Michigan lawmakers who would like to cut the state’s personal income tax rate may have found their way eased by a largely overlooked benefit: A rate cut would reduce the amount the state owes to corporations that are benefiting from extensive tax breaks and outright cash subsidies granted by the Michigan Economic Growth Authority during former Gov. Jennifer Granholm's administration.
The state’s liability to these corporations was revealed earlier this year, and shocked lawmakers preparing to adopt a budget for the coming fiscal year. Under a program repealed in 2011, corporations were granted some $9.38 billion in tax credits. The credits were "refundable," which meant that a company could get a check from the state for amounts that exceed its tax liability, with the benefits extending up to 20 years into the future.
In Lansing, tax cuts are always discussed in terms of their “cost” to the government, with this calculated as being equal to the amount taxpayers save. Under this way of thinking, $200 million in savings for taxpayers corresponds to $200 million less for the state to spend. On this basis, government officials routinely claim that Michigan can’t afford to cut taxes.
Tax-cut proponents, for their part, say this argument reflects a "static analysis" that ignores the increased economic growth associated with lower tax burdens, which in turn raises incomes and generates more tax revenue, in part offsetting the rate cut. Therefore, they say, conventional discussions of tax cuts overstate the extent to which they lead to foregone tax revenue.
That may be a controversial argument, but the effect of lower income tax rates on MEGA's liabilities for corporate welfare is clear, and based in simple math: They would be reduced, because the formula used to calculate the credits is based on personal income tax rates. Put simply, if those rates are lower, then the state doesn’t have to pay as much to the MEGA beneficiaries.
“The companies are awarded credits for each person they employ or retain on payrolls,” explained James Hohman, the assistant director of fiscal policy with the Mackinac Center. “The credits were based on what the employees were paid multiplied by the state’s personal income tax rate. That means that lowering the tax rate would lower the value of the credits and reduce their impact on the budget.”
The savings are small compared to the revenues the state would forego with a lower income tax rate, but it appears they would still reduce the net cost of a tax cut by 5 to 10 percent. Satisfyingly for some, they accomplish this by trimming the size of that $9.38 billion corporate welfare liability.
Rep. Jeff Farrington, R-Utica, the chair of the House Tax Policy Committee, said he was aware that lowering the personal income tax would also lower the cost of the MEGA tax credits.
“Yes, we keep being told there’s nothing we can do to reduce the credits, but that’s not so,” Farrington said. “Last year we made a change to the income tax that brought it down by 2 percent and doing so affected the cost of the credits.”
Among the lawmakers likely to welcome this tax-cut dividend is Senate Finance Committee Chair Jack Brandenburg, R-Harrison Township.
“I will say this: We’ve really done nothing over the past four years to reduce the tax burden on individuals,” Brandenburg said.
“In my opinion we should reduce the personal income tax. Part of the deal that was made back in 2007 was that the income tax would be reduced down to 3.9 percent, but that never happened. We were supposed to cut the income tax last year. [Senate Majority Leader] Randy Richardville and [House Speaker] Jase Bolger said we would do it in the election year, but then we were told the governor said he’d veto it, and it just didn’t happen.”
The Senate Fiscal Agency recognizes the impact that income tax rate changes have on the MEGA tax credits and mentions it, when applicable, in its bill analyses and state revenue projections. The state is expected to pay out more than $800 million in credits this year.