Numbers tell a story. And even though numbers, or more likely their interpretation, can be flawed they help to provide fact-based decision making. Too many times, people rely on feelings or emotions which may or may not be rooted in reality.
Let me give you some real life examples.
In the last few years, we’ve often heard that Michigan is a high tax state and in order to stimulate our economy we need to reduce taxes. This statement has two features to it that are not supported by objective analysis: 1) Michigan has high taxes; and 2) lowering taxes will stimulate our economy.
When you look at a complete picture, Michigan is a moderately taxed state. We’re in the middle. Using data from the conservative and well respected, Tax Foundation’s website here’s what it shows: Michigan is 24th when looking at state, local and federal tax burdens. If you look just at state and local taxes, Michigan is 14th. Some could look at that ranking of 14th and say we’re relatively high, but it seems like the total tax load, state, local and federal gives a better picture of where we really rank.
The Tax Foundation itself provides implicit support for use of all taxes (local, state and federal) when evaluate a state’s rank. One of the “featured” methods for comparing states is called, “Tax Freedom Day.” This calculation determines how many days each taxpayer must work in order to pay all their taxes.
Tax Freedom Day basically answers the question, “What price is the nation paying for government. The answer for 2007 is 32.7 percent of our income. That percentage is converted into days worked. So if we started on Jan. 1, it would take until April 30 until we can start keeping some of our earnings.
Michigan’s Tax Freedom Day is April 27 giving us a ranking of 22 of total tax burden. Michigan’s total tax burden was listed as 31.9 percent with Federal equaling 20.7 percent and State/Local equaling 11.2 percent of income. The U.S. Average is 32.7 percent for Federal and State taxes with Federal being 21.7 percent and State/Local at 11.0 percent.
Even though Michigan is 22 in the ranking, we’re actually below the U.S. national average and our State/Local taxes are just 0.2 percent above the national average. If you look at the next eight states with “better” Tax Freedom Days, you’ll find the 30th state, Indiana, has a Tax Freedom Day of April 23 – which is not a huge difference from Michigan.
Let’s talk business taxes
What about business taxes? Well, also according to the Tax Foundation, Michigan ranked 27th overall for 2007. The Tax Foundation uses and indexes based on a variety of factors to determine this ranking. The index goes from 1 (least favorable to business) to 10 (most favorable to business). Michigan’s score was 5.15, with the US average being 5.0. Does that sound like a high tax state for business?
Since all numbers used are for 2007 they will change when our next tax increases go into effect, but looking at the numbers you can expect Michigan to stay somewhere in the middle of the pack.
But does staying in the middle of pack in terms of taxes really matter for economic development purposes? Or are other factors more important?
Michigan experienced significant tax cuts in the late 1990’s, amounting to at least $1.3 billion a year in reductions from 2001-02 and beyond. At the same time, Michigan based auto companies lost significant market share. Was their loss of market share due to the tax system, or was it the design, perceived quality and business acumen of their competition? If taxes were the problem, maybe the tax cuts Michigan enacted in the 1990’s would have helped, but if shifts in the competitive environment were the main factors, cutting taxes isn’t really the answer to the problem – especially since Michigan is not a high tax state.
What’s the answer? Igor Vojnovic, a researcher from Michigan State showed that the world’s largest corporations tend to concentrate in cities like New York, San Francisco, and Boston. These cities have higher taxes, and spend more on public infrastructure than most. They also tend to experience more commercial growth. Vojnovic says that to business, robust urban infrastructures such as education, transportation and telecommunications are more important than lower taxes.
“The best performing cities and regions,” he wrote, “maintain the most robust urban infrastructures..” He goes on to say, “…these investment patterns are consistent nationally and internationally as evident with Tokyo, Paris, London, Beijing, Seoul and Zurich.”
Nobody, including me, wants to pay higher taxes. But taxes well spent are a wise investment. Education, according to many, many experts, is an essential part of that investment … and it pays off. It pays off for pre-school students, and it pays off for high school and college students and it pays off for their communities. There is considerable, hard research on this point that I will address in future columns. Most importantly, education pays off for the state at large. It’s an investment and an economic development tool we must take advantage of for the future of our students and our state.
As I said at the beginning of this article, numbers can tell a story. But that story can be told in different ways. People hear from various sources that Michigan is a high tax state, and they repeat this statement to others – it becomes an emotional touchstone for erroneous public policy decisions.
Next time you hear someone saying that Michigan is a high tax state, or that we need to cut taxes to stimulate the economy, please listen then gently respond that their view isn’t backed up by the facts, and that the world of economic development is far more complex than this single issue.
