Michigan Drive to Implement the FairTax

Following up our open forum on the FairTax, last night I heard that Michigan (my state) has a group that is spearheading a change to the FairTax here. The details:

A group that wants to significantly change Michigan's tax structure has kicked off its campaign targeting the November ballot.

The Michigan Fair Tax Proposal would amend the state constitution to eliminate the state income tax and Michigan Business Tax and replace them with a higher sales tax.

The sales tax on consumer purchases would be 9.75 percent. Business to business transactions would not be taxed.

I think I'll be signing the petition. If this can work on a state level, maybe it can on a federal one as well.

Comments

[Duncan]

FMF,
I guess one question to ask, is it ethical to advocate a tax that would be a large tax cut for yourself and increase taxes on the poor? Consumption taxes are generally regressive. Would such a tax cut really improve Michigan's business environment or are regulations more the problem?

[Justin]

I have a question about the fair tax. If implented, what happens to money that is taken out of someones Roth IRA when they are older. They already paid tax on the money beforehand and they would now have to pay taxes on the money when they spend it. Would they be getting taxed twice on the same money?

[FMF]

Duncan --

1. Not sure if it's ethical or not. That's a tough question that I think is very hard to answer (especially in a democratic situation where what the voters decide is "right.")

2. Not sure it will be a large tax cut for me or not (though it probably will be since I'm more of a saver than a spender.)

3. As far as taxes on the poor, my understanding is that there's a pre-bate for the poor that gets them on a level playing field. After that, if they spend more than others, they pay more than others.

4. It's hard telling what Michigan's true problems are (if I could replace the govenor and keep the taxes, I probably would, but as of yet no one's made me the king of Michigan.) It could be the taxes, it could be the auto industry, or it could be the crappy weather (I like to blame everything on our weather). For me, the FairTax seems like a revolutionary idea in principle and I think it's safer to test it out on a state than for the federal government to jump into it (as a couple presidential candidates suggest.)

[Rob]

Duncan, if you study the Fair Tax as endorsed by Mike Huckabee, you realize that a prebate is issued every month up to the poverty level so those people would effectively be affected in a more progressive way. Of COURSE they would benefit.

[Rob]

Forgot to add, 9.75% sales tax?! We pay close to that now here in Alabama and we still have all the usual income taxes. Granted property taxes are not so bad. What we need to change is how we spend that tax revenue (and that we should spend less and therefore collect less).

[Morydd]

Since I live in Chicago, I'm already paying >9% sales tax, plus income tax. However, I can see this being a major burden to tourism revenues as well, and people in border areas will likely simply do the bulk of their shopping across state lines (I know I would) if the tax rates were significantly different.

[Bobby]

Texas here. We pay NO STATE INCOME TAXES. I think our sales tax is 8.75%. I like the Fair Tax Plan. I hate that people refer to it as regressive.

[John]

Since the FairTax requires poor people to pay more as a percentage of income for necessities such as food and medicine, why not just not tax them in the first place? That would eliminate the monthly prebates while decreasing the tax on the poor.

[Colin]

Texas as well. State sales tax is around 6% with a county/city tax stacked on top of that.

A "sales tax only" method was apparently not sufficient here in Texas; starting this year there is a new margin tax that will focus on taxing Corp, S-Corps & Partnerships. That tax will be passed right along to consumers.

The Fair Tax Plan does seem to have a few advantages over our current system; however, it is so dramatically different I think it would be hard to gauge the outcome before implementation. The problem I have is meeting current budgetary requirements with a "fair tax." I think the rate would have to be substantially higher to meet the necessary Government income levels we have currently.

[Anonymous]

One of the biggest problems with the Fair Tax is that the people promoting are intentionally disingenuous about its effects, which is of course most of what movement conservatism is about these days. The Annenberg Forum's fact-check team did a thorough look at this based on peer-reviewed papers, not talk show host bloviation.

Huckabee either doesn't understand it, or lies about its outcomes.
http://www.factcheck.org/taxes/unspinning_the_fairtax.html

Please, try it out in Michigan. You guys are already in dire straits and when things are worse in several years, we will all know to steer clear. The Taxpayers Bill of Rights (TABOR) in Colorado was another right-wing scheme that has messed up that state's finances significantly.

[Aaron]

Just another reason I will order expensive stuff from newegg or amazon and not incur the sales tax as a whole. Not a great solution given the fact that the last thing that Michigan should attempt is pushing potentially local sales to out of state. A boom for UPS and Fedex I'm sure.

At least with a progressive tax the ability to forecast revenues is a lot clearer. What happens when this lacks the revenues they forecast, can't make people buy more cars/computers/what ever. They will just increase property taxes, registration fees, or any other goods.

