Thursday, March 07, 2013

My Michigan Taxes - Gerrymander Politics and Reverse Robinhoodism

The late, lamented Michigan Schedule 2
Over the weekend, I finally sat down with my documents and TurboTax, and settled in to my 2012 taxes. It's still a bit early for me, as I don't have all of my documents yet, but I wanted to get a sense of where I'd be this year.

I finished the Federal taxes, leaving gaps for the unreceived documents.

Then I got to Michigan. I completed the 1040 and Schedule 1, and went to fill out Schedule 2. That's my favorite. It's where the "Nonrefundable credits" are. For many years, Michigan has had a "different" tax system. Michigan didn't mimic Federal taxes for deductions, Michigan ignored most of those while giving direct credits for select favored items. The credit was 50% of a donation, up to a modest limit, for gifts to Michigan colleges or universities, Michigan public broadcasting stations, homeless shelters, and a few other select recipients. For 2011, my nonrefundable credits totalled $361. For 2010, it was $376, and for the 3 years prior to that the nonrefundable credits averaged $291. Reasonably consistent, and I'm guessing in line with many other Michigan taxpayers.

Because of the credits' extreme size -- a 50% credit -- nonrefundable credits could help transform relatively small out-of-pocket expenditures in to significant donations. For example, in 2009 I made a $200 donation to Gleaners Community Food Bank, one of the organizations that qualified for the "Homeless Shelter/Food Bank Credit" in line 4 of Schedule 2. On my state taxes, the 50% credit reduced my taxes by $100, and by itemizing my Federal return my taxes there were reduced by $50. In addition, PNC Bank matched my donation to Gleaners. So, Gleaners received $400, but after credits and deductions my out-of-pocket spend was just $50. In subsequent years I substantially increased my donations to Gleaners in 2010 and 2011.

Suffice to say, I found the nonrefundable credits to provide an extraordinarily wonderful way to encourage Michigan citizens to give to local organizations. It even had two features that made it clear that it wasn't a tax break for the rich, either:
  1. It was capped at a relatively modest total dollar amount ($200 credit for married people giving to homeless shelters, for example)
  2. It was a direct credit -- meaning that everyone who gave to those organizations got the credit, even if they had little or no income.
So I went to fill out Schedule 2, and... it wasn't there! The $600 donation to Capuchin Food Kitchen? Thank you very much, no credit (it would have been over the limit anyway, but still...). The donations to the University of Michigan? Count 'em on the Federal. And that wasn't all: The partial credit on my income tax to the City of Detroit? Fuggedaboutit.

What happened?

What happened, happened in 2011. Republican Governor Rick Snyder signed a tax bill (euphemistically called a "reform bill" that would bring "fairness" to Michigan taxes) that gave tax breaks totaling $1.6 billion to businesses, and to offset that, raised income taxes by $1.4 billion. The bill passed both the Michigan Senate and the Michigan House without a single Democratic vote, made possible in substantial part because of a Republican gerrymander back in 2001.

The tax hike was certainly no secret when the bill was passed, but it is still a bit of a shock when it hits. For the record, the votes broke down as follows:
Legislative Body
Republicans

Democrats

Overall

In Favor

Against

In Favor

Against

In Favor

Against
Michigan Senate
19
7
0
12
19
19
Michigan House
56
6
0
46
56
52
The senate vote was a tie, broken by the lieutenant governor.

Over the past month, as Michiganders start doing their taxes, they are becoming aware of the impact the tax changes are having on them personally. Not by coincidence, since mid-February local papers have been awash in stories with headlines like Michigan residents hit hard by tax increases and editorials such as Snyder’s devastating tax increases must be repealed. Even the staunchly pro-Snyder Detroit News noticed. The sweeping changes included not only the nonrefundable credits, but also deductions for children, a drastic reduction in the Earned Income Tax Credit and the Homestead Property Tax Credit, as well as on pensions. In short, it hit just about every non-rich person in the state.

I do not, in general, oppose tax increases. There are times when they are appropriate and even necessary. If there are programs that require spending increases (e.g., Snyder is calling for gas tax hikes to help pay for long overdue road repairs), I might be inclined to agree. Likewise, there are many times when I will prefer to raise revenue over cutting expenditures, when there is a budget crisis. But that is not the case here. I have an extraordinarily difficult time understanding regressive tax increases, especially when those increases are used not for necessary state spending but rather to fund tax breaks for businesses that are not required to do anything at all to earn those tax breaks. To me, that's text-book example of what Paul Krugman described as "open, explicit reverse Robin Hoodism: taking from ordinary families and giving to the rich."

In my case, the damage as a result of the tax hike will be somewhat over $400. It is the difference between sending a check, and receiving one. For many others -- especially the elderly and those with lower income -- the difference may be much more.

What will I do? For one thing, I may re-think my charitable donations. My donations page details some periodic donations I make, and I have another one coming up soon. It will the largest I have ever made, and in the past I would have likely given preference to a Michigan-based charity; half of the donations listed on that page over the past 5 years have been to Michigan-based food banks or soup kitchens. I may yet do so again, but I'm not certain (and I'll note that Gleaners and Capuchin are wonderful organizations that both deserve donations and are in no way responsible for the legislation of 2011).

Will Rick Snyder's popularity take a hit? Maybe... in the short term. Though that was also asked when he signed a "right-to-work" bill a few months ago as well, and it's not yet clear that he's taken a hit for that, either. So long as Michigan is a gerrymandered state -- and it'll be at least another 9 years before it changes -- it may not even matter very much. But at least don't have to worry about Michigan Republicans claiming to be against taxing the masses.
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