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Slowdown in Michigan disposable income growth in 2013 in part due to higher state tax burden

Andy Nguyen

The State of the State speech outlines what the Governor sees as spending priorities for the state. But state taxes and spending are only part of the story.   Michigan Watch has learned recovering from the Great Recession will not go as well in Michigan as the rest of the nation this year.

Let’s start with a major factor that will not only affect Michigan, but all the states. When Congress avoided the fiscal cliff, it did not extend a payroll tax holiday. As part of a stimulus package, the payroll tax was reduced from 6.2 percent to 4.2 percent for two years. That has ended. Your paycheck is smaller.

For the average Michigan family, that’s going to mean about $1 thousand less for the year.

George Fulton is an economist at the University of Michigan. He recently briefed government officials on how that will affect Michigan. 

“Some people call real disposable income ‘purchasing power.’ And you can see that it turns slightly negative in 2013. This is affected by the nominal income growth and an increase in the growth of federal taxes,” Fulton explained.

But Fulton went on to say that Michigan will have weaker growth than the rest of the U.S.

That’s in part because Michigan has passed new taxes on retirees’ pensions. There’s a smaller tax credit for the working poor. Special tax exemptions for seniors and children were eliminated and the homestead property tax credit for homes valued at more than $135 thousand was eliminated.

Most businesses might be benefiting from lower taxes, but because the people won’t have as much purchasing power due to higher taxes, businesses can expect their customers to spend less this year.

We wanted to know what business owners thought of the trade-off. Aubrey Lopatin and her husband Jeremy own Arbor Teas. It’s an online business selling organic and fair trade teas.

First, how did the tax restructuring help the company? Arbor Teas has not finalized the books for 2012, but Aubrey Lopatin thinks they might not notice much difference because the company is so new.

“We’re also growing substantially. So, last year we saw about 64 percent growth and we were just quickly looking at what our sales for just the first half of January were and we’re showing about 32% growth just this month so far, so it’s hard to compare apples to apples,” she said.

Another small business owner told me Michigan’s tax restructuring saved his company thousands of dollars. He’s hoping the economists are wrong about a slowdown in Michigan’s recovery.

Aubrey Lopatin says as far as her product goes, tea is inexpensive. She does not think people are going to cut back on what they see as a little indulgence. They'll more likely cut back on more expensive purchases, putting off that new car or electronic gear like computers or TVs.

That’s not to say the Lopatin family has not been affected by Michigan’s tax restructuring.

“Our family is consolidating homes with my mother who was a teacher of 38 years in Michigan, retired teacher now having her pension taxed  and she’s moving in with us. So, just personally speaking, I think everybody is just trying to make ends meet,” she told us.

So some business owners are paying for those tax cuts in other ways, personal ways.

Now, Governor Snyder says we need more tax dollars to fix roads and bridges.

“We need to invest at the state level a billion to one-point-two billion dollars a year. I also want to provide for a local option for an additional couple hundred million dollars of additional revenue,” the Governor said in his annual State of the State speech in Lansing last night.

So, that's up to $1.4 billion a year from taxpayers.

The Governor says if we don’t make the investment, it will cost us far more in the future. The Governor says we need to spend at least $10 billion over ten years, or face a cost of $25 billion in repairs if we don't.

To pay for the increase, the proposal will likely include a mix of a restructured fuel taxes and higher vehicle registration fees. The last time the state changed the fuel tax, diesel was not included because business said it would be too expensive.

So, the question this time is whether this will mean a hit for citizens pocketbooks or whether the cost will be shared by businesses? And what mix will mean a stronger economy for Michigan?

Governor Snyder stresses the road to economic recovery is now about fixing the pot holes.

Lester Graham reports for The Environment Report. He has reported on public policy, politics, and issues regarding race and gender inequity. He was previously with The Environment Report at Michigan Public from 1998-2010.