Enough is Enough: Business Tax Cuts Fail to Grow Michigan’s Economy, Hurt Budget–Executive Summary

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The $1.6 billion tax cut handed out to businesses in 2011 hasn’t grown the economy or created the jobs as promised, and is a significant culprit in the lack of revenue for roads and other state priorities. Instead, Michigan’s residents saw their taxes rise sharply, disproportionately hurting low- to middle-income families and seniors, and Michigan drastically disinvested in its roads, students and communities. Michigan businesses’ contribution to state revenue is estimated to fall by nearly 80% between 2011 and 2016; at the same time Michigan’s reliance on individual income taxes grew by nearly 40%. Meanwhile, a lack of state revenue has debilitated the state’s efforts to find funding for roads. Instead of tax cuts, Michigan needs to make investments in things Michigan residents and businesses value in order to create a Michigan that works for all.

Tax Cuts Hurt the State’s Budget, Roads

When these business tax cuts were enacted in 2011, it left the state without enough revenue to fund its basic needs, even when taking into account the huge tax increase on individuals. Michigan lawmakers have struggled to solve the road funding shortage over the last decade, a problem caused in part by the $1.6 billion drop in business tax revenue. The debate continues over the use of the state’s already-strained General Fund or raising new funds. Per-pupil funding through the foundation allowance, the largest unrestricted funding source for school districts, dropped significantly following the business tax cuts and has taken seven years to fully rebound above its 2009 peak. And Michigan communities have seen statutory revenue sharing cut significantly; cities, villages and townships have seen revenue sharing payments decline from over $600 million to approximately $250 million, and counties have seen reductions in state aid as well.

People Are Not Feeling the Recovery

Simply put, not all Michigan people are feeling the recovery. Michigan’s per capita income has lagged behind the nation and region. Michigan is roughly 12% below the national average, and 7% behind the region, including Minnesota. Additionally, when looking at the period just prior to the enactment of the business tax cuts through 2014, Michigan is one of the slowest growing states in terms of wage growth in the region, tied with Indiana.

Poverty remains high in Michigan. Nearly 1 in 6 Michigan residents, and 1 in 4 children, live below the poverty level ($24,000 a year for a family of four). One in three children lives in a household where neither parent holds a full-time job or is forced to piece together part-time jobs that do not provide stable employment. Reducing income for already struggling families can have adverse effects on children related to educational attainment, future earnings and health, thereby driving down economic growth.

Recovery Not Spurred by Tax Cuts

The jobs Michigan was promised when these business tax cuts passed have never materialized. Private job growth returned in 2010, and had its biggest increase in 2011, before the tax cuts took effect, with growth slowing after the tax cuts were implemented. Following the initial surge, Michigan jobs have grown at about the national rate since 2012. And while Michigan has seen net job growth since the official start of the national Great Recession, Michigan is still roughly 7.5% below its private job peak in 2000.

While the unemployment rate is near the national average, it is still one of the highest rates in the region, and it’s dropping in part because of a shrinking workforce. Michigan’s labor underutilization rate, which essentially includes all of those unemployed and underemployed, for 2014 was the 5th highest in the nation at 13.9% and its labor participation rate continues to remain below the national average.

Where to Go From Here?

The business tax cut “reform” hasn’t worked. In order to enjoy a robust economy and grow jobs, Michigan needs to invest in its people and its communities. To do so, Michigan policymakers should:

Resist the urge to cut business taxes any further. The business tax cuts in 2011, and the ensuing phase out of most personal property taxes, were too deep.

Explore new revenues that will allow the state to make strategic investments in the things people and businesses want. Policymakers could review and eliminate ineffective tax expenditures; revisit the tax shift of 2011 to determine if the Corporate Income Tax rate and base are sufficient; adopt a fairer income tax structure, which could cut taxes on most individual taxpayers and still bring in more revenue; or diversify the sales tax base.

Restore the targeted credits that help low- to middle-income people and the economy. A number of credits were reduced or fully eliminated as part of the 2011 tax shift. These credits are immediately used in the economy, being spent on transportation, childcare or household items. However, this shouldn’t be used as validation for a broad income tax rollback. Overall rate reductions help the wealthy more than lower income taxpayers and simply reduce state revenue that is necessary to pay for our vital services.