Michigan tax facts, part 8: What would Richard Headlee think today?

Editor’s Note: The 10 Things Every Voter Should Know About Michigan Taxes
To help voters make sense of ubiquitous political arguments in this fall’s elections in Michigan, Bridge’s 10-part special report tells it like it is on Michigan taxing and spending issues. Today we present parts seven and eight. Read each five-minute primer published so far:

Part 1: Are Michigan taxes too high, too low or just right?
Part 2: Who wants what in the long war over Michigan taxes?
Part 3: Who pays the taxes in Michigan?
Part 4: What do you taxes pay for in Michigan?
Part 5: Who gets tax breaks in Michigan?
Part 6: How much do taxes matter for business location?
Part 7: Will your city hall and local schools go bankrupt?

Richard Headlee, an affable insurance executive, challenged conventional thinking when he shepherded passage of Michigan's 1978 Headlee Amendment. It limits local property tax increases and prescribes that state revenue cannot grow beyond 9.5 percent of total personal income in Michigan.

Vowed Headlee at the time: “Tax limitation will put the brakes on runaway spending. We are saying that state government has to operate within the same economic framework as the rest of the people in Michigan.”

That was his bold line in the sand. When passed, the Headlee Amendment’s supporters considered it a benchmark for how to keep big government in check.

In Michigan today, the Headlee cap is merely academic – actual government spending is way below the limit that voters approved 36 years ago. Since its passage, state revenues have hit the threshold just three times, barely, in 1994, 1998 and 1999.

In fiscal year 2013, state revenue stood $6.5 billion below that limit. The year before, it was $5.2 billion below Altogether, state revenues are more than $90 billion below that limit since 1979. They are more than $60 billion below in the past dozen years.

Long-time Lansing political observer Bill Ballenger said he believes that Headlee, who died in 2004, might be taken aback by those numbers. “I think he would be surprised,” Ballenger said.

Former state Treasurer Doug Roberts, who served under GOP Gov. John Engler, said it's not so much a product of tax changes as it is the economic plunge that Michigan endured the first decade of this century.

“We had a terrible decade. We had 10 years in a row in which wage and salary employment declined,” he said.

“We had a major city go bankrupt. Two of our major car companies went bankrupt and then you say, 'How come we haven't collected more money?' Hello. No one would have foreseen that.”

To be sure, Michigan's deep recession – which drove down property values, income and pushed taxpayers out of the state – surely accounts for much of the state's recent fiscal woes. But Michigan State University economist Charles Ballard said Michigan's taxes are too low to maintain adequate funding for schools, roads and local government.

“There is a view by some that the answer to all questions is a tax cut. My view is that we have gone too far,” Ballard said. “You do get what you pay for.”

K-12 student performance in Michigan now lags behind most other states. College students are on the hook for a much higher proportion of their college costs than in the past generation. Michigan suffers from eroding roads, sewer and water system infrastructures. Many local governments have cut services ranging from parks upkeep to police and fire staffing.

But James Hohman, assistant director of fiscal policy for the Mackinac Center for Public Policy, a Midland-based free-market think tank, argued that tax increases would be counterproductive to building a better Michigan. He said a cut in the state income tax would foster economic growth.

Hohman said he considers the Headlee Amendment tax limit “an inappropriate gauge” of whether Michigan residents can afford higher taxes. He noted that since 2000, the state has awarded billions of dollars in tax credit programs for favored industries, spending which is not counted against the Headlee limit.

“Reductions in personal income tax rates have a long academic literature as a way of improving state economic growth. States that go without one of the three main state taxes — business, income or sales — posted impressive growth in the past two decades as well,” Hohman said.

“The state can do more with fewer resources and can and ought to lower taxes.”