A veteran state lawmaker and Democratic gubernatorial candidate on Tuesday proposed swapping Michigan's flat income tax rate for a graduated one, eliminating a business tax surcharge and some business tax breaks, and lowering the sales tax rate while extending it to services.
The massive tax overhaul would raise $6.5 billion more for state coffers that could be used to restore funding for public schools, local police and fire protection, and important services such as mental health care, Rep. Alma Wheeler Smith said.
It also would provide enough money to fund a new income tax credit Smith is proposing that would cover all tuition paid to state universities, community colleges and vocational schools _ in essence, making tuition free. The tax credit also would apply to preschool costs.
The longtime lawmaker from Washtenaw County's Salem Township currently serves on the House Appropriations Committee and was on the Senate Appropriations Committee for eight years.
She voted this fall against much of the $1.2 billion in cuts included in the current state budget, and says Michigan has to quit handing out tax cuts willy-nilly to businesses and others in an attempt to revive the economy. State general fund revenue dropped by 21 percent this year and is expected to drop again next year, leaving the state with $2.5 billion less than in 2008.
"We created a nightmare," Smith says of the way the state has handled its financial shortfalls for the past decade. "If we stay in that trench, we're going to stay in the bottom" among the 50 states.
Smith says she wants to see a comprehensive solution to Michigan's budget problems, a move she thinks citizens will support.
She hopes lawmakers _ who reconvene Tuesday for up to three weeks before leaving for the holidays _ will start work immediately on legislation that would eliminate $3 billion in tax exemptions for some businesses.
Half of the money raised would be used to eliminate a 22 percent business tax surcharge passed in 2007. Her tuition tax credit proposal would use $2 billion. And $500 million would be used to restore the cuts of $300 to $600 per pupil made this fall to school funding, including $52 million Gov. Jennifer Granholm vetoed in funding for 39 wealthier school districts.
Smith also wants lawmakers to lower the overall state sales tax rate to 5.5 percent and extend it to services, a move she says would raise $1.5 billion. If lawmakers fail to act by early next year, Smith would like to put a proposal on the May 2010 ballot and let voters decide.
The change from a flat income tax to a graduated one would require a ballot vote, which she said could be done in August or November. Under her proposal, 80 percent of taxpayers would pay the 4.35 percent rate they currently pay now or a lower percentage, while taxpayers with higher income would pay more. That proposal would raise $2 billion.
Smith says a number of her colleagues in the Democratic-controlled House support a comprehensive solution rather than the series of small, targeted tax increases being pushed by Granholm and Democratic House Speaker Andy Dillon.
She acknowledges that if she can get the measures through the House, she faces a far tougher job in the GOP-controlled Senate, where Senate Majority Leader Mike Bishop has resolutely opposed most tax increases.
But Smith says Senate Republicans have to acknowledge that Michigan won't have the money to invest in education and social services, especially once federal stimulus money is gone, if comprehensive changes aren't made to the state's tax system.
"If we fail to do that, then yes, we're a poor state, and we deserve to be a poor state," she said. But she's optimistic that voters and many in the business community want to see the state take a different path that creates more opportunities for economic growth.
Bishop spokesman Matt Marsden did not immediately respond to a request for comment on Smith's plan.
Smith is one of three Democrats running for governor in 2010. The others are Lt. Gov. John Cherry and former state Rep. John Freeman. Six Republicans also are in the race.