Fund road repairs by increasing the income tax

Originally posted May 25, 2014; updated June 9, 2014

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Here's an idea for funding repairs to Michigan's roads and bridges: increase the income tax. The current rate is 4.25%. Increasing it to 5.0% will generate about $1.45 billion, which is about what they say is needed.

 

Here's how I arrived at that $1.45 billion figure. Total revenue from the income tax in 2013 was $8.211 billion. (Source: Annual Report of State Treasurer, page 19) Divide that by 17 and you get $.483 billion, the amount raised by each of one percent (4.25 divided by 17 is .25). Multiply $.483 billion by 3 (the 3 quarters of a percent needed to raise the income rate to 5.0%) and you get $1.449 billion.

 

Here are the advantages of raising the income tax to pay for roads:

  1. Unlike raising the sales tax, it doesn't require a constitutional amendment. It can be enacted by the Legislature.

  2. The legislation itself is simple - just a line added to Section 51 of the Income Tax Act, Act 281 of 1967 (page 12).

  3. Raising the income tax rate has less impact on low income families than raising gasoline taxes or the sales tax. Income tax is paid only on the amount by which adjusted gross income exceeds the total of personal exemptions ($3,950 per person in 2013). Families with higher incomes will bear most of the burden. In 2011, the most recent year for which Treasury has published an analysis of the income tax, 98% of total income tax revenue came from filers with adjusted gross incomes over $50,000 (page 47), and 2011 was before the subtractions for pension income were cut back, which has shifted even more of the burden to higher income filers.

Since the effective tax rate is always less than the nominal rate, no one will feel the full .75% increase. In 2011, when the nominal rate was 4.35%, the average effective rate for filers with income over $50,000 was 2.55%. The highest effective rate was 3.42%, and that was for the group with incomes $300,001-400,000 (page 48 of the 2011 individual income tax analysis). And even if the full .75% increase was felt by someone with, for example, an AGI of $100,000, it would amount to less than $750.

 

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