Wednesday, May 28, 2008

If You Tax Something, You Get Less of It Part II

The latest news of Michigan's deepening budget woe is a national warning of what happens when you raise taxes in a weak economy (see chart above, Michigan's jobless rate vs. national).

Officials in Lansing reported this month that the state faces a revenue shortfall between $350 million and $550 million next budget year. This is a major embarrassment for Governor Jennifer Granholm, the second-term Democrat who shut down the state government last year until the Legislature approved Michigan's biggest tax hike in a generation. Her tax plan raised the state income tax rate to 4.35% from 3.9%, and increased the state's tax on gross business receipts by 22%. Ms. Granholm argued that these new taxes would raise some $1.3 billion in new revenue that could be "invested" in social spending and new businesses and lead to a Michigan renaissance.

Not quite. Six months later one-third of the expected revenues have vanished as the state's economy continues to struggle. Income tax collections are falling behind estimates, as are property tax receipts and those from the state's transaction tax on home sales.

From today's WSJ


At 5/28/2008 10:29 AM, Anonymous Anonymous said...

Well, the obvious solution is that Michigan needs to raise taxes again to make up for the shortfalls.

Just my 2¢ worth of sarcasm.

At 5/28/2008 10:59 AM, Anonymous Anonymous said...

Heck, why not raise the tax rate to 100% and let the state of MI hire everyone - Lansing could run the whole enchilada.

The all-knowing, all-seeing, all-feeling, professional arm chair quarterbacks will finally have their hands directly on levers of the economy. There will be 100% employment. We will attain nirvana.


At 5/28/2008 11:06 AM, Blogger bobble said...

i agree that raising taxes usually does not yield the additional amounts projected, especially if static analysis was used to determine the projected revenues.

however, it's way too simplistic to point the finger at tax hikes alone for causing the budget shortfall. there are a few other factors.

for instance, the price of gas going to $4/gallon has clobbered the state's main industry. plus, a national recession [i know, we're not in a recession] and housing collapse has reduced tax receipts in many states.

At 5/28/2008 11:35 AM, Blogger Unknown said...

This comment has been removed by the author.

At 5/28/2008 11:37 AM, Blogger Unknown said...

bobble, good analysis; however, if government and economists can not properly project budget revenue in good times and also in tougher times, why not let the private sector do the work. Local gov. should lower taxes to allow states to become business friendly instead of stifling business expansion.

What I dont understand and we are going through the same thing in IL is that where did all the money go??? Why is it that during good times states can not save a dime of the surplus and then when times are tough the immediate answer is to raise taxes.

States like IL and MI are doing it all wrong. You can not tax people and business to death

At 5/28/2008 12:46 PM, Anonymous Anonymous said...


You ask where all the money went. It was simply spent.

Politicians get elected by promising to spend money for everyone's pet project. Very few get elected by promising to save money. It’s actually our fault for rewarding them with our votes. Until that changes, we will keep getting the representation we deserve.

Try calling your representatives and telling them you don’t want any money spent on YOUR favorite project. It’s not so easy, is it?

At 5/28/2008 1:25 PM, Blogger Matt Young said...

Says FOX News:

"The tax increases should erase most of a projected $1.75 billion deficit in Michigan's next budget. The final budget for the new fiscal year will include $440 million in spending cuts, including no inflationary funding increase for public universities and community colleges, Granholm said. "

They got, so they say, $440 million in less supply of government for a $1750 million increase in price of government.

However, this bargain was struck long after the employment rate was at 7%, and if cause and effect are interpreted, it was the unemployment rate that caused the new equilibrium price of government.

At 5/28/2008 1:26 PM, Blogger Unknown said...

Walt G. thanks for your response, my comment was a rhetorical comment, but I appreciate your response.

At 5/28/2008 2:00 PM, Anonymous Anonymous said...

The answer is simple. Just allow struggling states to tax states that are doing well.

We can call it an equalization payment. /sarcasm

At 5/28/2008 2:30 PM, Anonymous Anonymous said...


Have you done (or do you know of) a fuller treatment of this issue that is, how Michigan has slowly drifted into an apparently permanent state recession?

At 5/28/2008 3:17 PM, Blogger randian said...

How to create a permanent state recession? First, have high taxes. Then, have a bunch of net tax payers vacate, leaving behind a bunch of net tax consumers. Heap a bit of corruption on top (see Detriot). Have a tone-deaf governor and legislator who don't seem to understand that the way out of a recession is to be friendly to business. Rinse and repeat.

Michigan also doesn't have some things to prop itself up. NY has NYC, a major financial hub. NY's economy is otherwise in the dumps, and NYC itself has such an overbearing and expensive government that I can easily see it repeating the 1970s. California has Hollywood, Silicon Valley, tourism, and great year-round weather. Their deficit is larger than the entire state budget of most states. New Jersey. High taxes and corruption, but it's next to NYC. I'm not sure what props up Massachusetts or Connecticut, but they both have high taxes and zero or negative population growth, which should tell you something.

At 5/28/2008 4:48 PM, Anonymous Anonymous said...

Try calling your representatives and telling them you don’t want any money spent on YOUR favorite project. It’s not so easy, is it?

It's very easy. My favorite project is providing for the well-being of my family - food, healthcare, etc. I don't need or want the government's help. I can do it better myself.

At 5/28/2008 5:53 PM, Anonymous Anonymous said...

"How to create a permanent state recession?"

Vote Democrat.

At 5/29/2008 12:39 AM, Blogger OBloodyHell said...

One thing that does occur to me. How does MI compare to other states in taxation?

Because it seems to me as though high taxation ought to also chase people out of the state, which does provide a good feedback loop to lower unemployment.

Granted, the ones still there are more likely to be stupid, meaning there may be a shortfall of competent workers, but that's another level of analysis.

At 5/29/2008 12:43 AM, Blogger OBloodyHell said...

> "How to create a permanent state recession?"

> Vote Democrat.

You're so mean.

Completely correct, but you're a real meany.



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