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From Governing’s Supplemental information | Introduction
Some reforms — notably restructuring the state’s property tax system in 1994 — have worked out well. A citizen initiative followed by legislative action raised the sales tax in order to broadly lower property tax burdens, creating a more balanced system. The state now pays for about 78 percent of school funding — compared with 29 percent prior to the change. With a guaranteed base of $6,700 per pupil, Michigan is making inroads toward a more equitable distribution of education money.
Then there are the cuts: About $32 billion in cumulative taxes were simply eliminated by former Governor John Engler’s administration and the legislature. Among the moves were the repeal of the intangibles tax on dividends and interest, increased personal exemptions for income taxes, higher deductions for children, generous new tax breaks for older people, a phase-out of the inheritance tax, and a planned five-year decline in income tax rates. The sales tax, which covered a fairly narrow range of transactions to begin with, was made even narrower. “Over the years, we’ve exempted little things here and there,” says Jay Wortley, senior economist for the state Senate fiscal agency. “We’ve nickel and dimed it.” While the economy boomed, all these changes were enormously popular — and helped contribute to Engler’s two easy reelections. But now state leaders are being forced to take a harder look at them. As a result of declining revenues, Michigan began drawing down its $1 billion rainy day fund two years ago, even as one-time money-raising gimmicks were being used to make ends meet. With a big gap to fill in FY2003, legislators needed to use another $650 million in one-time resources to balance the $9.2 billion general fund budget. They also increased the cigarette tax by 50 cents. Jennifer Granholm, the new Democractic governor, is likely to face a general fund budget gap of $1 billion to $1.25 billion for FY2004. What’s more, the legislature has pretty much ensured future budget problems with its actions affecting the state’s so-called single business tax. This consumption-focused tax replaced a variety of other individual taxes on business. It works much like a value-added tax, adding levies at every stage in the production of an item, based on the additional amount contributed to the price at that stage. Academics and tax experts loved the single business tax. Business generally hated it. And business won: In 1998, legislators began a gradual phase-out of the tax, softening the blow to the state treasury by stretching the process out over more than 20 years. At the time, they wisely stipulated that if Michigan’s rainy day fund fell below $250 million, the phase-out would halt temporarily. Since the rainy day fund is now down to $145 million, legislators were required this year to withhold a tax cut worth $87 million to the state’s businesses. But in a fevered effort to keep corporations happy, they accelerated the eventual demise of the tax, scheduling it for obliteration by 2010, more than a decade ahead of the original timetable. This is a problem. The single business tax still raises a lot of money — about $2.2 billion a year, or close to a quarter of the general fund budget. Its accelerated phase-out, combined with the five-year planned income tax cut, means that in 2010, the base of revenues for the general fund will be reduced by one-third from what it was in 1998. Michigan’s strict term limits law means that few legislators who made the decision will serve long enough to be accountable for it. Local governments are already screaming. To help solve its own budgetary problems, the state held back on $300 million in revenue-sharing funds to localities in the past two years. Another $53 million was cut in December. This is particularly painful as local governments have few options for raising revenues on their own. All local tax changes need state legislative approval, and many are simply forbidden, including some that are used routinely in other states, such as local-option sales or hotel receipts taxes. Local property taxes are restricted by a statewide ceiling, and income taxes can’t be imposed at the city or county level at all. “Revenue sharing has been sorely tested in the last few years,” says Michael Brady, of the Michigan Municipal League. “With their taxes capped constitutionally and legislatively, if localities don’t get the funding from the state, they can’t make ends meet.” On the positive side, Michigan can take pride in its management of revenue collection. The state is well known for its customer service and taxpayer outreach initiatives, including toll-free hotlines, a problem-resolution office, a walk-in taxpayer assistance office and training of volunteers to help senior citizens with their returns. Michigan has led in technology, as well. About half of income tax returns are handled electronically, and a Computerized Refund Information System (CRIS) provides information on the status of refunds. Technology also has played a strong role in streamlining the audit process. “It substantially improves our ability to do audits,” Roberts notes. “Auditors work at a faster clip, and taxpayers can get information a lot faster.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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ew states have transformed their tax systems as dramatically as Michigan has over the past decade. “It’s not that we changed any one tax,” says former state Treasurer Douglas Roberts. “We changed so many taxes that I won’t remember them all.”