Tax cuts are much better than tax rebates
Michigan finds itself in the rare spot of having more money coming into the state budget than it needs to run the state. Both Republican legislative leaders and Democratic Gov. Gretchen Whitmer agree that at least some of the $6 billion in extra funds should be returned to taxpayers.
But they are far apart in how to accomplish that goal. Whitmer wants one-time rebate checks of $500 a person, something she says will help residents deal with inflation immediately.
Lawmakers have already passed a bill, with some bipartisan support, that would cut the income tax rate to 4% from 4.25%, a longtime goal of Republicans. The price tag for the legislative package is $2.6 billion, which would make it one of the largest tax cuts in Michigan history.
In general, tax cuts are better than tax rebates as a means of lowering the tax burden and creating a more attractive environment for residents and businesses.
Tax cuts impact long-term behavior since families can adjust household budgets to reflect the lower burden, perhaps increasing savings or making large purchases they might otherwise not be able to afford. Cuts will return the surplus more gradually to taxpayers, but provide a more lasting benefit.
Rebates flush a lot of money through the economy all at once, and then they’re gone. The extra cash is likely to be spent as soon as it arrives, used to pay off debts or stashed in the bank. Rebates don’t permanently change the spending power of residents, and are typically used as a means to stimulate a sluggish economy. And to build goodwill with voters ahead of an election. Michigan’s economy doesn’t need a jolt. The risk of rebates in the current environment is that they could add to inflation by pouring more money into an economy that is already unable to meet demand.
Any tax relief should be broad based. Along with the rebates, Whitmer is asking for targeted tax cuts for certain constituency groups, including government retirees. The benefit to residents would be uneven.
The Republican plan provides relief across the board by lowering the rate and increasing personal income tax deductions. Their bill would also boost the earned income tax credit and provide a $500-per child nonrefundable credit.
The debate over how to distribute the surplus should take into account the economic forecast. The economy is creating jobs and incomes are rising, but inflation is eroding buying power and destroying consumer confidence. Turmoil in the corporate world is tanking the stock markets.
An Anderson Economic Group forecast raised “the real possibility we will see a recession in 2022-23,” citing increasing interest rates, declining growth in the first quarter, and a drop in real earnings for the past four quarters.
Policymakers in Lansing must carefully weigh whether today’s surplus will turn into tomorrow’s deficit. It’s a lot easier to cut taxes when a state is flush with cash than it is to raise them when it’s broke.