Priorities for tax dollars

There is a very strong impulse in many state legislatures to cut taxes, no matter what the cost is to the state's ability to provide essential services for its citizens.  The Michigan League for Human Services draws attention to the consequences of this impulse when it comes to the welfare of the children of Michigan.  MLHS is the publisher of an important report on the state of children's welfare in Michigan, and this report is a really important contribution (link).

The Michigan legislature is proposing to speed up a reduction in Michigan income tax rates by a few months, resulting in a loss of tax revenue of about $90 million. This change will make only a very small difference for each individual Michigan tax payer, whereas these tax revenues could have made a large difference for a number of important public priorities.

Gilda Jacobs, president & CEO of the Michigan League for Human Services, comments on the "opportunity cost" that this decision creates for the children of the state -- the things we give up by making this decision. "While this is being touted as a tax break, for most people it is not a decrease. Most of us will barely notice this change in light of the big increases that hit low- and moderate-income households the hardest starting in tax year 2012."

To consider the public policy issue fully, it is necessary to ask a fundamental question: how else could that $90 million have been spent as base budget?  What is the opportunity cost of this policy change?

Here is a list of items that could have been funded for that amount, and the investment would have had a meaningful impact on the children of the state.

• Implementing the governor’s Infant Mortality Summit recommendations to combat Michigan’s high infant mortality rate at a cost of just $16 million. According to Kids Count, Michigan is among the 10 worst states in the country with African American infants at triple the risk of white infants.
• Expanding Healthy Kids Dental nearly statewide to the half-million Medicaid-eligible children who may otherwise lack access to dental care.
• Sending 24,000 preschoolers to high-quality early education centers.
• Restoring the Earned Income Tax Credit to 11 percent of the federal credit. It will drop to just 6 percent of the federal credit, down from 20 percent, starting in tax year 2012.

The Earned Income Tax credit has been a major issue for the MLHS because of the potential this program has demonstrated in addressing poverty.  It was one of the victims of the tax restructuring that took place in 2011 in Michigan, with significant negative consequences for poor families.

Any of these items would have a substantial impact on the welfare and life prospects of thousands of children in the state.  So how can it be considered rational to prefer to provide a tax break of $15 for millions of taxpayers rather than rejecting the change and investing the money in projects like these?

It would seem that the answer is fairly straightforward: the policymakers do not assign a high priority to issues like infant mortality, kids' dental health, or access to preschool education for poor families. The value of cutting taxes trumps the possible benefits that would derive from not doing so -- even though the value of the tax reduction is negligible for the typical taxpayer.  It's hard to see how this can be considered good policy.