The Building Tradesman Newspaper

Friday, September 29, 2006

Cyclical auto industry, not business taxes, is state's millstone, study says

By The Building Tradesman

LANSING - There's no denying that Michigan's job situation is dire, with a 7.1 percent jobless rate that is leading the nation.

Job losses in our state - and why they're happening - is the single issue that will probably tip the outcome of the race for governor between incumbent Democrat Jennifer Granholm and Republican challenger Richard Devos. Tax policy is the other. Voters will have to sort through the rhetoric and decide for themselves the impact of Granholm's policies and their effect on losses, and whether Devos will be able to make Michigan more business-friendly and reduce the jobless numbers.

A new study takes some of the politics out of the equation. It said Michigan's tax rate isn't out of line with the rest of the nation. And the overwhelming controlling factor guiding the economic performance of Michigan is automobile sales - a situation which hasn't changed in a century.

The report, released last month, was produced by the nonpartisan, nonprofit W.E. Upjohn Institute for Employment Research and funded by the Michigan Economic Development Corp. It concluded that Michigan's economy has lagged behind the rest of the nation for the last six years almost entirely because of the decline in fortunes of the state's automakers.

"We have over seven times the national average of employment in the auto sector," said Timothy Bartik, a senior economist at the institute, told the Lansing State Journal. "If the auto industry had done better, we would have grown closer to the national average."

The report said, "each job lost in the Michigan motor vehicle industry causes a loss of more than four other jobs in other industries in the short run, and more than five other jobs in other industries in the long run. Many Michigan businesses are dependent on the spending either of the Big Three in purchasing supplies, or of the Big Three's workers in purchasing consumer goods and services."

The study probed a little deeper into the state's economic malaise - and found that after the auto-related problems, Michigan is fairly average. Turns out that the State's Single Business Tax (SBT) - a huge campaign issue and said to be a "job killer" by Devos - is benign when compared to other states.

In August, state Republicans voted to repeal the SBT at the end of 2007. The SBT accounts for about $1.9 billion of the state's budget. Granholm blasted that action, charging that Republicans did not have a plan to replace tax money, and said she would not support a plan that would place more of burden on Michigan taxpayers.

"Even though Michigan's business taxes are unlikely to be a major factor in explaining the state's recent slow growth," the Upjohn study said, "the question remains as to whether our taxes are out of line with those of the U.S. and our competitor states." Using three different tax scenarios, "the most recent measures of Michigan's taxes suggest that Michigan's taxes and business taxes are actually slightly below the U.S. average. Depending on the tax measure one uses, Michigan's taxes appear to be from 5 to 19 percent below the U.S. average."

That analysis relatively jibes with a report by Ernst & Young in conjunction with The Council on State Taxation in Washington, D.C., which ranked Michigan 26th nationally in state business tax competitiveness.

A year ago, the Michigan Prospect think-tank (which leans liberal) issued a paper called "Evaluating Michigan's Business Taxes." Author Robert Kleine pointed out that Michigan's business taxes have declined from 20.7 percent of the total state tax base in 1986 to 10.1 percent in 2004.

"Economists and tax experts," he said, "have debated for years the effects of state and local taxes on economic growth. The general conclusion is the taxes at the margin can make a difference but other factors such as quality of the work force, quality of the education system, labor costs, access to markets and natural resources, and quality of life are more important.
Michigan's current economic problems are due more to the problems of the American motor vehicle industry than to high business taxes."