Always be wary of rich men with tax schemes! I vote for what I know and expect, not some nouveau economic idea which could be reasonably disastrous without a clear quantitative incentive across all groups to the change other than it will be "simpler" or more "fair".

[Bobby]

I'm not an economist or any other sort of expert, just a citizen. Why can't they meet budgetary needs with a sales tax? Can't it be some sort of variable that the state, or federal gov., can adjust to demands of a balanced budget? Dallas seems to be doing great as far as being practically recession proof. There is alot of construction of office towers and condos, everything. Something must be right about the sales tax only strategy.

[TheMightyQuinn]

Living in a state with no income tax, i don't see what the big deal is. With one flat sales tax rate, our public servants can't game the system like is being done with income taxes.

[Brip Blap]

It all sounds great when you have 9% sales tax and no income tax, but the next year, when the government needs an extra 1%? The next? The cash economy will take over...

[Rev]

As a Nevada resident who has no state income tax. I love it. Moved here from Oregon who has no sales but massive income taxes. Sales + property seem to work great here and I like it better this way. If it were sales tax and no other tax I think it would be better because then when taxes go up its not hidden anywhere. I think that is why many politicians will oppose it because they won't have a blank check book as easily anymore.

[Rev]

@Anonymous That doesn't have me fully convinced against the sales tax. Jumping to a national scheme would probably be bad but I think a state going to it would be fantastic to test out. Also a hidden benefit will be more saving/investing I would imagine.

[Minimum Wage]

Questiuon. Does this proposal add rent and other services to the list of taxables?

If so, proponents have a moral obligation to eliminate the nonhomestead tax on rentals occupied as a tenant's primary residence.

[Mark]

The Michigan tax reform plan is a great idea ! Taxing income and productivity instead of consumption is one of the reasons why states are losing jobs to other states, who in turn offer taxpayer-funded incentives to lure business away from other states. I live in North Carolina, and most of our new jobs and transplants have come from states like Michigan.

Of course higher sales taxes impact the poor more heavily since their consumer purchases are a higher percentage of their disposable income. However, with the state's rebate offer, the lower income tax rate, the income that is excluded from taxes, the earned income credit, the child care tax credit, and all the other assistance programs, the poor don't pay many of the same taxes the rest of us do. There are even breaks for senior citizens and the poor on property taxes in some areas, so I think the argument that the poor are getting shafted with this proposal is pretty weak. If the higher sales taxes cause lower income people to spend their money on the things they need rather than the things they can't afford, the better off they will be. As someone said earlier, the tax is not hidden, it's right on the receipt.

[Minimum Wage]

Last I looked, Michigan did not have an Earned Income Tax Credit.

Of course, the last I looked, Michigan had an 18-mill State Education Tax on rentals and other "nonhomestead" property, this proposal says it repeals the 6-mill State Education Tax on business property.

Was the nonhomestead tax reduced from 18 to 6 mills?

[Minimum Wage]

If rent is to be taxed, there SHOULD be a corresponding reduction in pre-tax rents. Supporters will probably say rents will fall, but it didn't happen under Proposal A, why should anyone expect rents to fall under this tax plan?

[Minimum Wage]

I suppose landlords will have to register with the tax collector, and collect the tax from their tenants.

What happens when a tenant skips without paying rent? Who pays the tax?

And what about homeowners who rent out spare bedrooms in their homes? Will they pay their Fair share?

[Jay]

Wouldn't the Fair Tax hit savers during the change over? Granted savers might not be spending, so they can avoid the taxes. But when you do go to spend, the money saved under the old system will get taxed again.

[Javert]

An interseting concept. A more interesting result would be to possibly stem or even reverse the brain drain. Now this is not to say that there are not many intelligent folks still living in Michigan but based upon the movements of my friends from high school, very few have remained in Michigan purely for economic reasons. It seems that this would be a big selling point to bring in new companies. More people, more consumers, more state revenue. It seems like one of those ventures that because it may be a bit painful in the short term may never get implemented.

I will have to research this more. I know in New Hampshire that they have no income nor sales tax but property taxes are quite high (I have heard the term outrageous).

This will also have to go hand in hand with a fiscally responsible government and a plan to revitalize Detroit. Unfortunately, though many disagree, I believe that the long term economic strength of Michigan is very much tied in to Detroit and thus, will be a monumental struggle.

My state is 1) no earned income tax, 2) no sales tax, 3) very high property taxes, and 4) relatively poor services.

By the way, is this 9.75% the same "fair" tax rate, where a 30% tax is called a 23% tax?

@Javert: Regarding New Hampshire taxes: You missed the very high business enterprise tax and rooms and meals taxes. Oh yeah, and you get "taxed" as you use the highways.