround.”

Snyder said this spring that taxing more retirement income was necessary since Michigan had the most generous senior tax breaks in the country and, as a result, was pushing the tax burden onto younger residents.

But that rationale may not help Michigan House members up for re-election in 2012. Many voters will have paid a collective $559 million more in income taxes by the time they go to the polls in November, and some may want to punish Republicans who voted for the plan, which drew protesters to the Capitol earlier this year.

In addition to taxing more retirement income, the law also substantially reduces a tax credit for low-income workers, eliminates a $600 per-child exemption, shrinks the number eligible for a tax credit on property taxes paid and phases out exemptions for higher-income residents, among other changes. By fiscal 2012-13, Michigan residents will be paying $1.4 billion more in income taxes than they do now, even though the income tax rate will drop from 4.35 percent to 4.25 percent on Jan. 1, 2013.

The growing tax burden could slow the recovery, according to the CRC report. Consumer spending is considered the main driver to economic recovery, so anything that leaves consumers with less disposable income could hurt the state’s recovery by reducing consumption, Guilfoyle said.

Income taxes won’t be the only factor nibbling away at what consumers can spend. Public-sector employees such as teachers and state and local government workers also will lose a portion of their disposable income to higher health care premium and pension payments, if GOP lawmakers have their way.

Bills are pending that would either cap the amount public employers pay toward employee health care or limit that amount to 80 percent, requiring workers to make up the other fifth. Other bills would require state workers with defined benefit pensions – about half of those now working – to pay 4 percent of their pension costs. Teachers may be asked to do the same.

The CRC report also found that government spending reductions included in the budget that starts Oct. 1 could result in less money being paid to public employees or less income being earned by firms that do business with the government, which also could affect economic growth. And it warns that some of the business tax relief will go to out-of-state companies that are unlikely to spend their savings in Michigan.

Not everyone thinks the individual income tax changes will hurt consumers’ buying power, however.

East Lansing economist Patrick Anderson of Anderson Economic Group said he expects “the majority of taxpayers” will see little difference in their income tax payments. He added that the business tax cuts will boost the economy far more than any potential drag from higher income tax payments by individuals.

“The effect of the tax changes is unambiguously positive for Michigan,” Anderson said. “It eliminates an entire layer of taxation … (and) sends a signal that Michigan is getting a handle on its problems.”

Michigan State University economics professor Charles Ballard said cutting business taxes was a move in the right direction.

But he added that the implosion of the domestic auto industry was far more responsible for the loss of 860,000 jobs in Michigan between mid-2000 and December 2009 than business taxes, so simply cutting business taxes isn’t going to have an immediate effect on the state’s economic ills.

“It’s not necessarily saying the tax changes were bad, but we shouldn’t think it’s going to lead to some magical transformation of our economy,” Ballard said. “You don’t snap your fingers and all of a sudden increase a hundred thousand well-paying jobs.”

Copyright 2011 by The Associated Press.  All Rights Reserved.

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