The Politics of Sales Tax Expansion: Michigan Confronts Yet Another Budget Shortfall

The sales tax is one of the most administratively feasible taxes to collect, but one of the least politically feasible to implement or expand. Everyone pays it, and many businesses are affected by it. This makes the political process of implementing a new sales tax or expanding an existing one a very challenging process.

An interesting example of this is in the State of Michigan, where general fund revenue has been in decline since 2000 . Last year, the state faced a budget deficit of $1.3 billion. While the federal stimulus package helped Michigan to patch some of its holes, budget cuts totaling $300 million were required. This cut was only the latest in a series of budget cuts dating back to 2002, ranging from cuts to prison funding to zoos, operas, state colleges, medicaid, crime laboratories, libraries, and day care programs.



Michigan, still facing budget shortfalls, is running out of things to cut, as state budget director Robert Emerson describes:

“The big difference here,” said Robert L. Emerson, the state budget director, “is that we have very little to fall back on. Michigan has already done a lot of the things that other states are only thinking about doing now. Every reserve fund in the state government has been drained long ago. Our rainy-day fund? There’s $2 million in there. That won’t last you 30 seconds."

Facing yet another budget deficit, this time a whopping $1.8 billion, the state is now debating an expanded sales tax to increase revenue. Governor Jennifer Granholm, a Democrat, is seeking to expand the state's sales tax to cover services, which are not currently taxed. Doing so would help modernize Michigan's sales tax structure and raise $1.8 billion in new revenue--exactly the amount of the current budget deficit.

Granholm is term-limited, and thus doesn't have an election to worry about when promoting an expanded sales tax. In order to sell the tax, Granholm is promoting a reduction in the sales tax rate (from 6% to 5.5%) and removal of a business surcharge tax. The Governor argues that the additional revenues are necessary to prevent additional cuts to state education funding. Nevertheless, the proposal to expand the sales tax faces strong opposition. Republican legislators are adamantly opposed to the sales tax expansion, and instead have proposed another round of budget cuts totaling $800 million. But Granholm is firm in her position; when asked about the opposition to the tax proposal and her declining favorability poll numbers, she responded:

"It doesn't matter. I'm not running again. ... This is the right thing for Michigan"

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