Tax competition helps discipline profligate state governments. States that raise taxes cause jobs, capital, and entrepreneurial talent to escape to better fiscal environments. The Detroit News understands this relationship, which is why the paper is strongly condemning the governor for pushing irresponsible tax rate increases:
Gov. Jennifer Granholm and state House Democrats are pushing for an increase in the state’s income tax rate to erase the budget deficit. The income tax is the most easily comparable of taxes. At a 3.9 percent flat tax rate, Michigan’s income tax compares extremely well with other states and gives it a rare advantage. Pushing it to near 5 percent would throw that small edge away, particularly since fast-growing and highly attractive states like Florida, Texas and Tennessee have no income tax, and more than a dozen states across the country have either cut their income tax this year or are considering doing so. For Michigan to head in the opposite direction will give potential employers and residents yet one more reason to pass by the state. Even worse, the governor and House Democrats reportedly want to place a graduated income tax on the ballot for the fall of 2008. A graduated tax would mimic the federal tax in creating different tax rates for different income levels. This soak-the-rich approach by the Democrats will lessen Michigan’s chances of attracting the high-tech entrepreneurs Granholm says she is counting on to turn around the state’s economy. Why come here and give the state a greater percentage of the profits from their risk taking when they can locate in other states that don’t punish success?
Politicians in Maine, by contrast, may finally be learning that high tax rates have hurt state competitiveness. Lawmakers are considering a couple of proposals to significantly reduce the state’s onerous income tax rates in hope of luring new business. The Times Record reports:
The Taxation Committee is considering two competing tax reform plans — one that would lower the income tax to a flat 6 percent and another that would drop that rate to a flat 4.9 percent by adding a penny to the sales tax. …The committee has been working on its tax reform proposal for months. The goal is to replace the state’s graduated income tax system with a flat tax and bring down Maine’s top income tax rate of 8.5 percent. That high rate kicks in at a low level — $18,250 of taxable income for individuals — and adds to Maine’s reputation as one of the most overtaxed state’s in the county. … The plans are based on the same logic, said Rep. Dick Woodbury, an independent from Yarmouth, who is pushing the bolder version. He believes the lower income tax would help attract more businesses to the state. … The proposal to decrease the income tax rate to 6 percent by expanding the sales tax base appeared to have the most support Monday among committee members, although the 4.9 percent plan was picking up steam. “I like the 4.9 percent. It really does change the perception of Maine’s income tax,” said Sen. Joe Perry, D-Penobscot, the Senate chairman of the Taxation Committee. … Rep. Scott Lansley, R-Sabattus, picked up on Woodbury”s theme that the lower income tax rate would attract more business here because it would make the state more attractive to higher-paid professionals. “If the CEO moves here, the company’s going to move here,” Lansley said. “Aren’t we trying to attract more business? Aren’t we trying to keep our young people here?”