Proposal 5 would take political dysfunction in State Capitol to whole new level

Five years ago this week, Michigan lawmakers were hurtling toward their own fiscal cliff as a new budget year loomed with no spending and revenue agreement in sight.

A month of legislative chaos marked by a desultory combination of boredom, tension, recrimination and fatigue ended in the early morning of Oct. 1 when lawmakers gave final approval to an income tax increase that remains largely intact and a limited, but widely derided, expansion of the sales tax base that was repealed weeks later.

The income tax rate increase from 3.9 percent to 4.35 percent was approved in the House by a bare majority of 57 votes. Fast forward to June 14, 2012, when the House voted 97-13 to force the income tax rate back down to 3.9 percent by 2019 when the revenue loss would exceed $800 million. And by 2019, everyone who voted for this tax move will have been term-limited from office.

Then again, it's always easier to cut taxes than to raise them. Proving that last year's $1.7 billion business tax cut hasn’t sated the appetite for still more relief, the Senate on July 18 approved a retroactive Michigan Business Tax cut 36-1.

Senators did so even though, according to the Treasury Department and the Senate Fiscal Agency, the move could blow a $440 million hole in a 2013 budget put to bed some weeks earlier.

The measure is now on the House floor along with another bill, approved 38-0 in the Senate, that exempts from sales and use tax software services provided offsite in the "cloud." Estimated cost of that in 2013 is $10 million, with an estimate it could grow by 20 percent each year.

Gov. Rick Snyder’s administration is now on record opposing tax cut legislation that doesn’t also contain offsetting revenue increases or spending cuts. As the Treasury Department’s Howard Ryan told the committee when it was discussing the software bill on Sept. 12, the measure "isn’t paid for" and we have to "balance the budget."

Accounting for the budgetary impact of tax reduction remains a novel idea after years in which taxes were cut with little concern about what the impact would be. It remains to be seen whether Snyder would actually veto tax cut legislation approved by veto-proof majorities in the Legislature. Implicit in the governor's position is that Michigan may still have problems, but overall tax burden isn't one of them.

That’s because Michigan’s tax code is already constructed with plenty of restraint built in.

Tax limits are everywhere

As home values rise when the market inevitably picks up, taxable value growth in property tax bills will still be capped to inflation. Local government millage increases for public safety, transit and infrastructure routinely require voter approval. Most school districts are barred from assessing local millage for operating purposes. Any increase in the state’s 6-mill State Education Tax requires a vote of the Legislature.

Gasoline is taxed in two forms. While sales tax receipts rise (and fall) with the wholesale price, gasoline taxes earmarked for roads and transit -- assessed on a fixed 19-cent rate per gallon -- do not. Thus the gas tax paid on the fill-up of a 41-mpg Dodge Dart is half that of a Jeep Wrangler.

A Michigan sales tax act limited in scope compared to most other states reflects an economy when consumers purchased more goods than services -- when consumers, for example, bought their books and music in stores. Those who long ago swapped iTunes for CDs and Kindle editions for hardcover bestsellers receive a tax break every time they place an online order.

Unlike in most states, Michigan's flat-rate income tax doesn’t tax different income brackets differently. And as was the case in 2007, even raising the flat rate a modest amount apparently first requires shutting down government for a spell.

The result of all that restraint is that Michigan ranked second-to-last among Big Ten states in per-capita state and local tax burden, according to the Tax Foundation, which evaluated calendar 2009 receipts. Only Indiana was below Michigan.

That voters undoubtedly believe they are taxed more than they actually are leads majorities of those polled in two recent surveys to express support for Proposal 5, which would require either a two-thirds vote in the House and Senate or statewide voter approval for the establishment of a new tax, an increase in existing tax rates or an expansion of a particular tax’s base.

Business groups that backed the idea of financing the elimination of the Michigan Business Tax through assorted tax increases oppose the constitutional amendment effort financed by the Moroun family that owns the Ambassador Bridge. And for good reason: Had Proposal 5 been in effect last year, the MBT would still be in place.

If you assume Proposal 5’s passage, it’s hard to imagine assembling a supermajority to increase the gas tax to finance road construction or to expand the sales tax base to shore up public education. Handcuff the Legislature’s ability to improve the state’s economy through judicious use of the tax code makes the next downturn that much worse. And when that downturn hits, balancing the budget with a mixture of spending restraint and revenue increases would be politically impossible.

Thus cemented into place would be a 2007 level of dysfunction that makes support for tax limitation the logical response of the voter distrust that such dysfunction breeds. That’s why Snyder believes the central premise of his governorship -- rebuilding public trust in Lansing through sound fiscal stewardship -- would be set back by Proposal 5’s passage.

He and his allies have five weeks to make that case stick.

Peter Luke was a Lansing correspondent for Booth Newspapers for nearly 25 years, writing a weekly column for most of that time with a concentration on budget, tax and economic development policy issues. He is a graduate of Central Michigan University.