Michigan’s budget requires a stronger, more equitable revenue system

A version of this column originally appeared in The Alpena News.

The last several years have been unpredictable and unprecedented. The start of the COVID-19 pandemic brought a swift and dramatic impact on our economy, but also on the well-being of Michiganders. Thankfully, federal pandemic aid buoyed our budget, allowing us to continue to ensure Michigan families had access to healthcare, groceries, housing support and education. Additionally, direct federal support to families, including Economic Impact Payments, expanded unemployment benefits, and an enhanced federal Child Tax Credit helped families thrive, which also had a beneficial impact on our state revenues.

However, we’ve officially met the fiscal cliff, as these pandemic-era policies are winding down or have ceased completely. Federal support to Michigan’s budget is back to its baseline, and we need to rely on our own state resources to invest in what Michiganders need to thrive. 

At the Consensus Revenue Estimating Conference (also known as CREC), held last Friday in Lansing, state fiscal experts came to a consensus on the economic and revenue forecast for our state and the amount of money that will be available for the current and next state budget. And what they found is that our state revenues and revenue growth—and therefore our state budget—are returning to normal. The good news is that our economy appears strong and stable, and our revenues are coming in as projected. Unfortunately, as we’ve seen through the past decades of disinvestment, normal is not good enough.

The pandemic-era policies gave us a great opportunity to see the impacts of investing in our people. Through the enhanced federal Child Tax Credit, which Michigan should establish at the state level, child poverty nationwide was cut in half. Universal school meals gave our children the ability to go to school and learn without being hungry. Support for child care helped keep child care providers’ doors open. And continuous healthcare coverage through Medicaid allowed families to go to the doctor for illness, preventative care and annual checkups. With federal support winding down, Michigan needs to prioritize state investments in these areas.  With Michigan’s future revenue picture it will be challenging to do everything we need to ensure Michiganders can not only survive, but thrive. Simply put, Michigan’s budget needs and revenue projections are out of balance.

To address this, Michigan needs to move toward a strong, equitable revenue system that raises sufficient money to invest in the things Michigan needs and to do so in a way that requires everyone to pay their fair share. A recent report by the Institute on Taxation and Economic Policy found that Michiganders in the top 1%, those making more than $670,300 a year, pay an overall lower effective state and local tax rate (at 5.7%) than any other income group, including Michigan’s lowest income families, those making less than $21,300 per year (7.1%). While Michigan’s tax system isn’t the most upside down, it still makes income inequality worse. 

To help both long-term revenue sufficiency and tax equity, Michigan should enact a graduated income tax, which would mean that taxpayers with larger incomes pay higher marginal and overall effective tax rates. Despite having a flat income tax rate, Michigan’s personal income tax is somewhat progressive due to refundable tax credits such as the Earned Income Tax Credit, which helps working families make ends meet, and the Homestead Property Tax Credit, which offsets high property taxes. However, because the rest of Michigan’s tax code is very  regressive overall, the slight progressivity of the income tax does not go far enough to offset high tax rates elsewhere.

A graduated income tax would help this. Taxpayers making a low to moderate income would benefit from lower effective tax rates, and taxpayers making a higher income would be expected to pay their fair share. This would, at the minimum, flatten out the overall tax burden across incomes and would likely result in increased tax revenues in a fair and equitable way. 

As Michigan faces changes in revenues in the post-COVID era and works toward strengthening its revenue systems, policymakers should prioritize funding in investments that help Michiganders thrive–including affordable child care, quality education, access to healthcare and safe housing. We can make a Michigan that works for all of us.