The Citizens Research Council of Michigan recently published 2009 Tax Revenue Comparison: Michigan and the U.S. Average, an analysis of state and local government finance data recently released by the U.S. Census Bureau for 2009. The report shows that in 2009, Michigan’s total state and local tax revenue of $108.22 per $1,000 of personal income ranked 18th highest in the nation, which was slightly above the U.S. average and the same ranking as in 2008 despite a more pronounced decline in personal income from the Great Recession compared to the rest of the country. Michigan’s tax burden increased from 0.4 percent above the U.S. average in 2008 to 1.4 percent above the average in 2009. This change goes against a longer term trend which saw Michigan’s tax burden decrease from 8.4 percent above the U.S. average in 1979 to 0.4 percent above the average in 2008.
The Census Bureau report presents useful data for measuring and comparing tax burdens across states, because it includes both state and local government tax revenues. State and local government revenues combined provide the best comparisons of taxation across states, because of the varying assignments of service responsibilities and tax levies to support those services between state and local governments.
A state’s total tax burden can be measured in a number of ways, and each manner includes its own set of advantages and disadvantages; however, no single method of measuring tax burden can be considered perfect. Tax revenue as a percent of personal income measures the proportion of a state’s income paid in taxes. This contrasts with measures of the raw dollar amount paid in taxes per person, which can be distorted by the size of a state’s wealth.
June 2009 marked the end of the worst post-World War II national recession. Called the “Great Recession”, this period of economic decline had a profound, negative effect on state and local government tax revenue. In Michigan, declines in total personal income as a result of a “single state recession” that began in the early 2000s and continued through the Great Recession also played a major role in its government finances.
Since 1979, the U.S. average for personal income had been growing faster than Michigan’s personal income. Around the turn of the century the difference in growth rates became even more pronounced. Between 1999 and 2004, Michigan’s personal income grew by 15.9 percent while the country’s personal income grew by 25.6 percent. Even before the Great Recession, Michigan’s personal income was growing at a slower rate than the rest of the country.
Between 2004 and 2009, Michigan’s personal income grew by only 3.9 percent while the country’s personal income grew by 20 percent. The Great Recession negatively affected personal income growth for both Michigan and the rest of the country between 2008 and 2009, but the impact on Michigan was more pronounced because of the ongoing economic restructuring taking place in key industries (manufacturing).
In general, income tax revenues are highly elastic (meaning they tend to change by a greater percentage than personal income), sales tax revenues are less elastic than income tax revenues, and property tax revenues are relatively inelastic. Michigan’s heavy reliance on property tax revenue meant that its state and local tax revenues did not decline as fast as personal income between 2008 and 2009, resulting in an increase in tax revenue per $1,000 of personal income relative to the rest of the country. Tax revenue increased from $107.28 per $1,000 of personal income in 2008 to $108.22 per $1,000 of personal income in 2009.
Michigan’s increased tax burden is also a result of its economy faring worse than the national economy in 2009. Michigan’s personal income (the denominator in the ratio) fell by a greater percentage than national personal income, thereby affecting its standing relative to the U.S. average. However, this change in its standing relative to the U.S. average did not cause Michigan’s comparative tax ranking per $1,000 of personal income to change from 2008 to 2009. It remained 18th highest in the nation.
Some of the states close to Michigan in the 2008 rankings experienced relatively dramatic shifts in their rankings, such as Indiana (from 21st in 2008 to 14th in 2009) and New Mexico (from 16th in 2008 to 21st in 2009), but these changes offset each other and left Michigan in the same comparative position.