Michigan's Tax Structure Needs Reform and Sate will have 24% less revenue in 2010 FY.

(AP)
Senate Fiscal Agency director Gary Olson says money collected both for the general fund and the school aid fund are falling much faster than the state economy is shrinking, in part because residents and successful businesses are shelling out a smaller proportion of their personal income to the state.
"The revenue as a percent of personal income has just been plummeting," says Olson, who has headed the nonpartisan agency for 18 years. "These are very, very significant declines."
The percentage of their personal income that state residents and profitable businesses pay in state taxes has dropped over a full percentage point since hitting a high of 8.4 percent in the mid- and late 1990s. So far this fiscal year, the rate is 7.3 percent.
Residents aren't necessarily paying fewer tax dollars. But as their incomes have risen, they're giving the state a smaller proportion of their money -- 2 full percentage points less than they did a decade ago, Olson says.
Much of the reason for the drop is that Michigan has been cutting taxes and adding exemptions, essentially forcing state government to shrink. That's a welcome move to some, but a concern to others who worry the state is cutting too deeply into services such as education, policing and the safety net for the poor.
The state tax system also has failed to change as taxpayers' behavior has changed. Consumers are spending less of their personal income on sales taxes, for instance, because they're buying fewer goods, which are taxed, and more services, which are not.
"Our tax system, for a variety of reasons, is not keeping up with the economy," Olson says. "Part of it is tax cuts, but part of it is that we are not taxing things that are growing in the economy."
A number of public policy groups have been studying Michigan's tax structure, and a consensus is forming that some type of change is needed.
Among the possibilities being discussed so far: Dropping the overall sales tax rate and extending it to services; changing to a graduated income tax that would collect a higher percentage from the better-off; and changing the gasoline tax to generate more money for roads and bridges.
The revenue drop-off has contributed to the state's growing budget hole. Gov. Jennifer Granholm and state lawmakers have cut more than $400 million from the current budget and must find a way to make up a $2.7 billion shortfall in the budget year that starts Oct. 1, with a $1.8 billion deficit in the general fund and a $900 million shortfall in school aid fund.
Much of the deficit likely will be filled with federal recovery dollars. But those dollars disappear in 2011, when the state is expected to be facing an even bigger deficit.It's already in serious trouble because tax revenues have fallen dramatically in the past two years.
In the 2007-08 fiscal year, the state netted $9.4 billion for the general fund, its main checkbook. But it's expected to get 24 percent less in the budget year that starts Oct. 1. Net revenue for K-12 schools is expected to drop about 8 percent, to around $12.1 billion in the next fiscal year.
That means $3.2 billion less is being collected than two years ago for state programs ranging from prisons to child protection to K-12 schools and help for seniors, universities and local governments.
A 1978 constitutional amendment caps state spending at 9.49 percent of personal income, but tax revenue has dropped so low, the state could spend $7.5 billion more without hitting the limit, Olson says.
"These are very, very significant declines in revenues," he says. "There's been a pretty dramatic downsizing of state government."
He warns that, even when the economy improves, state revenues won't keep up with the growing prosperity.
State Sen. Gilda Jacobs, the ranking Democrat on the Senate Finance Committee, is starting to hold public hearings around the state to explain to voters that Michigan must change its tax structure if it's going to be able to support its schools, universities and state services in the years ahead.
"It's hard to go and tell people we really don't have a high tax burden when ... people are reeling from the effects of this bad economy," the Huntington Woods lawmaker said. "But if we're really going to be honest about how we're going to fix things, we need ... to give the people the correct facts so that when we do make changes, they'll understand."
House Republican Leader Kevin Elsenheimer of Kewadin agrees the state needs to revise its tax structure, but not as a way to solve the upcoming year's budget troubles.
"As we found out two years ago, it can be very messy, even disastrous, to try to solve budget problems through changes in tax policy," he said, referring to 2007 tax increases passed in a rush in the middle of the night to avoid a government shutdown. "Let's get the budget done and then start focusing on these major reforms."
Mike Boulus of the Presidents Council, which represents Michigan's 15 state universities, says the state needs to look beyond the quick fixes of its recent budget deals, and even beyond the proposals for the upcoming budget to close tax loopholes and cut spending.
"That might get us through this year, but it won't get us through next," Boulus said. "At what point do you deal with the broader issue of restructuring our whole system? Our tax system needs to be addressed."
On Wednesday, 27 of the state's human service advocacy groups ranging from the Michigan Catholic Conference to the Food Bank Council of Michigan and Michigan's Children warned Granholm and lawmakers that any more cuts to the state's safety net would leave many Michigan families without the resources to get by.
Jacobs said she's telling constituents about the options that could help Michigan change its tax structure to meet its future needs, and hopes taxpayers and her fellow lawmakers realize that trying to move forward with the current tax structure isn't going to work.
"We need to have a tax structure that is responsive to a growing economy. We don't have that right now," she says.
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Many of these tax structure issues will have to be put on the ballot for a vote of the people. There is a big push for a graduated income tax instead of our flat tax in Michigan. Others seem to be willing to go to a lower sales tax rate and a new tax rate for a new service tax, but in exchange want Michigan's corporate tax, the Michigan Business Tax, eliminated. So lots of big, big revenue/tax issues for the legislature to debate. They do not return to session until after Labor Day and have not left themselves much time to resolve these huge issues--not to mention time to convince Michigan voters to support these tax reforms when they are on the ballot in 2010. Todays legislature's method of having all issues debated and resolve only via Legislative Leadership and leaving the vast majority of legislators out of the debate is not suited to getting a consensus that will then go back home to the neighborhoods and sell the reforms to the voters.