Michigan's proposed fair use tax will create job growth - for Indiana

A tax proposal overhaul is in the works for the citizens of Michigan. But, will this tax proposal improve the employment rate in Michigan, or will it instead benefit the neighboring states, or benefit the wealthiest individuals and businesses in Michigan at citizen expense? If we look at the lessons from our southernmost counties, is it the right decision?

The lessons from tobacco sales in the Hoosier State

From Kalamazoo, travel down US 131 to the state line of Indiana. From the border, you can see two tobacco outlets, a fireworks store, as well as a very nice office complex. 

What makes this interesting is that for at least one of these businesses, about 50% of the sales come from the Michigan residents who purchase cigarettes across the state lines, because of the lower prices. The Kalamazoo Career Guidance Examiner visited one of the sites, and found that in the 30 minutes at that business, several cars drove directly down from Michigan to the larger tobacco outlet, for the specific purpose of purchasing products. Upon interviewing one of the customers, the White Pigeon resident indicated that it was worth the five-mile trip to the outlet, "because the cost was about $8 per carton cheaper than in Michigan." At the same time, this business also offered convenience items of milk, snack foods, limited groceries, soda and gasoline - which meant that this business and the resulting tax revenue became part of Indiana's economy. Ironically, two of the employees working at this busy store were Michigan residents, who stated that they took this job, "because they could not find work in Michigan." When the employees were asked about the volume of business from Michigan residents, two employees indicated "too much," and one employee estimated that "50% of their sales came from Michigan." All because the prices are cheaper in Indiana and it is cost effective to go across the state line. 

While most people would suggest that these financially-struggling individuals should quit tobacco, especially due to the health risks; it is not an easy process to quit this highly-addictive substance. This author neither advocates any business in Indiana, nor the purchase of these products. However, the point being raised is the issue that higher prices in Michigan mean that consumer purchases, revenues, and jobs will flow out of our state into neighboring states. For the border counties of Berrien, Cass, St. Joseph, Branch, Hillsdale, Lenawee, and Monroe counties in the lower peninsula; and for Gogebic, Iron, Dickison, and Menominee counties in the UP, lower prices in the neighboring states mean a loss of jobs and revenues to our own economies.

When consumers purchase items outside of Michigan, it will also affect available jobs due to the loss of revenues to our retail establishments.

The supposed "Fair Tax" shifts the tax burden from businesses and the most wealthy Michigan Residents to  consumers, including grocery purchases

A proposal is being offered by the Michigan Fair Tax Association. This proposed change to our state's tax structure supposedly will be beneficial to the businesses of Michigan, and "spur creation of jobs in Michigan." However, in the opinion of the Kalamazoo Job Search Examiner, this proposal would be devastating for the economies of the border counties of Michigan.

The shortened proposal is as follows (http://www.mifairtax.org/index.html): "A PROPOSAL TO AMEND THE MICHIGAN CONSTITUTION BY AMENDING SECTIONS 3, 7, 8, 10, and 11 OF ARTICLE IX, AND BY ADDING SECTIONS 43, 44, 45, 46, AND 47 TO ARTICLE IX. THE AMENDMENT IS BRIEFLY SUMMARIZED AS FOLLOWS: The Michigan Fair Tax Proposal would amend the Constitution of the State of Michigan to eliminate the Michigan Income Tax of 4.35% and the Michigan Business Tax and replaces those taxes with a 9.75% sales tax on all consumer purchases of goods and services, but does not tax business to business transactions. No other statewide tax could be restored, enacted, or the sales tax increased without a vote of the people. The state shall reimburse to every Michigan citizen's household an amount based on the Federal Poverty Level Guidelines. This proposal would constitutionally guarantee Revenue Sharing for counties, townships, cities, and villages."

There is a slide show on the Fair Tax website that suggests that Michigan's economy will improve through elimination of the state income tax,  business taxes, and all other taxes. Instead, our state's government's tax intake would be dependent upon a 9.75% sales tax. Their theory is that this change in tax structure will improve Michigan's business climate, which in turn will result in increased jobs for Michigan.

That may be fine for the counties in the middle of Michigan, where all the surrounding areas would also be affected. However, a consumer often shops where the prices are lower, even if it means driving further to purchase items.

For the following reasons, the Kalamazoo Career Guidance Examiner feels that the Fair Tax proposal will hurt the border counties of Michigan, and also the tourism economies of Michigan.  With Michigan's high unemployment rate, this proposal has some serious flaws that will need to be addressed if this proposal is to have serious consideration.

