When Governor Whitmer vetoed a tax cut that would have reduced the state income tax rate from 4.25% to 3.9%, she claimed the state could not afford to reduce taxes. The governor said the state would have lost $2.5 billion a year because of the tax cut, as well as the additional child tax credit and increased exemptions for seniors. Not taking that $2.5 billion from Michigan taxpayers “would blow a recurring multi-billion dollar hole in basic state government functions, from public safety to potholes,” a said Whitmer.
However, the state would not have to cut spending at all with the increase in taxes. Indeed, the state budget has increased and should continue to increase. The income gains are far greater than the tax effects would have been if Whitmer had let people keep more of what they earn.
The tax reduction is not large enough to lead to a decrease in the state budget. The Governor’s proposal calls for $42.0 billion in spending from state taxes and fees, an increase of $4.1 billion over the originally approved budget for the 2020-21 fiscal year.
For now, this kind of runaway spending is possible due to additional fund balances, but revenue should continue to grow.
Revenue gains have also been significant in recent years. Today’s budget spends $11.7 billion more on state taxes than a decade ago, or 21% more than inflation. If the state cannot afford tax cuts today, it is because it has long been spending at unaffordable levels.
Lawmakers may call the governor’s affordability bluff by approving a budget that leaves enough money set aside to cut taxes. Approving a Michigan sustainable budget — which allows the state to increase spending at the state’s combined inflation and population growth rates — would save more money than needed to approved tax reductions.
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