Net Change in Michigan's State and Local Government Taxes

• From 1991 through August 1998, an unprecedented number of changes in Michigan's State and local government taxes were enacted into law. These enacted tax changes include both tax decreases and tax increases; however, the net impact of all of these tax changes is a sizeable reduction in Michigan's State and local taxes. Since some of the enacted tax changes are being phased in over several years, the tax changes that were enacted from 1991 through August 1998 will not be fully implemented until fiscal year (FY) 1999-2000.

• These tax changes include net reductions in the property, income, single business, unemployment insurance, inheritance, and intangibles taxes.

• Taxes that have been increased include the sales, use, tobacco, gasoline, motor carrier diesel fuel, and truck registration taxes.

• In addition to the above changes in existing taxes, three new taxes were created: the State education property tax; the State real estate transfer tax; and the casino wagering tax. (Note: This report does not include estimates of the wagering tax as the tax applies only to the three proposed casinos in Detroit, and it has not yet been determined when the casinos will open.)

• It is estimated that the numerous tax changes enacted from 1991 through August 1998 will result in a net reduction in State and local government taxes of $2.37 billion in FY 1997-98 and $3.08 billion by FY 1999-2000.

• State and local taxes will be reduced by an estimated 7.9% in FY 1997-98 and by 9.3% in FY 1999-2000 from what they would have been if no tax changes had been enacted.

• As a result of these tax changes, Michigan's State and local taxes will capture a smaller share of overall economic activity. State and local taxes as a percentage of Michigan personal income will decline from 11.0% in FY 1990-91 to an estimated 10.4% in FY 1997-98 and 10.2% in FY 1999-2000.

• In 1994, Michigan enacted a broad-based tax reform package that significantly changed the way public K-12 education is financed. These various tax changes resulted in a net tax reduction of $774 million in FY 1993-94. By FY 1997-98, the net tax reduction increased to an estimated $1.34 billion. The major tax changes that were part of school finance reform included a significant net reduction in school property taxes and an increase in the sales and use tax rates from 4% to 6%.

• In addition to school finance reform, various other tax changes were enacted from 1991 through August 1998. These other tax changes included reductions in the State income, sales, use, single business, unemployment insurance, intangibles and inheritance taxes and the local property tax, and increases in some transportation-related taxes. These other tax changes resulted in a net tax reduction of $119 million in FY 1991-92 and are expected to result in a net reduction of $1.0 billion in FY 1997-98 and $1.37 billion in FY 1999-2000.

• The overall net reduction in State and local government taxes is having an impact on both individuals and businesses. It is estimated that approximately two-thirds of the net reduction in taxes is benefiting individual taxpayers and one-third of the net tax reduction is going to businesses.

• The various tax changes have resulted in a tax shift away from local governments to State government. For example, it is estimated that the various changes that have been enacted since 1991 generated a net increase in State taxes of $3.45 billion in FY 1997-98, largely due to the sales/use tax increase. At the same time, these changes reduced local government tax revenue by $4.5 billion, largely due to the reduction in property taxes.

• As a result of these tax changes, State government's percentage share of total State and local government tax revenue rose from 55% in 1991 to an estimated 72% in 1998.

• The net change in State taxes is affecting particular portions of the State budget in different ways. It is estimated that in FY 1997-98, the various tax changes will reduce General Fund revenue $2.1 billion from what it otherwise would have been, while School Aid Fund revenue will be up $5.4 billion. Revenue in the Transportation Fund will be up $247 million due to the recent increases in transportation-related taxes.

• The Federal income taxes on individuals and businesses allow eligible taxpayers to deduct certain State and local taxes in computing their taxable income. The net reduction in Michigan's State and local taxes has reduced the State and local taxes that Michigan individual and business taxpayers can deduct on their Federal taxes. As a result, a portion of the net reduction in Michigan's State and local taxes is being offset by an increase in Federal taxes. In FY 1997-98, overall State and local taxes will be down an estimated $2.37 billion due to the various tax changes enacted since 1991. Therefore, it is estimated that Federal income taxes paid by individuals and businesses in Michigan will increase by an estimated $734 million in FY 1997-98 from what they would have been without any of these tax changes. As a result, the net tax change including Federal, State, and local government taxes will be a net tax reduction of $1.64 billion in FY 1997-98. By FY 1999-2000, it is estimated that the net tax reduction, after the Federal tax impact, will total almost $2.2 billion.

In April 1996, the Senate Fiscal Agency published a report entitled, "Tax Changes in Michigan 1991 through 1995". This report provided a detailed listing, description, and fiscal analysis of the State and local tax changes that were enacted in Michigan from 1991 to 1995. Since 1995, a number of additional tax changes have been enacted, so this new report updates the earlier report to include the tax changes that were enacted through August 1998.

Both the number and the magnitude of the tax changes that have been enacted during this eight-year period are unprecedented. During this time, over 80 changes in State and local government taxes, including both tax increases and decreases, have been enacted. These changes to Michigan's tax laws include the various changes that made up the comprehensive school finance reform package, plus a number of other tax changes. While the tax changes included in this report were enacted through August 1998, some will not be fully phased in until FY 1999-2000. It is estimated that State and local government tax changes will result in a net tax reduction of almost $2.4 billion in FY 1997-98, and when fully phased in in FY 1999-2000, will result in a net tax cut of almost $3.1 billion. The net tax reductions translate into a 7.9% tax cut in FY 1997-98 and a 9.3% tax cut in FY 1999-2000, compared with what the level of taxes would have been without these changes.

The first section of this report identifies and summarizes each of the major tax changes that has been enacted from 1991 through August 1998. The second section presents estimates of the fiscal impact of the major tax changes. These fiscal impacts are estimated through FY 1999-2000, when all of the tax changes will be fully phased in. Included in the fiscal impact section are estimates of the revenue impact of the total tax changes, breakdowns of the school finance reform tax changes, and all of the other tax changes, as well as estimates of the breakdown of the total fiscal impact between State and local governments, and individuals and businesses. Also estimated is the net tax cut after including the impact these tax reductions have on taxpayers' Federal income tax liabilities.