Michigan’s Romney Was Brainwashed—By The Income Tax

Over the summer I played golf at a course near Nashville. The club paired me with a thirtysomething gentleman. The two of us exchanged questions about what we do. His answer: “I’m an autoworker.”

Of course he was. There are legions of them in Tennessee. I got to hear about expertise in using fancy equipment to pack off the next generation of Nissans. Or was it Volkswagens or even GM’s? It does not matter. All these companies are paying real money to their Tennessee employees. In turn these people manipulate cutting-edge capital equipment to build product that yields profits and customer satisfaction.

Swing a cat in Tennessee, hit an autoworker.

Swing a cat in Michigan in the 1950s, hit an autoworker. The places are a five hundred miles apart.

In 1967, Michigan instituted its income tax. The rate is now 4.25 percent. Municipalities can tack on a wage tax. Detroit’s is 2.4 percent. People in the major places therefore pay about 7 percent. Prior to 1967, there were no such taxes in the state. Just like Tennessee today—no income tax.

What happened to Michigan’s share of the national economy since 1967 is staggering. In Taxes Have Consequences: An Income Tax History of the United States, the new book I wrote with Arthur Laffer and Jeanne Sinquefield, the reader will blink at the chart depicting it. Since that year, Michigan has lost nearly 40 percent of its share of national population and nearly 50 percent of its share of national income.

In 1967, Michigan had about 6.3 percent of the nation’s inhabitants. Now it has 3.9 percent. It had about 6.7 percent of the nation’s income. Now it has 3.5 percent. The place has sunk like a stone.

In 1967, Michigan Gov. George Romney acceded to an income tax, so that, as the official reasoning went, corporate taxes might be reduced. That happened for a while until those corporate taxes went right back up again.

It is a myth that manufacturing in the United States declined in the 1970s, 1980s, or 1990s. The permanent slouching of manufacturing came with the Barack Obama presidency. (See this graph.) Manufacturing did great over the first forty years of the Michigan income tax. It did great in nice part by leaving Michigan and going to other places, like zero-income-tax Tennessee.

From the perspective of corporate accounting, the income tax was serious business. If Detroit workers prior to 1967 were making a certain amount, the company then had to pay them 7 percent more to stay whole. Actually more than 7 percent, because the federal tax structure is progressive. Moreover, employee benefits customarily have been a function of nominal wages. The company would have payroll obligations some 10 percent higher because of a new state income tax like Michigan’s of 1967. Ten percent could easily be the whole or more of a profit margin.

The finance people will note to the accountants that capital obtainable at a 10 percent margin will not be at a 2 percent margin. Therefore, for the company to get the money it needs, it has to leave Michigan for better climes.

What if a company sticks it out, commits to making things work in the new-income-tax state? Michael Jensen’s classic research on the 1980s showed what happens. Jensen ranked the Fortune 500 over that decade by return on reinvested profits. GM and Ford were dead last, numbers 500 and 499 (Big Mo Philip Morris was first). The two big Detroit automakers said we are going to reinvest in this place, now with the income tax, and they got creamed. There was nothing to make—the cost structure sailed the would-be profit bucks off to government.

Trying to work with the state income tax means ignoring market advice, burning capital, and staving off inevitable moves. In time, the moves happened. Income departed Michigan even more than population (see Illinois today), such that the place is half itself compared to what it was with respect to the nation when Romney acted in 1967.

The social transformations made up another huge side of the story. African-Americans got out. The Great Migration refers to the big black population movements from the South to the North beginning with the European Great War of 1914. Henry Ford rang the bell and a healthy share came to Michigan.

Then there was The Other Great Migration, as in the standard book on the prehistory of the matter by Bernadette Pruitt. Blacks got out of Michigan beginning in the 1970s and packed off for places often in the Old South from whence they had come, especially Texas. There they lived large in the zero-income-tax state. If August Wilson had lived up to our own time, his latter decades stories would not have taken place in the locales of the Great Migration but the Other one.

Michigan Gov. Romney was timber for the 1968 presidential ticket. He was done in by a remark that authorities or someone had been “brainwashing” him about the prospects of American success in Vietnam. The brainwashing had been active the year before, when he had high hopes for his state on signing the income tax into law.