Michigan continues state trends of tax breaks = budget deficit

Add Michigan to Wisconsin, Kansas and North Carolina onto the growing list of states that have budget problems after offering tax breaks to businesses and rich people. Yesterday the Wolverine State revealed it has a $325 million current-year budget deficit, and future year deficits as well, although as Michigan-based MLive notes, some of the reason is oddly related to Michigan's bounce back from the Great Recession.

Ironically, the growing economy may be largely to blame for the budget crunch. More companies are meeting job number requirements to cash in refundable credits issued under the old Michigan Business Tax, which was scrapped in 2012.

An unexpected number of refunds this year means the state is generating significantly less revenue than officials had anticipated in May. The state has a hard time anticipating when refunds will be requested, and some of the credits can be redeemed through at least 2032.

“We’re talking about something that isn’t going to go away any time soon, and as the economy picks up … taxpayers may be more likely to claim them than they would have been during the recession,” said Jim Stansell of the House Fiscal Agency.

Republicans have largely blamed the budget crunch on previous administrations that relied on tax credits as an economic development tool. [Gov Rick] Snyder and the GOP-led Legislature scrapped the MBT in 2011 and replaced it with a flat Corporate Income Tax, exempting a number of small and medium-sized businesses in the process.

Michigan was hit as bad as any state by the lousy economy of the mid-to-late 2000s, which helps explain the desperation to attract and keep jobs by any means possible, but it has generally bounced back well once President Obama's bailout of the auto industry began in 2009 and the national economy began to recover. Its job growth has slowed some in 2014 compared to the previous years (guess that (right-to) work-for-less thing wasn't a magic pill, was it?), but since there's still growth, it makes it likely that some of these businesses hit their thresholds in 2014, and will write that off when they file their taxes this year.

And if you remember, it was an unexpectedly high amount of tax refunds that started to lead to Wisconsin's budget shortfall in 2014. This time last year, we were halfway through Fiscal Year 2014, and Wisconsin's income tax collections were up 4.7% vs the halfway point of Fiscal Year 2013. Corporate tax collections were way up, at 20.6%, and those figures were instrumental in having the Legislative Fiscal Bureau up their revenue estimates for the rest of the 2013-15 budget by $893 million. But the lower revenue effect of the first round of Koo-Koo tax cuts that affected the 2013 tax year had largely yet to be seen, since the withholding tables hadn't been adjusted, and so the only time it would hit the state treasury would be as people handed in their tax returns.

Sure enough, as the tax returns came in for January, February, March and April, Wisconsin's tax income and corporate tax revenues plummeted.

Wisconsin income and corporate tax revenues, Jan-Mar 2013 vs. Jan-Mar 2014
Jan-April 2013 income taxes $2.408 billion
Jan-April 2014 income taxes $1.982 billion (-$426 million, -17.7%)

Jan-April 2013 corp. taxes $352.4 million
Jan-April 2014 corp. taxes $290.2 million (-$62.2 million, -17.6%)

Only about $55 million of the income tax decrease was due to the lower withholdings that started in April 2014, so you can't blame that either. In addition, these lower revenues did not spur businesses into hiring people on any great scale, as only 9,500 private sector jobs were added, and 14,000 overall in a time when the U.S. job market started to take off. Sure, there has been 3 months of good jobs numbers since then, but that could simply be catching up to the hole that we were already in, and our tax revenue collections certainly have not benefitted from those allegedly higher job numbers in the Fall, as we are likely to be more than $400 million in the hole for this fiscal year, and more than $2 billion down for the next.

What this tells me is that cutting taxes for the rich and corporate do little if anything for job growth, but because the rich and corporate have more time on their hands to do tax-avoiding behavior, they tend to be more likely to take advantage of the breaks they are given. The problem is that these people pocket the profits and extra tax refunds instead of putting it back into the economy for a useful purpose, or even worse, they take it out of the economy and into more risky and unproductive ventures because the tax code encourages them to.

So if we want to balance budgets and create jobs, maybe a better strategy is to make the rich and corporate pay back some of the excessive profit and income they've been able to grab by gaming the tax code, and instead concentrate on giving raises to workers who not only will pay more taxes on higher incomes, but also might use some of that extra money to do something worthwhile that helps other businesses and individuals in the state get by. It's just a thought.