State and Local Taxes

Revenues Rise in Michigan and New Jersey

Michigan and New Jersey have cut taxes while balancing their budgets and increasing spending, according to a study from the Joint Economic Committee of Congress. The report concludes that cutting taxes doesn't harm the economy by increasing deficits or decreasing government investments.

Tax cuts actually helped the economy of the two states examined:

  • In Michigan, the economy grew faster than most of the states in the Midwest, and faster than the average rate of growth for that region.

  • Likewise, in New Jersey the economy grew at an accelerated rate compared to the average rate of growth for the Mid-Atlantic region.

  • Tax cuts have allowed New Jersey and Michigan to create more jobs than neighboring states.

New Jersey Gov. Christine Whitman reduced income taxes by 30 percent in two years.

  • The marginal tax rate on median income earners fell from 2.5 percent to 1.75 percent and top marginal tax rates fell from 7 percent to 6.37 percent.

  • Local taxes rose in response to slower increases in state spending, by an average of 22 cents for each dollar cut in state income taxes.

  • But a typical household saved over $200 a year in state taxes, and received a net tax cut of $156.

Michigan Governor John Engler restructured the tax system, almost eliminating property taxes and cutting other taxes 21 times. Although sales taxes were raised to partially replace property tax revenues, the total state and local tax burden has fallen from more than 11 percent of personal income to 10.4 percent. And it is expected to fall to 10 percent when the impact of tax law changes is fully realized.

  • The unemployment rate in Michigan was above the national average from 1966 to 1993, but has fallen below the national rate and is currently 4.5 percent.

  • Even with government taking a smaller share of personal income, Michigan moved from a projected 1991 deficit of $1.5 billion to a surplus of $1.2 billion, yet spending has grown an average of 8 percent a year.

The two states were able to balance their budgets by slowing the growth rate of state spending and by gaining increased state revenues from higher economic growth.

Source: Reed Garfield, "Tax Cuts and Balanced Budgets: A Tour of Lansing and Trenton," October 1996, Joint Economic Committee of Congress, Washington, D.C.

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