Michigan taxes: Businesses pay less, you pay more

People pay more.

Businesses pay less.

And the jobs picture is still clouded by slow growth and unemployment.

Four years into Gov. Rick Snyder's first term in office, that's the net effect of the signature tax reforms he pushed through the Legislature in 2011.

Snyder's plans relied heavily on the premise that lower taxes for businesses would create a stellar turnaround, ending the depression that gripped the state when he took office. And many of his changes made good policy sense.

But a close analysis of tax incomes shows that the cost of funding state government has shifted to those who can least afford it, and the job growth that would have justified that shift hasn't materialized.

That's a hard sell for a governor seeking re-election in a competitive race with a challenger who vows to reverse some of Snyder's most significant changes.

And with just a month before the election, Snyder has neither acknowledged the deficiencies of his tax policy, nor indicated that he's open to changing course.

How you're paying more

For some Michigan families, changes to tax credits and deductions have been deeply felt.

The state is collecting nearly $900 million a year more from individuals, many of them poor people who have lost tax credits or deductions.

Meanwhile, businesses pay about $1.7 billion less in taxes, all while job growth has slowed each year since the tax cuts took effect.

Michigan's individual income tax revenue jumped 25% between 2011 and 2012, a $1.4-billion increase. About $560 million of that is because of income growth, and much of that is because of a one-time spike in national income tied to changes in the federal tax code.

The remainder of the increase can be explained by deductions and tax credits that were either eliminated or modified significantly. For millions of Michigan residents, these were experienced as tax increases.

They include:

■ $270 million from a decrease in the homestead property tax credit.

■ $240 million from cuts to the Earned Income Tax Credit (EITC).

■ $200 million from the pension tax changes.

■ $50 million from the elimination of deductions for children.

■ $50 million from the elimination of the special exemption for age and unemployment compensation.

■ $90 million from elimination of other nonrefundable credits, such as city income tax, homeless/food bank contributions and contributions to public universities and public broadcasting.

The average taxpayer received half as much in credits in 2012 as in 2011. In addition, the new tax code freezes the individual income tax rate at 4.25%; before the changes, that rate was scheduled to drop 0.1 percentage point each year until it reached 3.9% in 2015.

In fact, Michigan had the fifth largest percentage increase in tax revenue collected from individuals, according to a survey of government tax collections by the U.S. Census Bureau during fiscal year 2013.

"By taking away taxes on business, you are increasing the burden on everything on else," said Norton Francis, a senior research associate at the Urban-Brookings Tax Policy Center. "The money has to come from somewhere."

Shifting tax burden toward individuals tends to hit the low-income population the hardest, Francis said: "High-income individuals tend to save more, those receiving the Earned Income Tax Credit pour that money right back into the economy and tend to spend locally."

Michigan taxpayers claiming the EITC and seniors able to claim property tax credits experienced some of the largest tax increases. About 793,000 tax returns qualified for the Michigan EITC in 2011; the average return was $450. In 2012, the average EITC credit dropped to $140 among 772,000 returns filed by Michigan residents. Senior citizens averaged about $740 in property tax credits in 2011, down to $590 in 2012.

The revamping of Michigan's tax code — described as some of the most sweeping tax reforms the state has seen since the mid-1990s, "involved a fairly significant tax burden shift; reducing business taxes and increasing individual taxes," according to a report by the Citizens Research Council, a nonpartisan research group.

It's a different story for businesses.

Revenue from business taxes fell by about $1.7 billion after the elimination of the Michigan Business Tax (MBT), replaced in 2012 by a 6% flat corporate income tax. About 95,000 businesses no longer pay state taxes. In addition, the repeal of the business personal property tax passed this year by the Legislature is estimated to reduce state revenue from business by $350 million in fiscal year 2017.

Where are the jobs?

While businesses have paid less in taxes, job growth is slowing. It's an astonishing outcome for a tax policy whose sole purpose was to put Michiganders back to work.

