The numerous tax changes that were enacted from 1991 through August 1998, have had a significant impact on the level of taxes in Michigan. In FY 1991-92, total State and local taxes were reduced by an estimated $119 million from what they otherwise would have been, but by FY 1997-98, tax changes are creating a net reduction in revenue of almost $2.4 billion. Some of the tax changes that have already been enacted will not be fully implemented until FY 1999-2000. It is estimated that when all of the enacted tax changes are fully phased in during FY 1999-2000, State and local taxes in Michigan will be $3.1 billion lower than what they otherwise have been.

Tax Decreases

Table 1 breaks down the overall fiscal impact of these tax changes by the major taxes from FY 1991-92 to FY 1999-2000. The major reduction in taxes occurred in the property tax, but the income, single business, unemployment insurance, inheritance/estate, insurance, and intangibles taxes also were reduced. Collectively, these tax reductions lowered State and local tax revenue by an estimated $4.8 billion in FY 1996-97, and will reduce taxes, from what they otherwise would be, by $5.4 billion in FY 1997-98. By FY 1999-2000 the tax cuts will total an estimated $6.35 billion.
 

Tax Increases

These tax reductions are offset in part by various tax increases. These tax increases fall into two groups: First, while the school finance reform package was an overall tax decrease, it did contain a number of tax increases including the increase in the sales and use taxes. The second group includes transportation related tax and fee increases. These tax increases generated an estimated $2.7 billion in FY 1996-97 and will generate an estimated $3.0 billion in FY 1997-98 and $3.3 billion by FY 1999-2000.

Net Tax Change

These decreases and increases in State and local taxes enacted from 1991 through August 1998 resulted in a net tax reduction of an estimated $2.1 billion in FY 1996-97 and will generate a net tax cut of an estimated $2.4 billion in FY 1997-98 and $3.1 billion in FY 1999-2000.

Michigan's State and Local Tax Burden and Tax Mix

To help put the size of the net tax cuts into perspective, this section compares the magnitude of the tax reductions with total State and local government tax collections and Michigan personal income.

It should be noted that data on total local government tax collections are not readily available, so in this report local government tax collections include three major local taxes: school and local government property taxes, city income taxes, and the Detroit utility users tax.

Net Tax Cuts and Overall State and Local Taxes. Table 2 and Figure 1 compare the level of Michigan's State and local taxes both with and without the recently enacted tax changes. In FY 1990-91, taxes collected by State government totaled $10,866 million, and the major local taxes, including the local property tax, city income taxes and Detroit utility users tax, totaled $8,741 million, for a combined total of $19,607 million. Assuming no changes in any State or local taxes, it is estimated that State and local tax collections would have equaled $28,275 million in FY 1996-97, $29,651 million in FY 1997-98 and $32,730 million by FY 1999-2000. These estimates are based on historical growth trends. Factoring in the fiscal impacts of the various tax changes, it is estimated that total State and local taxes will continue to increase each year, but at a slower rate of growth compared with what the level of taxes would be without the tax changes. This is illustrated in Figure 1. Without the tax changes, it is estimated that State and local taxes would have increased at an average annual rate of 5.3% from FY 1990-91 to FY 1999-2000. With the tax changes, it is estimated that State and local tax revenues will increase at an average annual rate of 4.2% over the same time period.
 

In terms of the size of the net tax reductions, it is estimated that in FY 1996-97, State and local tax collections were 7.3% below what they otherwise would have been. In FY 1997-98, it is estimated that taxes will be down 8.0% and by FY 1999-2000, tax collections will be down 9.4% from what they otherwise would be. These estimated percentage reductions in State and local taxes are illustrated in Figure 2.
 

Tax Revenues as a Percentage of Personal Income. Another helpful measure used to identify the size of government relative to the total economy is State and local taxes as a percentage of personal income. Personal income is the total income received by individuals from all sources including wages and salaries, interest, dividends, property including capital gains, proprietors income, and transfer payments. This is the broadest measure of economic activity in Michigan available on a timely basis. In FY 1991-92, State and local taxes equaled 10.9% of personal income. This is about what the size State and local government taxes had been since 1986. From 1982 to 1984, a temporary increase in the income tax pushed up State and local taxes to as high as 11.7% of personal income. It is estimated that without the recently enacted net tax reductions, State and local taxes would equal about 11.2% of personal income in FY 1997-98, and 11.1% in FY 1998-99 and FY 1999-2000. The net reduction in State and local taxes has reduced State and local taxes as a percentage of personal income. In FY 1993-94, State and local taxes fell to 10.4% of personal income; the percentage edged down to 10.3% in FY 1994-95 and FY 1995-96, and then edged up to 10.5% in FY 1996-97, largely due to the surge in income tax collections resulting from an acceleration in capital gains. In FY 1997-98, the State and local tax burden, as a percentage of personal income, is expected to fall back to 10.3% and then edge down to 10.0% by FY 1999-2000. This is presented in Figure 3.
 

