Charles L. Ballard Department of Economics Michigan State University East Lansing, MI ballard@msu

1. Let’s Have a Graduated Income Tax And Eliminate the Michigan Business TaxPresented atGerald R. Ford School of Public PolicyFebruary 9, 2009 Charles L. Ballard Department of Economics Michigan State University East Lansing, MI ballard@msu.edu

2. Reasons to Enact a Graduated Income Tax in Michigan • Increase in Income Inequality: Ability to Pay Taxes is Increasingly Concentrated 2. Federal Deductibility: We Leave Money on the Table 3. Revenue Responsiveness: A Flat Rate Contributes to the Structural Deficit 4. Public Support

3. Incomes Have Stagnated for the Bottom Half of the Michigan Income Distribution

4. Another Look at the Increase in Inequality

5. Michigan is One of Only Seven States With a Flat-Rate Income Tax. • Michigan’s Flat Income-Tax Rate of 4.35% Means That The Top Rate Is Among the Lowest in the U.S., and the Rate on the First Dollar of Taxable Income Is Among the Highest.

6. Top Marginal Tax Rates in State Individual Income Taxes, January 2008 1. California 10.30% 30. Maryland 5.50% 2. Rhode Island 9.90*** Oklahoma 5.50 3. Vermont 9.50 32. Massachusetts 5.30* 4. Oregon 9.00 New Mexico 5.30 5. Iowa 8.98 34. Alabama 5.00 6. New Jersey 8.97 Connecticut 5.00 7. Dist. Of Columbia 8.50 Mississippi 5.00 Maine 8.50 New Hampshire 5.00** 9. Hawaii 8.25 Utah 5.00* 10. Minnesota 7.85 39. Colorado 4.63* 11. Idaho 7.80 40. Arizona 4.54 12. North Carolina 7.75 41. Michigan 4.35* 13. Arkansas 7.00 42. Indiana 3.40* South Carolina 7.00 43. Pennsylvania 3.07* 15. Montana 6.90 44. Illinois 3.00* 16. New York 6.85 45. Alaska 0.00 17. Nebraska 6.84 Florida 0.00 18. Wisconsin 6.75 Nevada 0.00 19. West Virginia 6.50 South Dakota 0.00 20. Kansas 6.45 Texas 0.00 21. Ohio 6.24 Washington 0.00 22. Georgia 6.00 Wyoming 0.00 Kentucky 6.00 Louisiana 6.00 Missouri 6.00 Source: Federation of Tax Administrators Tennessee 6.00** 27. Delaware 5.95 * Flat-rate income tax 28. Virginia 5.75 ** Tax applies only to dividend and interest income 29. North Dakota 5.54 *** State tax is 25% of federal tax liability

7. Marginal Tax Rates On First Dollar of Taxable Income In State Individual Income Taxes, January 2008 1. North Carolina 6.00% 26. Alabama 2.00% Tennessee 6.00** Kentucky 2.00 3. Minnesota 5.35 Louisiana 2.00 4. Massachusetts 5.30* Maine 2.00 5. New Hampshire 5.00** Maryland 2.00 Oregon 5.00 Virginia 2.00 Utah 5.00* 32. New Mexico 1.70 8. Colorado 4.63* 33. Idaho 1.60 9. Wisconsin 4.60 34. Missouri 1.50 10. Michigan 4.35* 35. Hawaii 1.40 11. New York 4.00 New Jersey 1.40 Dist. of Columbia 4.00 37. Arkansas 1.00 13. Vermont 3.60 California 1.00 14. Kansas 3.50 Georgia 1.00 15. Indiana 3.40* Montana 1.00 16. Pennsylvania 3.07* 41. Ohio 0.618 17. Connecticut 3.00 42. Oklahoma 0.50 Illinois 3.00 43. Iowa 0.36 Mississippi 3.00 44. South Carolina 0.00**** West Virginia 3.00 21. Arizona 2.59 22. Nebraska 2.56 Source: Federation of Tax Administrators 23. Rhode Island 2.50*** 24. Delaware 2.20 * Flat-rate income tax 25. North Dakota 2.10 ** Tax applies only to dividend and interest income *** State tax is 25% of federal tax liability **** First $2700 of “taxable income” has zero rate; next is 3%

8. With Full Federal Deductibility, Effective Marginal Tax Rate Imposed by Michigan Individual Income Tax is: ● 3.26% for Married Couple with $100,000 Taxable Income. ● 2.83% for Married Couple with $400,000 Taxable Income.

9. Public Support For a Graduated Income Tax in Michigan State of the State Survey Round 47 (1012 Michigan Adults, Interviewed January – March 2008) 57.2% Favor Graduated Income Tax 37.4% Opposed 5.3% Neutral

10. Detail of Responses to Question About Graduated Income Tax GroupFavorOpposeNeutral All 57.2% 37.4% 5.3% Men 59.5 37.9 2.7 Women 54.8 37.0 8.2 White 57.4 38.4 4.2 Black 60.5 24.5 15.1 <$30,000 78.1 18.0 3.8 $30,000-$50,000 51.5 42.9 5.4 $50,000-$70,000 57.3 33.1 9.7 >$70,000 49.0 49.0 2.0 Democrat 64.9 26.4 8.6 Republican 36.5 60.8 2.7

11. The Michigan Business Tax:Why Tax Businesses At All? Some may believe that business taxes are borne by owners of capital, and are therefore progressive. However: • Economic incidence is complicated, and much of the burden of state business taxes is in fact probably borne by workers, and (b) The public doesn’t appear to perceive business taxes as progressive.

12. Public Perceptions of the Incidence of Taxes on Businesses in Michigan State of the State Survey Round 48 (1008 Michigan Adults, Interviewed May – July, 2008) Passed on to Consumers: 43.5% Passed on to Workers: 15.3% Passed on Investors: 4.6% Shared Equally: 36.5%

13. Thus, if we were to eliminate the Michigan Business Tax, and introduce a graduated income tax, we would: • Increase the overall progressivity of Michigan’s tax system. • Simplify our tax system, by eliminating a tax that creates administrative and compliance headaches. • Increase the amount of taxes exported to other states, through federal deductibility.

14. Income Tax Rates Necessary To Achieve Various Revenue Goals: • To replace the existing income tax and the MBT with a flat income tax, rate ~ 5.6%. • With a graduated income tax, top marginal rate could be in the ballpark of: • Below 6% to replace existing income-tax revenues. • 6.5% to replace revenues from income tax and old SBT. • 7.9% to replace revenues from income tax and MBT.

15. One possibility worth considering: • Replace existing income-tax revenues and old SBT revenues with a graduated income tax, with rates similar to those in Kansas. • Replace the MBT surcharge with revenues from other sources, such as a broadened sales tax.

16. State and Local Taxes As Percent of Personal Income: • Michigan Remains Quite Close to the National Average • National Average Has Fallen Substantially