The Citizens Research Council of Michigan recently published 2009 Tax Revenue Comparison: Michigan and the U.S. Average, an analysis of state and local government finance data recently released by the U.S. Census Bureau for 2009. On January 25, 2012, the Tax Foundation, a nonpartisan tax research group based in Washington, D.C., released its own tax burden analysis, 2012 State Business Tax Climate Index.
In CRC’s analysis, Michigan ranked 6th highest in corporate income tax revenue per $1,000 of personal income; 35th highest in individual income tax revenue per $1,000 of personal income; 31st highest in general sales tax revenue per $1,000 of personal income; and 11th highest in property tax revenue per $1,000 of personal income compared to the rest of the country in 2009.
In the Tax Foundation Index, Michigan ranks 2nd highest in corporate tax; 40th highest in individual income tax; 44th highest in sales tax; and 21st highest in property tax compared to the rest of the country in 2012. Besides comparing two different tax years, the differences in comparative tax rankings between CRC’s analysis and the Tax Foundation Index can be explained by differences in what the two groups are trying to measure.
CRC’s analysis compares tax burdens by state for each of the major state and local government tax revenue sources in 2009. It uses 2009 combined state and local government tax revenue data from the U.S. Census Bureau, and tax revenue as a percent of personal income as the chosen measure of tax burden. Using revenue projections for tax policy changes enacted in Michigan in 2011, the analysis projects Michigan’s comparative tax ranking in 2013 (as it would be reported by the U.S. Census Bureau).
The Tax Foundation Index, however, compares business tax climate by state, not the tax burden of individual tax revenue sources. In its Index, the Tax Foundation does not use tax revenue data from the U.S. Census Bureau or from any other source. Instead, they have devised a weighted scale based on five components: corporate tax, individual income tax, sales tax, property tax, and unemployment insurance tax. Each component issues a score for each state’s business tax climate on a scale from zero (worst) to ten (best).
A heavier weighting is applied to those components with the greatest variability in scoring. Individual income tax is weighted the heaviest (33.1 percent) and unemployment insurance tax is weighted the least heavy (11.1 percent). Within each component there are two equally-weighted sub-indexes that measure the impact of tax rates and tax base. These sub-indexes contain both scalar (0 to 10) and dummy variables (0 to 1). Component scores are normalized to create final scores to compare between states. For a more in-depth description of the Tax Foundation’s methodology, please read the Methodology section of their report.
In summary, the CRC analysis and the Tax Foundation Index are measuring different things. The Tax Foundation uses a combination of tax rate and tax base to determine a score (and subsequent ranking) for each component of taxation to measure the overall business tax climate, while CRC uses tax revenue and personal income to determine tax burden (and subsequent rankings).