The Michigan Comeback Story: How business-tax reform helped revive the state’s economy

WSJ editorial. Excerpts:

"While Michigan’s GDP has been expanding at roughly the national average since 2011, it has led the Great Lakes region.

Michigan slipped into recession in 2003 as manufacturing contracted, which unions blamed on China and free-trade agreements. But misguided policies were arguably bigger contributors to Michigan’s slump. Between 2002 and 2007, Michigan’s manufacturing grew at a third of the rate of the Great Lakes region. During this period, motor-vehicle and parts manufacturing in Indiana increased five times as much as in Michigan. And Indiana’s economy is nearly as dependent on vehicle production as Michigan’s.

Democrats in Lansing responded by raising taxes with dispensations for politically favored constituents. In 2007 Democrats increased the state income tax to 4.35% from 3.9%. They also enacted a new business tax with a 4.95% tax on income, a 0.8% gross-receipts tax, plus a 21.99% surcharge on business tax liability.

The three-layered business tax replaced a value-added tax, but retained its flaws—namely, its pyramid structure and myriad carve-outs."

"None of the tax gimmicks revived growth, and Michigan’s economy plunged amid the national recession with unemployment hitting 14.9% in June 2009."

"By 2011 when Mr. Snyder assumed office, auto manufacturing had rebounded, but other industries remained limp. Michigan still hadn’t posted annual net job growth since 2005. Its 10.9% unemployment rate was the fourth highest after California, Nevada and Rhode Island.

Mr. Snyder’s first major undertaking with his Republican legislature was to replace the cumbersome state business tax with a 6% corporate tax and trim the individual rate to 4.25%. Michigan’s corporate-tax ranking jumped to seventh from 49th in the Tax Foundation’s business tax climate rankings.

Republicans financed the tax cuts by eliminating most business handouts along with individual income-tax preferences for public pensions and jobless benefits. Credits for children, automobile donations, city income taxes, college tuition and charitable contributions were axed.

After the 2012 midterm elections, Republicans passed right-to-work legislation that lets workers choose whether to join unions. In 2014 state voters approved a ballot measure backed by the governor to repeal the personal-property tax for small businesses and manufacturers"

"Capital investment and hiring have increased sharply. Two months after Mr. Snyder signed the tax reforms, job growth turned positive."

"Unemployment has fallen below the national average to 3.9% even as the labor-force participation rate has ticked up. The jobless rate is still 5% in Illinois and 5.4% in Ohio, and labor-force participation has declined in both states."

"auto manufacturing isn’t driving Michigan’s growth. Between 2011 and 2015 (the last year with available disaggregated data), Michigan’s motor-vehicle and parts production increased by 2.3%—half as much as in Indiana and the U.S. During the first quarter of this year, when car sales stalled, overall manufacturing in Michigan still grew by a healthy 7.4%."