Want to Know the Power of Tax Reform? Look to Michigan

Republicans just released the framework of their tax reform proposal, the centerpiece of their legislative agenda and the last-best hope for pro-growth tax reform.

“Too many people are struggling in America today. They pay too much in taxes. They feel stuck. They feel anxious. They are living paycheck to paycheck,” Speaker Paul Ryan said on Tuesday. “We need faster economic growth and we need a tax code that is built for growth that helps struggling families.”

Americas economic and wage growth has been stuck in neutral for more than 15 years, a slump that was exacerbated by the reverberations of the Great Recession. In the United States, per-person gross domestic product has only increased by 0.9 percent since 2001, less than half of the average of 2.2 percent growth from 1947 through 2000. And although unemployment is the lowest it has been since before the 9/11 attacks, real median wages has only risen 9 percent since 1979, a dramatic downshift from the 91 percent increase in the 25-years following World War II.

Tax reform will not solve every issue that ails the economy—the free market has been too larded with the paradoxical, parochial policies of Washington’s collective ego to believe that is possible. But it can solve a lot. After all, the last time Congress successfully reformed our tax code was more than three decades ago, a time before computing and the internet fundamentally disrupted nearly every corner of the economy.

To understand its potential growth-unleashing power look no further than the state of Michigan. The Wall Street Journal editorial board writes:

Former Michigan Democratic Gov. Jennifer Granholm was a progressive specialist in using the tax code to politically allocate capital, which depressed and distorted business investment. Between 2002 and 2007, Michigan was the only state to experience zero economic growth.

Ms. Granholm’s Republican successor, Rick Snyder, recharged growth with tax and regulatory reforms. While Michigan’s GDP has been expanding at roughly the national average since 2011, it has led the Great Lakes region.

It’s worth digging into just how bad things were in Michigan prior to the arrival of a business-minded Republican governor. The state slipped into a recession in 2003, well before the rest of the nation labored under the Great Recession in 2007, as a result of the slow erosion of manufacturing. Between 2002 and 2007 manufacturing in Michigan grew at a third of the rate of other Great Lakes states (Illinois, Indiana, Ohio, Michigan, and Wisconsin).

The Wolverine State wasn’t just non-competitive compared to the nation as a whole, it was losing manufacturing work to its neighbors. A large part of the reason why is the burden of their tax code. And rather than make it more job friendly to try and jumpstart economic and job growth, Democrats increased the state income tax rate by 11.5 percent, enacted a new 4.95 percent tax on business income, a 0.8 percent gross-receipts tax, and a 21.99 percent surcharge on business tax liability. Unsurprisingly, the state’s unemployment rate remained stuck at 10.9 percent—the fourth highest in the nation—until 2011, when Gov. Snyder took over.

The governor’s first initiative was fundamental tax reform to reduce the rates and broaden the base by eliminating economy-distorting handouts and credits. As the Wall Street Journal writes, the results speak for themselves:

Capital investment and hiring have increased sharply. Two months after Mr. Snyder signed the tax reforms, job growth turned positive. In 2011 Michigan added jobs for the first time in six years, and it has since led the Great Lakes region in manufacturing growth.

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.

Downtown Detroit is drawing tech firms and young entrepreneurs. Unemployment in the Detroit metro area has fallen to 3.2% from 11.4% six years ago. Businesses in Ann Arbor and Grand Rapids say they can’t find enough workers. Perhaps they should try recruiting in Chicago or New Haven.

Michigan is in the midst of its comeback story and it kickstarted it by recognizing that the tax code should be redesigned to promote growth rather than continue to be used as a tool to incentivize liberal policy aims. The United States is similarly primed for a economic renewal. Our small businesses and corporations are laboring under a tax code that was designed for a different time and place, and over the decades has been papered over and patched into a discordant maze of conflicting incentives.

Tax reform can ignite economic growth. And we need to look no further than Michigan to prove it.