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Raise money for roads by increasing the income tax rate April 6, 2019
As I said in a March 6 story, I don't like Governor Whitmer's plan to raise money for roads by repealing the pension tax and extending the 6% corporate tax to small corporations.
I'm for increasing the gasoline tax to raise money to fix roads, but I think the majority of road funds should come from an increase in the individual income tax.
Since it is related to road use, it makes sense to raise the gas tax. People who use the roads will pay the tax and it might just encourage some to use public transportation rather than drive. However, a lot of low-income people have no choice but to drive, and we don't want to add substantially to that expense.
I see the income tax as the most fair of Michigan's taxes. The people who pay the most are the ones who can most afford to. Although it is a 4.25% flat tax, the effective tax rate less, and it is progressive.
Each year, the Treasury Department produces a report on the individual income tax. The most recent report is for tax year 2016. It says on page 11:
The overall average effective tax rate for 2016 was 2.39%. The following is from a table on page 40 of the report:
And this is from a table on page 41 that provides a breakdown of upper income filers:
Note that the effective rate unexpectedly goes down for incomes over $300,000. The report explains that "For taxpayers with AGI over $1 million, if Income Attributable to Another State were subtracted from AGI, the effective tax rate would be about 3.422%."
So the highest effective rate is 3.37%, and it is for taxpayers with AGI over $180,000. For taxpayers with AGI less than $50,000, the highest effective rate is 2.72%.
The Senate Fiscal Agency has estimated that in addition to the road funding package passed in 2015, it will take $2.2 billion a year to fix the roads. To determine how much of an increase in the individual income tax it would take to raise $2.2 billion a year, I divided $10.186 billion, the amount of revenue projected for the 2018-19 fiscal year, (source) by 42.5, the number of tenths of a percent in 4.25%. The result is $239.7 million, the amount raised by each tenth of the 4.25% income tax rate. Dividing $2.2 billion by $239.7 million gives 9.17. It would take an increase of just over .9% to raise $2.2 billion, bringing the rate to 5.15%.
I think my arithmetic is correct, but my assumptions may not be. Anyway, the effective rate will be a percentage point less than the nominal rate (5.15%) for people with high incomes and even less for low income people.
Send comments, questions, and tips to stevenrharry@gmail.com, or call or text me at 517-505-2696. If you'd like to be notified by email when I post a new story, let me know.
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