Plan B: If road funding proposal fails, increase income tax

April 6, 2015




I've already mailed my absentee ballot, and I voted Yes on Proposal 15-1, the road funding proposal. Yes, the proposal includes allocations for items other than roads (see the Mackinac Center's analysis here), but the bulk of the new revenue goes to roads and I have no problem with the other items. Let's get it done. I plan to buy a new car this year to replace my 17 year old Mercury Mystique, and I want it to last more than a couple of years.


If the proposal fails, I'd like the Legislature to raise the needed money by increasing the income tax rate. I made the same recommendation back in May of last year, before the current proposal was cobbled together.


The current income tax 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 on the amount by which adjusted gross income exceeds the total of personal exemptions ($4,000 per person in 2014). Families with higher incomes will bear most of the burden. In 2012, the most recent year for which Treasury has published an analysis of the income tax (page 41), 90% of total income tax revenue came from filers with adjusted gross incomes over $50,000; 60% came from filers with AGIs over $100,000. For filers with AGIs under $30,000 - 51% of filers - the effective rate was less than 2%.

  4. The Legislature can decrease the income tax rate as easily as it can increase it. So once all the roads and bridges are back in shape, the rate can go back to 4.25%.*

Since the effective tax rate is always less than the nominal rate, no one will feel the full .75% increase. In 2012, when the nominal rate was 4.33%, the average effective rate for filers with income over $50,000 was 2.42% (source, page 41). The highest effective rate over all was 3.46%, and that was for the group with incomes $190,001-200,000 (page 1 of the 2012 individual income tax analysis). Based on that experience, the highest effective rate with a nominal rate of 4.25% would be 3.40% and the highest effective rate with a nominal rate of 5.0% would be 4.0%, a difference of 0.6%. So if your 2015 income is $200,000, you would expect to pay an additional $1,200 (.006 times $200,000).


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This comment received 4/7/15:


Something to consider in light of this comment from your recent missive:  "The Legislature can decrease the income tax rate as easily as it can increase it. So once all the roads and bridges are back in shape, the rate can go back to 4.25%."


The Legislature can also decrease the sales tax rate easily.  The constitutional amendment part of Prop 1 only raises the maximum cap on the sales tax rate it does not set the rate.  Separate legislation is needed to increase (or decrease) the sales tax rate.  Of course, in this instance, the Legislature has already passed a bill (and the governor has signed it) to do just this.  The law will only take effect if Prop 1 is approved.  If the legislature decided on May 6 to pass a bill to reduce the sales tax rate, it is within its powers to do so.  It would not need a vote of the people.


Your article is a little misleading by raising the specter that the sales tax rate is fixed in the constitution.



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