[Editor's note: this newsletter contains both a reprint of an article from Classical Principles and a letter from a taxpayer]
In today's letter I am sending a reprint of an excellent article by Robert Genetski from Saugatuck, Michigan. He clearly and concisely explains what a negative effect taxation can have on the economy of a state. I also include a recent letter from a constituent which, I believe is a perfect example of how tax increases hit home in the real life of an "everyday taxpayer."
Taxing Away Michigan's Future
Defenders of Michigan's recent tax increases argued that additional revenue is necessary to provide much-needed government services. This was the same argument used when the State established the Single Business Tax in 1975. It was also the same argument used eight years earlier when Michigan established its State's income tax.
Do new taxes aid the State's economy, as proponents suggest? Looking at history, the answer is obvious. From 1940 to the mid-1960s, Michigan's economy consistently produced between 4½% and 5% of the nation's income.
In 1967, Michigan adopted a State income tax. Eight years later it adopted its Single Business Tax. Since the adoption of these taxes, Michigan's economy has lost jobs and income relative to the rest of the nation.
Michigan is not alone. A substantial body of economic research shows that states that raise the tax burden on their citizens tend to lose incomes and jobs to those states that reduce tax burdens.
Unfortunately, Michigan's politicians have failed to understand that raising taxes begins a vicious cycle. As individuals and businesses leave the State, the economic climate deteriorates. With the loss of business and jobs, tax receipts suffer and government services have to be curtailed. Raising taxes to make up for this shortfall accelerates the loss in jobs and income. This in turn accelerates both a loss in tax receipts and cuts in state services.
Since 1965, the only period of significant tax relief for Michigan citizens occurred from 1984 to 1994. During these years the state income tax was cut from 6.35% to 4.4%. As the chart shows, these are the only years since the mid-1960s that Michigan did not experience a major decline in income relative to the rest of the country. This period is also the only time in the past 30 years that the state experienced a sustained growth in new jobs.
Michigan Income Chart
Today Michigan is in the midst of this vicious cycle. Over the past year US personal income increased by 6.3%. In some states, income grew faster. In others, it grew slower. Michigan has the dubious distinction of having the worst economic performance of all 50 states. It has the slowest growth in income and the highest rate of unemployment. And this is before the Governor insisted up a major new increase in taxes.
While Michigan tax receipts should increase in response to the latest tax hikes, the increase will be temporary. It takes time for businesses to relocate. As they relocate, Michigan will lose jobs and incomes to other states. Before long, Michigan's politicians will again be faced with a shortfall of revenue. With less revenue they will once again be forced to cut government services and jobs.
To reverse this vicious cycle, Michigan must do what other states have done to attract jobs and businesses. It must significantly reduce the tax burden on our citizens. Doing so will help reverse the economic deterioration of the past forty years.
A Letter From a Frustrated Taxpayer
Thank you for your relentless diligence of trying to keep our tax burden in check. I just received my paycheck last week. I now bring home $10.29 less every two weeks. I know it does not seem like much to the BIG spenders in Lansing, but it has a tremendous impact on my family budget. Unlike the government, I will not rob my neighbors and fellow citizens to make up for my budget shortfall. I balance my budget every month, and I will make judicial cuts that will come back out of the money that I normally to Lansing every year.
I will not purchase a Michigan state parks permit next year, I will not use the Michigan state park system next year. I will not purchase a Michigan combo deer license this year. These are things I do and have done every year for the past several years. I normally like to support Michigan, but I cannot afford this tax increase and will do everything I can to make sure the Governor isn't going to win at my family's expense. Please feel free to use this letter to let the Democrats and any big spending Republicans know that they are not balancing the state budget by taking more of my money. In fact, they are losing more money from me.