Does Michigan Need a New Jersey Tax System?

New Jersey's experience with a graduated income tax provides a stern warning for Michigan voters, particularly if a graduated income tax proposal is sold as a means of reducing other taxes. That is one lesson from the work of researchers at the Mercatus Center at George Mason University. Mercatus is a market-oriented research center.

The Mercatus Center's Eileen Norcross researched the history of the New Jersey income tax that was created in 1976. She found that it started at the rate of 2 percent on incomes up to $20,000 and 2.5 percent on higher incomes. She reported that by 2008, it had increased to a rate of 10.75 percent.

"New Jersey's income tax was marketed as a way to reduce other taxes," said Norcross in a press release. "But over time it increased taxes and spending."

Norcross said from 1971 to 2008, New Jersey's spending doubled "as a percentage of total state income."

"Voters should be wary of tax plans that promise to reduce one tax while raising another," said Norcross. "As New Jersey shows, states can go from having moderate taxation to very high taxation in just a few years."

Unlike the federal income tax, the Michigan Constitution categorically prohibits the imposition of a graduated income tax by either the state or any local government. At the state level, this creates what is effectively a "flat tax."

Article 9, section 7 reads:

"Income Tax: No income tax graduated as to rate or base shall be imposed by the state or any of its subdivisions."

But with Michigan struggling and many people blaming Michigan's business taxes, some politicians have suggested cutting business taxes but making up for the lost revenue by creating a graduated income tax. Such a move would require a proposal to amend the state constitution and the approval of voters.

The wheels for this could be set in motion as soon as Election Day this November if Michigan voters endorse the calling of a constitutional convention. This question is asked by Proposal 1.

A "con-con" would open up the entire constitution for revision. Elimination of the flat-rate income tax would be fair game, and it has already been targeted. Last year, Gov. Jennifer Granholm proposed a graduated income tax as a means of eliminating the 22 percent surcharge on the Michigan Business Tax.