Study shows Michigan tax system skewed for rich

A new nonpartisan study shows that Michigan taxes are skewed in favor of the wealthy, lending support to advocates crying for a restructured Michigan tax code.

Low- and middle-income families in Michigan pay a far higher share of their income in state and local taxes than do the richest families in Michigan, according to "Who Pays? A Distributional Analysis of the Tax Systems in All 50 States" by the Institute on Taxation & Economic Policy. ITEP Executive Director Matthew Gardner slammed Michigan for having "an unfair, regressive tax system."

"No one would ever design an income tax with lower tax rates for the best-off taxpayers," said Gardner. "But that is exactly what Michigan's tax system overall does: it allows the very wealthiest individuals to contribute less of their income, on average, than middle- and lower-income families must pay."

The report found that Michigan's reliance on sales and property tax made it more regressive. Despite Michigan's flat income tax — which economists usually consider regressive — Michigan's tax is slightly progressive, due to the Michigan Earned Income Tax Credit (EITC), a homestead property tax credit and personal tax exemptions indexed to inflation.

The EITC is frequently mentioned to be on the chopping block, whether to offset cuts to K-12 education or the Michigan Promise grant or to pay for phasing out the MBT surcharge.

Of the states that levy a broad-based personal income tax, all but seven have chosen to apply graduated income taxes. Michigan is one of those seven, according to the study.

"Michigan lawmakers may be forced to make difficult tax and spending decisions in the upcoming year," said Gardner. "They should be mindful that the Michigan tax system already falls most heavily on the very poorest families in the state."

Fast Facts from the study:

• Michigan families earning less than $15,000 -- the poorest fifth of Michigan non-elderly taxpayers -- on average pay 8.9 percent of their income in state and local taxes.
• Middle-income Michigan taxpayers -- those earning between $32,000 and $54,000 -- on average pay 9.8 percent of their income in Michigan state and local taxes.
• The richest Michigan taxpayers -- with average incomes of $1,099,200 -- on average pay only 6.4 percent of their income in Michigan state and local taxes.
• Property, sales and income taxes are contributing to less state revenue in 2007 than 1997. That's being offset by an increase in non-tax revenue.

Read state-by-state fact sheets and the full report...

Source: MIRS Capitol Capsule, 11/19/09