Lansing looks at income tax cuts

That's partly because they make, on average, more than residents in many other states, according to Mark Haas, director of the Michigan Bureau of Finance and Fiscal Policy.

But politicians looking for ways to make voters happy in an election year and economists who think lower taxes will spur more economic growth say it might be time to lower the state's 4.4 percent individual income tax.

Republican Gov. John Engler recently said that corporate and individual income tax rates are out of line with other states and that he's looking at a possible tax cut, although not necessarily in the income tax.

House Democratic Floor Leader Pat Gagliardi of Drummond Island has said the House might raise the personal income tax exemption this year if the money can be spared. Raising the exemption lowers tax payments by reducing the amount of income that's taxed.

There's little consensus, however, on how much and how quickly exemptions should be raised or tax rates should be cut - or whether either course is a good idea.

The individual income tax brought in $5.9 billion in fiscal 1996, and dropping the tax rate by even a tenth of a percent would bring in about $150 million less, Haas said.

Considering that income tax revenues account for 31 percent of the state's tax collections - and nearly a quarter of the money given by the state to schools - some are urging caution.

"You're going to have to make a choice of reducing several programs if you want to reduce taxes," said Bob Kleine, former state economist under Gov. William Milliken.

"We have a lot of tax cuts that are going to be kicking in in 1999. I'd probably wait to see how things went in terms of the economy, and until these other cuts were fully factored in."

Kleine, now senior economist for Public Sector Consultants in Lansing, said the 1998-99 budget already is going to be tight.

But two economists said cutting the income tax is just the tonic Michigan's economy needs to stay healthy.

"One of the factors in Michigan's current economic growth streak has been the improvement in its tax climate. Like a championship team that ... wants to keep winning, Michigan has to keep improving," said David Sowerby, an economist and investment adviser at Loomis Sayles & Co. in Detroit.

While he declined to give a fixed amount that income taxes could be reduced, Sowerby prefers a cut in the overall rate to an increase in the exemption. Raising the exemption benefits families more than people without dependents, so rate cut is more fair, he said.

David Littmann, senior economist at Comerica Bank, would drop the income tax entirely.

"It could be done easily given the seven-year stretch of good times and the expected good times ahead," said Littmann. "They could phase it out if they were privatizing (government services) in five to 10 years."

Littmann is convinced the state would come out ahead as investors and new residents rushed in to benefit from the lower taxes.

"You more than make up the difference through demographics and economic activity," he said.

Although Michigan has a flat tax rate, personal exemptions and credits for property taxes, city income taxes, taxes paid to other states, home heating expenses and contributions to Michigan colleges and food banks all affect how much individuals actually pay.

The exemptions and credits also lower Michigan's effective tax rate to around 3 percent. Michigan taxpayers pay about 2.5 percent of their personal income in state income taxes each year. Nationally, the average is about 2 percent.

Even if an income tax cut or personal deduction increase doesn't come about this year, state residents can expect some tax relief when they pay their 1998 taxes.

The personal exemption went from $2,500 in 1997 to $2,800 in 1998. And families will be eligible for a $600 deduction for each child under age 7 and $300 for each child under 13.

Engler spokesman John Truscott said those changes - along with some tax cuts still being phased in from earlier years - may make an income tax cut unlikely this year. But if it's possible, Engler will be leading the way.

"There's a lot of numbers to be run," Truscott said. "But we're certainly going to give it a try."

01-12-98