Graduated Income Tax To Replace MBT?

A Michigan State University economist Monday called for a graduated income tax to replace the state's new and much-hated Michigan Business Tax and the current onerous surcharge.

Charles L. Ballard, professor of economics at MSU and director of the MSU State of the State survey, said Michigan could replace MBT revenue by changing from today's 4.35 percent flat tax to a graduated tax at levels similar to Kansas -- where low-income people pay a state tax of around 3 percent, but tops out at a 6.35 percent marginal rate for the top income of the highest wage-earners.

"I like to use Kansas as an example because it is not known as a hotbed of radical liberalism," Ballard said.

As for where opposition to the proposal may come, Ballard said: "Some on the left may say, 'Oh, graduated income tax, great, but I want to keep the business tax,' and some on the right may say the opposite," but he bet few on the right would be willing to defend continuing a $2.5 billion-a-year business tax.

Ballard was one of four economists speaking at "Michigan's Economy in 2009 and Beyond: a Panel Discussion of Economic Experts," at the University of Michigan Monday.

Ballard said the graduated tax is also a public policy answer to a "phenomenal increase in income inequality," in which incomes in the bottom 50 percent of wage earners is virtually flat or down slightly since 1976, while the income of the top 5 percent of wage earners has rocketed 40 percent in real terms.

He also said higher wage earners who itemize their federal income tax deducations would get much of the increase back anyway.

Ballard said a graduated tax would cover all of the original MBT, while the MBT surcharge could be covered by a modest increase in the sales tax.

On other topics, Ballard said that in terms of the state's economics, the cost of a college education has gone up faster than inflation, but so has the reward. He said wages for high school graduates and dropouts in recent years have "fallen off a cliff."

He also said Michigan has to move away from a "school year that was developed in the 19th Century. It made sense when you wanted your kids around to pick bugs off the potatoes and hoe the corn rows all summer long."

As for other speakers, moderator Paul N. Courant, university librarian and dean of libraries, and Harold T. Shapiro collegiate professor of public policy, quipped that with the MBT, Mchigan has managed to create a tax structure that is inhospitable to both labor and captial.

Kim Hill, director of the Automotive Communities Program and Associate Director of theEconomics and Business Group, Center for Automotive Research in Ann Arbor, covered the recent crash in auto production.

And echoing Ballard, he said education is critically more important -- even in manufacturing jobs. "Even a new assembly line worker ... is required to have two to four years of college, and there's an engine plant now in Dundee where everybody there has a four year degree," Hill said. "The reason they want college degrees is that they have learned from the Hondas and Toyotas of the world that have empowered their workers to improve theproduct. They want people with heads on their shoulders, not just muscles and sweat."

Hill pointed out that Michigan has retained the high-tech part of the auto industry, averaging about 70 percent of automotive research and development spending most years, with more than 50,000 jobs in auto research and engineering.

And he hailed the $25 billion loan package for the automakers that encourages efficiency upgrades and credits for the purchase of plug-ins, and hopes the rumors of billions more for advanced battery research are true.

John Austin, director of Southeast Michigan New Economy Initiative, said Michigan and the Midwest have significant and unique economic challenges that are legacies of past industrial leadership, including  contaminated land and water. The region also has low education attainment levels relative to new economy leaders, and faces a severe brain drain of young, talented workesr.

However, the region also has huge advantages, including strong production of intellectual property and top-flight universities -- in fact, 20 of the world's top 100 universities are in the Midwest, more than the West Coast or the Northeast.

The region also has immigrants who are much better educated than the native-born, and is above average in the creative economy.

Christopher Hayter, director of the economic development program at the National Governors Association, said he's studying the link of post-secondary education and industry. He said most funding for higher education has been flat, and college attainment rates for young people are actually following below the rates of earlier generations. He also criticized state legislatures' funding strategies: "The golden rule of state legislatures is that which we don't understand, we cut."