Tax Policy – Michigan Voters Could Allow Governor to Oversee a .5 Billion Tax Increase by Executive Fiat
A Michigan group, Michiganders for the Commonwealth, is coordinating a petition drive to put a constitutional amendment raising taxes overall while creating a graduated income tax on the ballot in November. Voters have overwhelmingly rejected such proposals in the past, and this particular measure has the added complexity of binding the legislators to act but leaving the details up to them, while vesting the governor with extraordinary authority should they be unable to agree.
While the proposed amendment does not outline any specific rates and brackets, it requires that the legislature change the individual income tax in four ways:
- Establish more than one marginal tax rate.
- Reduce the rate for individuals with an annual taxable income of $175,000 or less ($350,000 for joint filers).
- Raise the rate for people with an annual taxable income over $175,000 ($350,000 for joint filers).
- Increase individual income tax collections by $1.5 billion a year, not giving the legislature the option to decrease collections again until 2025.
The funds from this increase would be dedicated to education and infrastructure.
If the legislature does not create this new tax system by June 1, 2021, Gov. Gretchen Whitmer (D) would be required to create the system by an executive order by September 1, 2021.
This movement borrows a name from the “fair tax for Illinois,” which has its own share of unintended consequences. To place this measure on the ballot, this group would need to gain 425,000 voter signatures by July.
According to the Michigan Department of Treasury, taxpayers in the state with more than $170,000 in AGI currently provide 41 percent of the state’s individual income tax revenue (Treasury does not specify collections from those with $175,000). To come up with an extra $1.5 billion in revenue, as required by the proposal, the state would have to increase tax collections on that group by 41.6 percent, even before accounting for any reductions for the remaining taxpayers.
Constitutional amendments bind legislatures by definition; they cannot act contrary to their provisions. It is unusual, however, for an amendment to direct legislators on how to vote, or to set up a situation where something as fundamental as tax rates and brackets can be established by executive fiat if the legislature fails to come to an agreement. Indeed, should the governor favor a more aggressive proposal than the legislature, she could just veto the legislature’s efforts and create a new income tax code on her own, absent any checks and balances. This raises serious constitutional questions which would likely be addressed in court.
This change would also affect Michigan’s competitiveness with neighboring states. Currently, the Wolverine State has a flat individual income tax rate of 4.25 percent. This compares well to neighboring Ohio and Wisconsin, which have graduated income taxes with top rates of 4.797 and 7.65 percent, respectively, but is higher than Indiana’s flat rate of 3.23 percent. If Michigan eliminated its flat rate system and levied a top rate above Ohio’s and close to or above Wisconsin’s, it would weaken the state’s competitive advantage in the region. It would also drop Michigan’s ranking on our State Business Tax Climate Index, both on the individual income tax category and overall, although definite rankings are not possible without specific rates and brackets. Importantly, while Michigan’s income tax features a single rate, it already contains progressive elements due to available deductions, exemptions, and credits.
Even beyond the uncompetitiveness of this specific plan, there are broader problems with graduated income taxes. High taxes on income are generally among the least desirable taxes because they discourage wealth creation. A comprehensive review of international econometric tax studies found that individual income taxes are among the most detrimental to economic growth, with graduated-rate income taxes being particularly unfavorable. In addition, a 2002 study by economists Glenn Hubbard and William Gentry showed that states with graduated income taxes have lower rates of upward job mobility.
Michiganders would do well to maintain a flat rate income tax, rather than moving toward a less-competitive graduated rate structure paired with a $1.5 billion tax increase.