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.
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
Total revenue from the income tax in 2013 was $8.211 billion.
Annual Report of State Treasurer, page 19) Divide that by 17 and
you get $.483 billion, the amount raised by each ¼ 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:
Unlike raising the sales tax, it
doesn't require a constitutional amendment. It can be enacted by the
The legislation itself is simple -
just a line added to Section 51 of the
Income Tax Act, Act 281 of 1967 (page 12).
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%.
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).
Send comments 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%."
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
is a little misleading by raising the specter that the sales
tax rate is fixed in the constitution.
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