United States - Michigan wakes up to tax increases

Michiganians went to bed Sunday night with the state nearing its first government shutdown and awoke to a $1.35 billion tax hike, among the largest in state history.

An 11.5 percent income tax increase and expansion of the 6 percent sales tax to a strange brew of services will close most of the $1.75 billion hole in the state budget year that began Monday.

Gov. Jennifer Granholm billed it Monday as a $1 per person increase per week for the average state household.

"This is a solution, not one of celebration but one of resolve," Granholm said after the state avoided a full shutdown with a budget deal that called for the tax hikes and as-of-yet unspecified budget cuts of $440 million and long-range government reforms. The state constitution requires a balanced budget.

"This puts the state on solid fiscal footing and will allow Michigan to move forward," she said

State Treasury officials estimated the income tax increase from 3.9 percent to 4.35 percent, which took effect Monday, will cost the average family of four $157 a year after typical deductions.

The income levy begins to ratchet down gradually in 2011 and returns to 3.9 percent by 2015. The service tax -- on items such as landscaping, ski lifts, janitorial services, investment advice, carpet cleaning and tanning -- will cost that same family about $50 a year when it takes effect Dec. 1.

Sherry Pyszczynski, a 40-year-old business owner from Hazel Park, had a different take on the budget solution, particularly the service tax.

"I'm really shocked. It upsets me terribly," she said. "I own a janitorial service and now I have to pass that cost along to all my clients. I don't know how the people in Lansing consider that a luxury."

Robert Smith, a Ford Motor Co. retiree from Northville, said he wished the state shutdown had occurred with full force to wake up politicians and make state employees endure the same sacrifices that have befallen the private sector.

"People would have been mad, but my expenses have risen and my health benefits have been reduced," Smith said. "Everybody is giving out here, but I don't see it happening in the public sector. It needs to happen."

Taxes 'slightly above' U.S. average

State Treasurer Robert Kleine said the new taxes move the state's overall tax burden "from slightly below the national average to slightly above the national average."

It's difficult to compare income taxes across states because most states with such a levy have a graduated tax with varying rates. Using the top rates in each state, the Treasury claims Michigan's 4.35 percent makes it the fourth lowest in the nation. It's the highest rate in Michigan since 1999. The higher rate is expected to generate about $760 million annually.

The tax on 23 new services -- which will generate $725 million over a full year -- means Michigan now taxes 49 services, according to the Treasury. The state already taxes some services, including storage and auto leasing. That puts the state at 27th in the country in the number of services taxes, up from 36th, Kleine said.

Another measure of tax burden is state and local taxes as a percentage of personal income, with the national average at about 11 percent. Kleine said the new tax boosts mean Michigan edges up from slightly below 11 percent to slightly above 11 percent.

But the Tax Foundation in Washington, D.C., which tracks such data, takes a different view of Michigan's ranking. The combination of the sales and income tax hike puts Michigan's tax burden at 11th-highest in the nation, up from No. 14, the institute says.

Sports, concert tickets spared

The list of services to be taxed can be kindly called unusual. Services on the list were meant to be discretionary, mainly by the affluent. But nonessential items such as sports and concert tickets and cable TV won't be taxed. The Detroit Tigers, who drew more than 3 million fans this year, reminded fans before games to protest the proposed hike with lawmakers. Tigers tickets were excluded.

Ski lifts are on the ledger; golf fees and boat slips are not. Personal services, such as astrology, massage, dating and fortune-telling are now subject to the tax.

Asked about how the list was drawn up, Kleine said: "We had to look for a certain amount of money and we looked for services we thought we could get votes for."

Senate Majority Leader Mike Bishop, R-Rochester, likened the selection of the services to be taxed to a "Chinese food menu where you pick a la carte from the list. It's not scientific at all. You identify your revenue target then go down the list and make selections."

Bishop also said he wouldn't be surprised to see a citizens' referendum to try to repeal the service tax.

"There will be outward rebellion when some of these interest groups and industries impacted by it see exactly what it means," he said.

The tax increases were ushered in almost exclusively with Democratic votes. The service tax drew no Republican votes in the House and two in the Senate. The income tax hike attracted two GOP votes in the House and four in the Senate.

"Republicans refused to put up votes for anything," said House Speaker Andy Dillon, D-Redford Township. "Basically, this entire package was delivered by Democrats."

House Republican Leader Craig DeRoche, R-Novi, said he expects outrage about the tax increases in general.

"This is a victory for the bureaucracy and special interests and a loss for families struggling to make ends meet," DeRoche said. "It's one of the largest spending sprees in Michigan history."