• There is no guarantee that a company will lower their prices to consumers or other businesses if business taxes are eliminated.
• There is no guarantee that decreasing the taxes of a business will guarantee additional employees will be hired by these businesses.
• Services to consumers will now be taxed, which will affect employment in related industries. http://www.mifairtax.org/facts.htm
• The tax structure benefits business owners disproportionately, by eliminating all business taxes, including the sales tax on business-to-business revenues. The only exception would be the sales tax on purchases by business owners for their own personal use.
• For businesses which count on consumer purchases in these border counties, there is a higher  likelihood that further layoffs will ensue, especially if a consumer decides it is cheaper to purchase items across the border in Indiana or Ohio (or Wisconsin and Minnesota in the UP).
• The employees who typically work in either retail or tourism are typically part time, hourly, non-benefitted employees; most of whom live below the Federal Poverty Guidelines. For a household size of four, that equates to a wage of $10.60 per hour; and only if they can work 40 hours per week, every week of the year. For most wage earners in these industries, the sad situation is that most employers typically do not offer full time work. As a result, the workers in these counties most affected would be further reduced below the FPG if decreased revenues to these businesses result in a loss of hours.
• The cost of the tax burden will be shifted to consumers, not to the businesses. The assumption is that this is "fair to all concerned." The translation is that all citizens, including retirees, displaced workers, the unemployed, the self employed, the middle class, as well as the wealthy, will all share equally in the taxes.
• The information on how this affects the border counties implies that the prices will be reduced on products through the proposed tax structure. However, there is no guarantee that prices to the consumers will drop, especially if a business has been struggling financially for survival (see http://www.mifairtax.org/facts.htm - click on the link "Being competitive along the border in Michigan").
• The Fair Tax does include a disclaimer that a prebate check will be issued on a monthly basis to the citizens of Michigan. However, if our current system of government-issued checks are any indication, the prebate system does not guarantee a timely issue of a prebate check. Further creating a new state bureaucracy to handle the complaints and other issues concerning this prebate.
• Supposedly the system "untaxes" the lowest income residents and offers a prebate, regardless of income, but will be based upon household size. This arguably means that the wealthiest residents of Michigan will also receive a supplemental check, at taxpayer expense. Do our highest income residents really need this prebate?
• This prebate system gives an advantage to those citizens who have a stable residence, which includes our middle and higher income residents.
• When a low-income family cannot afford stable housing, they are often forced to move in with family or friends, or become homeless. How would these low-income residents be able to collect the prebate?  
• Prior to our five year-limit on TANF (welfare) benefits, a welfare recipient in Michigan was capable of collecting benefits indefinitely. How will the administration of the prebate system ensure that Michigan will not once again attract people who are happy to collect a prebate check without attempting to find work? 
• A key reason why so many retail businesses in Indiana are situated close to the border (not just on 131 south of White Pigeon) is that If the prices typically are lower in Indiana. Because sales volume impacts the selling price to consumers, there is no guarantee that a retail establishment on the north side of the border can (or will) reduce prices low enough to remain competitive.
• In a county like St. Joseph county, where a large amount of employees are dependent upon work from employers like WalMart, Meijer, Walgreens, and other retail establishments, the loss of revenue will result in a further loss of jobs if the increased sale tax shifts business to Indiana.
• According to the full proposal (the link can be found at http://www.mifairtax.org/) groceries purchased in Michigan will include the 9.75% sales tax, currently not taxed.
• There is no guarantee that an out-of-state business will relocate to the border counties of Michigan and improve employment opportunities in our area.
• The Michigan Fair Usage Tax relies upon a healthy amount of consumer spending in order to generate the necessary revenues for the state.
• The 9.75% sales tax will discourage Michigan's tourist industry and further increase our unemployment rate, especially in those counties dependent upon tourism, such as the Upper Peninsula and the counties nearest to our Great Lakes. The result will most likely be higher unemployment rates in those counties.
• Under this proposal ALL businesses in Michigan, including those that are highly profitable, will pay NO state taxes, shifting the tax burden to the citizens of Michigan. 
• Under state law, our state government is required to balance the state budget each year. The Fair Tax proposal, if implemented will mean that the state will be dependent upon consumer spending above the prebate disbursement level for revenue, or further reduce services to Michigan residents. 
• Would this proposal allow companies to then provide the business executives with purchases made by the corporation on their behalf, including company cars, houses, etc, while the lower paid workers will pay a 9.75% tax rate on the same purchases? 
• The supposed influx of businesses flooding into Michigan (based upon the proposal) depends upon a skilled workforce capable of working in these businesses.
• A worker who has not graduated high school or is not interested in higher education is more likely to work in industries like retail and/or tourism. What this means is that the proposed tax structure will affect the employment opportunities for the lowest-income residents.
• The tax structure is designed to reduce the taxes from the wealthy to the consumer. No employee in Michigan, including the highest paid executives, will pay state income tax. So, the citizens who benefits the most from this proposal, are the wealthiest residents of Michigan.
• In a high unemployment rate, when families are faced with lack of income, the likelihood is not high that consumer spending will increase. For those who are unemployed, the prebate check will most likely be used to pay for bills and housing, not to be used for consumer spending. What this means is that the taxes lost from the existing tax structure will not be improved in the new tax structure.
• The prebate system does not guarantee that purchases will be made in Michigan.
• Somehow, this sales tax is purported to guarantee a tax revenue from purchases in our underground economy,  (http://www.mifairtax.org/facts.htm - see link to Michigan Fair Tax Explained).

In summary, this proposal disproportionately benefits those who are currently making the highest income, profitable businesses in Michigan, and places the burden on consumers. It gives a promise of no state income taxes. Which means that for the Upper Class of Michigan, this will indeed be a nicer place to live, and for those at the lower end of the economic scale, we accept the additional burden.

In the interest of fair balance, this author welcomes comments and alternative viewpoints.

In particular, how will the tax shift to consumers guarantee additional jobs in Michigan?

In the interest of fair balance, here is some recommended reading

http://www.examiner.com/x-55862-Oakland-County-Independent-Examiner~y2010m7d6-Michigan-Fair-Tax-Association-plans-to-make-Michigan-first-choice-for-business-and-jobs

http://www.mifairtax.org

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(article edited 7/12/2010)