The net tax changes that have been enacted since 1991 fall into two broad groups: 1) school finance reform and 2) all other tax changes. School finance reform refers to the significant changes that were made in the way K-12 public education is financed in Michigan. This comprehensive reform package shifted more of the responsibility for financing public K-12 schools from the local property tax to State taxes. In addition, the method for distributing State funds among the many school districts was changed to a foundation grant, in which the State guarantees each school district a certain minimum level of funding per pupil. Most of the tax changes that were part of this school finance reform package took effect in May 1994. In addition to the numerous tax changes that made up school finance reform, a number of other tax changes were enacted from 1991 through August 1998.

The estimated net change in taxes from FY 1991-92 to FY 1999-2000, broken down by school finance reform changes and all other tax changes, is presented in Table 3 and Figure 5. Beginning in FY 1994-95, when the tax changes that comprise school finance reform were almost entirely implemented, the net tax reductions generated by both school finance reform and the other tax changes were of very similar magnitudes. School finance reform tax changes created a net tax cut of an estimated $627 million in FY 1994-95, and in FY 1997-98 these tax changes are expected to reduce tax revenues by $1.34 billion. By FY 1999-2000, school finance reform changes will result in an estimated $1.71 billion net reduction in State and local taxes. The tax changes other than school finance reform resulted in net tax reductions of $119 million in FY 1991-92, and around $300 million in FY 1992-93 and FY 1993-94. In FY 1994-95, a number of newly enacted tax changes increased the net tax cut from changes unrelated to school finance reform to an estimated $751 million, which is expected to grow to $1.0 billion in FY 1997-98. By FY 1999-2000, it is estimated that these other tax changes will cut State and local taxes by $1.38 billion.
 

The fiscal impact of the tax changes that were part of school finance reform is summarized in Table 4. The major school finance reform tax changes included: 1) reductions in local school property taxes and the State income tax, 2) increases in the State sales, use, and tobacco taxes, and 3) the creation of a new State education property tax and State real estate transfer tax.
 

Income Tax Reduction.  The income tax rate was reduced from 4.6% to 4.4% effective May 1, 1994. As a result, income tax revenue was reduced by $279 million in FY 1994-95 from what it otherwise would have been. By FY 1999-2000, this reduction in the income tax rate is expected to reduce State revenue by $372 million.
 
Sales and Use Tax Increases.  The major tax increase under school finance reform was a 50% increase in the sales and use tax rates. The sales and use tax rates were increased from 4% to 6%, effective May 1, 1994. All items subject to the sales tax at the 4% rate are also subject to the additional 2% rate, except residential utilities will continue to be taxed at the 4% rate. In addition to the tax rate change, two changes were made in the bases of the sales and use taxes: 1) The State cigarette tax was included in the price of cigarettes subject to the sales tax, and 2) the use tax was extended to interstate telephone calls that originate in Michigan. In total, these sales and use tax increases generated an estimated $1.93 billion in FY 1994-95, the first full year these changes were in effect. By FY 1999-2000, these sales and use tax increases will generate an estimated $2.46 billion.
 
Tobacco Tax Increases.  The cigarette tax was increased from $0.25 to $0.75 per pack and a new tax on other tobacco products equal to 16% of the wholesale price was enacted. These tobacco tax changes generated an estimated additional $388 million in FY 1994-95. Due to the assumption that cigarette consumption will continue to decline, the increase in revenue due to the tobacco tax changes will diminish to an estimated $323 million by FY 1999-2000.
 
New Taxes.  In addition to the new State education property tax, which is discussed above, a new State real estate transfer tax was enacted as part of school finance reform. This tax went into effect on January 1, 1995, and generated $91 million in FY 1994-95. In FY 1995-96, the first year it was in effect for the entire fiscal year, it generated $161 million. By FY 1999-2000, this tax will generate an estimated $184 million.
 
Other Tax Changes

In addition to the significant school finance reform tax changes, a number of other tax changes have been enacted. These other changes include reductions to the property tax, income tax, single business tax, unemployment insurance tax, inheritance/estate tax, insurance tax, intangibles tax, and sales and use taxes. The gasoline tax, diesel fuel tax, truck registration taxes, and the State markup on the price of liquor were increased. The fiscal impact of these other tax changes is detailed in Table 5 and briefly described below.