Tax Analysts Blog

Michigan's Wrongheaded Approach to Tax Policy

Posted on Jul 29, 2015

Over the past few years, I’ve offered advice to both liberal and conservative politicians on tax policy. One of my pearls of wisdom is that both the left and the right should at least try to adhere to the concepts of sound tax policy. Both parties ignore and violate the principles of good tax policy every day. Liberals in Michigan offer the latest example.

As my colleague Maria Koklanaris reported, Michigan House Democrats want to increase the state corporate income tax by 3 percentage points and use the money to pay for roads. Perhaps spurred along by Sen. Bernie Sanders’s success, union groups in Michigan want to go even further. A group of unions called Citizens for Fair Taxes wants to raise the corporate income tax from 6 percent to 11 percent. It too would use the money to pay for transportation, the difference being that it wants to present the issue to voters in the form of a ballot initiative.

The unions say it’s time for corporations to pay their fair share — whatever that means. They also say that the state desperately needs more transportation spending. The unions, of course, are not really interested in fixing potholes. They are, however, interested in creating jobs.

Let’s assume Michigan needs more transportation spending—most states do. Using the corporate income tax to pay for highways is nonsensical for a couple of reasons. First and foremost, roads should be maintained through gasoline taxes. Economists have long asserted that society should payfor government services through user fees when possible. Because the gas tax acts like a user fee, transportation is oneof the few services in which this can be done efficiently. There are alternatives, such as mileage fees and tolls, but thegas tax remains the best way to pay for roads.

The second problem with the liberal approach in Michigan is that it focuses on pure politics. Advocates of raising corporate taxes are assuming that people will want to stick it to corporate fat-cat shareholders. This is right out of the ‘‘tax the rich and give to the poor’’ playbook. Except in this case,proponents want to tax the rich and give it to construction contractors. But it is not clear who pays the corporate income tax. There is some evidence, albeit from conservatives, that the tax burden falls on labor in the form of lower wages. If true, that would be ironic. And in 2015, the world is shifting away from taxing mobile bases like capital. Everyone is looking to lower statutory rates. It is odd that some in Michigan would like to raise rates a lot. It is even odder since there are better alternatives to pay for the needed services.

This is an excerpt of an article that will appear in next week's State Tax Notes.

Read Comments (1)

emsig beobachterJul 29, 2015

David: There are good reasons why transportation projects should e financed by
a mix of user fees and general revenues. Taxes on fuels may not be the best
user fee because of increasing fuel efficiency and the advent of electric
vehicles. Tolls would be the optimal user fee; if they are practical.

I agree that increasing the corporate income tax rate would not the tax of
choice as the general fund revenue source to finance transportation spending.

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