Column: How to get rid of the personal income tax

From the Detroit Free Press

Michigan annually collects a net of $9.7 billion in personal income tax payments. Wouldn’t it be nice to make that $0 and join the other states that no longer require its citizens to file income tax forms?

Oh, I know the response of the naysayers: “That’s impossible.” But it’s not if we prioritize the best interests of all of our citizens over those of special interests. Some policy makers understand tax incentives can be good, but only seem willing to do so when it benefits some special interest like data centers or developers of “transformational brownfield projects.” When it comes to everyday citizens, however, these same policy makers are more than willing to increase tax burdens on our households, as was the case with the Senior Pension Tax and recent gas tax and registration fee increases.

So how can we responsibly take the income tax (and the Senior Pension Tax) from our current 4.25 percent down to zero? By incrementally decreasing the state income tax based upon the achievement of specific expense reduction and economic growth milestones and keeping whole the funding for priorities such as schools and road funding as we do so.

Let’s start with delivering the largest line item in the state budget more efficiently. Medicaid is the single largest line item in the annual state budget at $17.7 billion. If we were to offer Direct Primary Care Services (DPCS) as the preventive care component of Medicaid coverage, we could save taxpayers a minimum of 20 percent while improving the care received by Medicaid enrollees. The taxpayer savings would be over $3.5 billion once fully implemented. If the federal government would provide annual lump sum Medicaid block grants based on current expenditures, all $3.5 billion would be credited to the state. Extending DPCS to public employees would save another $280 million leaving us with a balance of $5.8 billion to cover with the income tax. These reforms alone could lower the income tax rate from 4.25 percent to 2.58 percent.

How about building higher quality roads? Investing in pavement technology that costs 15 percent more upfront but results in roads that last four times longer would not only reduce the frequency of orange barrels on our roads but would also save taxpayers close to a $770 million per year on road maintenance costs. Once all roads have been upgraded, we could reduce the state income tax to 2.24 percent.

Our pro-growth policies over the past six years have helped create almost 500,000 new private sector jobs. We would stimulate another wave of job growth, especially in small businesses, by eliminating the state income tax. Each job created results in $1,139 in additional state tax revenue and reduces the state welfare demand by $5,648 for a net gain of $6,787. Once we add another 500,000 jobs with pro-growth policies, we could cut our income tax rate to 1.37 percent.

We are now in striking distance of eliminating the income tax. Let’s keep going. If we were to replace special interest-driven economic development policy with broad-based economic development policies like the elimination of our state income tax, we would free up $663 million per year in MEDC tax credits and another $336 million per year in Michigan Strategic Fund grants. We could cut our state income tax to 0.93 percent. We now need another $2.1 billion in savings to reach our goal.

For the sake of this exercise, let’s attempt to forgo the typical disingenuous cries of “Draconian cuts” and assume that we cannot find another $2.1 billion in savings (a 3.7 percent cut) in our annual budget. We’ve all heard the standard “eliminate waste and fraud” line from politicians with very few specifics. I would like to provide a very specific example of fraud that should be eliminated. Have you ever heard of a “zapper?” Most law abiding citizens have not. If you live in southeast Michigan, you may recall a news story about how La Shish restaurants diverted $20 million of taxable income to fund Hamas. They perpetrated this diversion using what is called a “zapper” in their point of sale system. Without going into too much detail about this technology in this article, suffice it to say that Michigan sales tax revenues are annually shorted an estimated $1 billion due to fraudulent usage of “zappers.” Simply by enforcing current sales tax law, we could take the state income tax rate to 0.49 percent and, for good measure, we can put an end to further diversion of funds to terrorist organizations like Hamas.

So far, we have shown how we could rationally take our state income tax from 4.25 percent to 0.49 percent. Only $1.1 billion in expense reductions remains in order to enable us to eliminate the Personal Income Tax. How do we close the remaining gap? In light of the observation that the remaining $1.1 billion gap is only 2 percent of our overall state budget, my preference would be to continue exploring opportunities for additional expense reductions. In support of this approach, if the savings realized by deploying DPCS for Medicaid enrollees were to actually be 23 percent rather than 20 percent, the gap goes to $0.

In the final analysis, we have merely scratched the surface of what can be done to maintain a fiscally sound, balanced budget while pursuing the elimination of the state’s taxation of our labors. All it takes is a resolve to do so on the part of our legislators and the governor. It is time to say no to the naysayers who have been ignoring the best interests of the majority of our citizens.

Posted in Colbeck-Editorials.