Above, panelists at CRC’s March 19 discussion at the Michigan Chamber of Commerce on state tax competitiveness, L-R: Jason Puscas, Charley Ballard, and Jeff Guilfoyle.

Finding a balance between competitiveness and adequacy in our state and local tax systems – i.e., the right mix between maintaining a friendly tax environment for businesses and generating sufficient revenue to provide quality government services – is a difficult yet crucial goal for state policymakers.

Different perspectives

Earlier this week, the Citizens Research Council held a panel discussion in Lansing on this issue, bringing together voices from state government, academia, and business. The event was co-hosted by Ernst & Young, Consumers Energy, and the Michigan Chamber of Commerce, all long-time supporters of the Research Council’s mission and its work to inform public policy discussions in our state.

State Treasurer Rachel Eubanks greeted the audience and shared highlights of the recent tax policy proposals of Governor Whitmer’s administration.  

Research Council President Eric Lupher offered some background information on where Michigan tax policy stands relative to the rest of the nation as a starting point for the discussion.

The panelists offered three different perspectives on the topic. Jeff Guilfoyle, Chief Deputy Treasurer; Charley Ballard, economics professor, Michigan State University; and Jason Puscas, Detroit Regional Chamber, all have backgrounds that inform administrative, academic, and private-sector views on the issues of tax competitiveness. Puscas discussed the interplay of  competitiveness and adequacy in attracting businesses to locate in Michigan. Ballard helped explain the economic conditions behind that give and take relationship. And Guilfoyle discussed how these factors played a role in developing the Governor’s tax proposals currently before the legislature.

The panel fielded questions regarding the distribution of state taxes, alternatives to tax increases, and the nature of state revenue sharing.

Competitiveness and Adequacy

One theme that reverberated across several answers was the need for balance, the tricky calculus of maintaining a welcoming business climate (lower taxes) while at the same time ensuring that enough taxes are collected to finance public services that make the state a desirable place to live and do business, i.e., higher taxes. There’s no simple formula, and it requires constant attention.

If taxes are too high, there is less of an incentive to invest in the state. Michigan is competing against other states to attract business investment, and must consider how those states are doing their own balancing act. Tax policy has a real effect on where businesses choose to start up or relocate, and Michigan has taken steps to improve the business climate in recent years, Puscas said. Michigan is tied with the 29th highest Corporate Income Tax rate, with only 10 states that levy a Corporate Income tax applying one at a lower rate. State and local governments collect the 34th highest revenues per capita, compared to 1999 when Michigan was 16th. Governor Rick Snyder made improving the business climate a first-term priority of his administration, and the changes in state rankings show those results.

While remaining competitive is important for Michigan’s long-term economic growth, the panelists also cautioned that the business climate is not the only important factor. Functional infrastructure and quality public services are essential for recruiting and maintaining a strong workforce. Poor infrastructure can create hidden taxes, as seen with Michigan’s roads, where drivers pay an estimated $4.6 billion a year in road-related maintenance. Maintaining a quality education system is also important. Poor performing schools serve as a disincentive for younger workers to move to an area.

Michigan’s business climate improved over the last two decades, but the performance of some core government services, particularly infrastructure (roads, bridges, water systems, etc.) and k-12 schools, are towards the bottom of national rankings. While the Snyder administration made several changes to improve the state’s tax competitiveness, including the major business tax restructuring and personal property tax reforms, Governor Whitmer appears focused on tax changes intended to increase investments in state services that are the backbone of recruiting a talented workforce.

Appropriate balance between competitiveness and  adequacy is subjective for sure. What is considered an effective tax level and what role the government has in providing core services are necessary questions to answer in finding a balance, but they often require personal value judgments. As Ballard put it during the discussion, “the economics of taxes are easy; the politics are hard.”