In 2009, at the end of the great recession, Michigan unemployment spiked at 14.2%, largely because of massive automotive and manufacturing job losses. Nationally, unemployment stood at 9.6%. Yet despite the overall decline, jobs began returning to Michigan in 2010, the last year of then-Gov. Jennifer Granholm's administration, as the auto industry improved. While the unemployment rate was 11%, Michigan added about 76,000 payroll jobs — more jobs than in any year since Snyder's tax cuts took effect, but still a fraction compared to the nearly 800,000 jobs lost over that decade.

At the end of Snyder's first year in office, Michigan added 97,000 jobs. The unemployment rate was 9%, a percentage point above the national rate of 8%. But in 2012, the first year of Snyder's business tax cuts, hiring grew by only 75,000 jobs. Between 2013 and 2014, just 32,000 jobs were added.

"It's fair to say that job growth has been slower in Michigan after the tax shift went into effect than the first year of Gov. Snyder's administration," said Charles Ballard, an economics professor at Michigan State University. "It doesn't mean that his policy wasn't successful, so much is determined by forces beyond control of the governor."

Ways to help the people

Taken individually, many of the changes that Snyder pushed made sense, say policy watchers and economists who saw the old tax code as antiquated and complicated.

The Michigan Business Tax, for instance, was almost universally loathed, and considered a disincentive for companies to locate or operate in the state.

"MBT was a labyrinthine business tax," said Ballard, "such a godawful mess — it was a mighty bad tax."

The hope, falsely placed or not, was that a simpler business tax that produced a reduction for thousands of businesses would jump-start hiring.

Snyder's pension tax was even described by the Free Press editorial page as a move toward fairness: Retirees with 401(k) accounts paid income taxes, so it didn't make sense to treat pensioners differently.

Other changes were simply part of the governor's fiscal philosophy, such as his overall dislike of tax credits, which he has described as built-in budget liabilities. His effort to balance a state budget that was routinely at least a billion dollars out of whack relied heavily on removing those kinds of liabilities up front.

But viewed in totality, Snyder's tax code revisions have placed a much heavier burden on individuals, and haven't resulted in sufficient job growth to bring Michigan in line with national unemployment numbers. In Michigan, the August unemployment rate was 7.4%, compared to the national rate of 6.1% in the same month.

In addition, the governor has balked at enacting other sensible tax changes that could help turn the jobs tide.

There has been no talk, for instance, of tying the new tax breaks for businesses to job creation, or of tax penalties for companies that eliminate jobs in Michigan or move them elsewhere.

Nor has Snyder discussed ideas such as a progressive individual income tax, which would require a constitutional change. Under many models, that would lower rates for the vast majority of low- and middle-income taxpayers, while raising rates for top earners to those similar in other states.

And Michigan is an outlier there: In 2012, only six other states had flat income taxes, while 34 had graduated tax rates.

Policy wonks can argue about business versus individual taxes, how to grow jobs, and how to keep more money in families' pockets. But analysis of results — and data — matter.

Credit where it's due

Most people, Ballard says, think of a business tax as "a tax on fat cats." But that's not entirely true, the Tax Policy Center's research shows: On average, taxes levied on business income are funded roughly 80% by shareholders, but about 20% by workers, in the form of lower wages.

But economists like Ballard and Francis say cuts to business taxes are unlikely to produce real employment changes.

For most businesses, the economy, not tax policy, guides investment, Francis said: "The literature suggests tax policy may make a marginal difference, but companies tend to make location decisions based on labor force, market and infrastructure."

Snyder is an accountant, a data guy whose entire leadership pitch hinges on Michigan's financial recovery. Four years into his term, there's no question that Michigan's economy has improved — along with the nation's.

Can Snyder take credit? That's the question voters should be asking.

Michigan's changing business tax structure (numbers for fiscal year 2013, in millions)

Below are revenue estimates for the impact of changes to Michigan business taxes for fiscal year 2013.

Source: Senate Fiscal Agency, State Budget Overview, August 2014

Breakdown of Michigan's $1.4-billion individual income tax increase, 2012 tax year (in millions)

Source: Michigan Department of Treasury