Tax cut trigger will prove costly

This column originally appeared in The Alpena News on September 16, 2020

In 2015 as part of Gov. Rick Snyder’s push for road funding, the Michigan Legislature and governor established Public Act 180, which included a provision that created a trigger that would reduce the state income tax rate if Michigan’s General Fund/General Purpose revenue rises at a rate faster than inflation. In 2018, the Michigan League for Public Policy released a brief detailing the dangers of the impending trigger and outlining four primary concerns:

• Policymakers did not have enough information at the time of passage to know if the triggered tax cuts would be affordable.
• The tax cuts can be triggered during economic downturns or other times when revenues are badly needed.
• Income tax cuts primarily benefit the top 1% of taxpayers.
• The slated tax cuts enable policymakers to claim credit for cutting taxes while avoiding accountability for the consequences.

Now, we have updated information on how this tax cut will negatively impact state revenues in the future. The tax cut trigger was written to look at budget year 2020-2021 General Fund/General Purpose revenue as the base on which to calculate the trigger. And it just so happens that that’s turned out to be a real, real bad year to base any economic calculations on.

COVID-19 has created a fiscal crisis in the state, where state revenues have dropped dramatically. The state’s consensus revenue estimates put General Fund/General Purpose revenue at $9.5 billion, nearly $1.6 billion below revenues in budget year 2018-19. The combination of the reduction in revenues in budget year 2018-19 and the income tax cut trigger mean that the state will not be able to recover from the COVID-19 fiscal crisis for years.

According to estimates from the Senate Fiscal Agency, without the trigger, state General Fund/General Purpose revenues would return to 2018-19 levels by 2022-23. However, with the income tax cut trigger, the recovery will take four years longer. Based on the consensus revenue estimates, the income tax rate will be cut from 4.25% to 3.99% in 2022-23 and will continue to decline to 3.44% by 2029-30.

That’s a lot of numbers to keep track of, even for a tax policy analyst. But there’s only one number you really need to remember, and it’s a doozy: $15.7 billion. That’s how much revenue the state is estimated to lose over the next decade if this income tax trigger stands. That’s an average loss of $1.9 billion per year in state funds–funds that are vital to supporting everything else Michiganders care about. In budget year 2019-20, the Individual Income Tax contributed approximately 66% of General Fund/General Purpose revenue and 20% of School Aid Fund revenue, according to the Michigan House Fiscal Agency.

The state cannot afford more tax cuts, especially in the midst of the recovery from the COVID-19 fiscal crisis. Moreover, we know that these tax cuts are not equitable. The tax cuts are set to primarily benefit the top 1% of earners. Meanwhile, Michigan’s families with middle to lower incomes will be left to deal with worsening roads, underfunded schools and service reductions thanks to lost state revenue. According to the national Institute on Taxation and Economic Policy, a 0.25% rate reduction in the personal income tax will give the richest 1% an average tax cut of $2,778, while the bottom 60% will receive an average tax cut of $49. Also, the richest taxpayers will receive the largest share of the triggered income tax cut.

With COVID-19, the state is weathering an economic storm right now. But an all-out disaster is waiting in the wings with this income tax cut trigger. When this law was passed in 2015, no one could have imagined where we would be at in 2020. Increasing costs of administering state services and programs and decreasing tax revenues will mean that the state will be required to make huge cuts in services, which will hurt every Michigander. The current Michigan Legislature didn’t vote for this, but they do have the power to stop it. Lawmakers need to step up and repeal this harmful tax cut before the state’s fiscal health–and our way of life–are put into further peril.