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Inverted tax structure could end Michigan’s budget deficit

June 28, 2011

We are constantly told that the reason Michigan is in such a dire financial state is because we don’t have a “business-friendly” environment.

This has been the mantra of the last four Governors of Michigan and it was reflected in the policy decisions to further deregulate the state culminating in the elimination of the Michigan Business Tax this year under Governor Rick Snyder.

The claim by Snyder, individual business owners, the Chamber of Commerce and groups like the West Michigan Policy Forum is that limited or no business tax will attract new companies thus creating new jobs that will have a trickle down effect in generating local and state revenues.

Not only has this notion been factually dismissed by authors such as Greg LaRoy in his well documented book The Great American Job Scam: Corporate Tax Dodging and the Myth of Job Creation, the very idea that eliminating business taxes will make it impossible for states to be fiscally responsible. A new report by the Boston-based group United for a Fair Economy can help shed some light on this reality.

According to the report Flip It to Fix It: An Immediate, Fair Solution to State Budget Shortfalls, “At the core of the budget crisis facing states are regressive state tax structures (comprised of the major state and local taxes) that are unfair, unsound, and unsustainable by design.

The researchers at United for Fair Economy state that of the current state tax structure was inverted, which would mean that business pay more of the share of taxes that states could eliminate their deficit. The report goes on to state, “The inversion exercise takes a state’s current distribution of state and local taxes by income quintile (lowest 20 percent, second 20 percent, middle 20 percent, fourth 20 percent, top 20 percent) and flips it at the 50th percentile mark, thereby making a regressive structure progressive.

This resulting progressive tax structure has major benefits to states.

  • It raises significant revenue. If every state inverted its tax structure, states would raise a combined $490 billion, wiping out deficits with cash to spare to invest in economy-enhancing activities.
  • It is unmatched in its economic efficiency, which encourages steady and strong economic activity and widespread prosperity over time.
  • It provides commonsense equity, with wealthy families contributing a greater share of their income in taxes than low- and middle-income families.

The report also provides a state by state breakdown of the current and inverted tax structure to show how states could eliminate their budget deficits – as is reflected in this graph.

Inverting the current tax structure is not being proposed by even most progressive organizations and since the current administration and legislative body seems bent on turning more of the public sector over to the private sector that such a policy will not even be considered in the near future.

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