Talk about a perfect storm!
Michigan’s state budget could face a whopping $3 billion deficit (out of a $9.3 billion General Fund) as a result of the legislature’s repeal of the Single Business Tax. That’s because the lawmakers who did that this summer acted without the slightest idea of what to replace it with. And there is no guarantee they’ll get one in place before the tax expires.
And if you need further proof of a lack of coherent political leadership these days, you need only look at two contradictory proposals on the November ballot — both of which might pass.
Let’s look at the ballot proposals first. One, called “Stop Over Spending” (SOS) would constitutionally restrict the amount the state can spend, period. The other, called “K-16,” seeks to require more state spending for schools. For one thing, most government experts think sticking spending decisions into our Constitution is a bad idea.
But beyond that — if both pass, and that could easily happen — these two proposals would be in direct conflict, though it does seem to be clear what would happen after that.
The SOS measure would limit state spending to the sum of inflation plus population growth — giving our elected lawmakers very little ability to deal with major crises. Supporters claim they’ve handed in more than the 317,757 signatures needed to put the proposal on the ballot. Some early polls show SOS ahead, although a coalition of civic groups is fighting the proposal, saying the language is impossible to understand. They also point to the mess that a similar measure created in Colorado before it was repealed.
But though this promises disaster, it still may be on the ballot.
The K-16 proposal would automatically commit to school districts, community colleges and universities at least enough state funding to cover inflationary cost increases. The Senate Fiscal Agency says the measure, if it passes, would require the state to spend an additional $567 million the first year.
This proposal is also ahead in the polls. If both were to pass, however, the SOS proposal would trump the other, since unlike the K-16 proposal, it is a Constitutional Amendment, not a simple law.
(If both had the same status, the rules say the proposal which gets the most votes supersedes the other.)
But that doesn’t mean those on the losing side may not take their case to the courts. And if SOS passes, the odds are that it will lead to a further blow to the state’s national reputation.
That in turn will mean increased interest costs when our bond rating for state government debt is downgraded. Notice I don’t say if; the only real question will be when.
As for the Single Business Tax — it now seems the legislature, in its urgency to repeal the unpopular tax (and pander to the voters) forgot it takes some time to properly set up the system to administer and collect any replacement business tax. The SBT, which produces around $1.9 billion in state revenue, is set to expire on December 31, 2007. As of now, the current lawmakers are supposed to solve that problem in a “lame-duck” session after the November 7 election.
More realistic observers figure it will take the legislature months and month to hammer out a new state business tax.
And on top of that — veteran tax experts say it takes a long time to develop the necessary systems to collect the new revenue.
Joseph J. Tomczyk, Director of JohnBernard LLC, a tax advisory firm in Royal Oak says “it certainly will take at least a year, probably closer to 18 months to put together all the systems required to make the tax work.”
He knows something about this; he is a former staffer at the state treasury department. Tomczyk says the state has to understand the language of whatever bill the legislature passes and the governor signs. Who’s taxed? How is the tax to be computed? What about estimated payments? Pre-payments? Then there is the matter of forms and systems. How to process and account for the returns? What about delinquent taxpayers and follow-up, not to mention audits?
The bottom line is that the state is already facing a billion-dollar “structural” budget deficit, which means that the funding systems now in place automatically turn up that much of a shortfall, every year.
If the legislature follows its traditional work pace – which is very, very slow – it won’t get around to passing a replacement business tax until late 2007. If it then takes 18 months for the Department of Treasury to sort out the tax-collection systems, the state could be facing a sky-high deficit of nearly $3 billion or so (the $1 billion current deficit plus nearly $2 billion in business tax shortfall) for the fiscal year that starts in October, 2007.
Michigan’s Constitution forbids any deficits at all, so some time next year the legislature might find itself having to cut state spending by around one-third! You may be certain neither candidate for governor nor any of the folks running for the legislature are going to talk much about this problem. But we could be facing a financial train wreck, thanks to the obsession with cutting taxes above anything else, especially sound government policy.
When asked about this problem, Sen. Nancy Cassis (R-Novi) a member of the legislative committee that will propose a replacement business tax, said “I hear it (the problem) loud and clear.” She added, “it will take an extraordinary level of discipline” for the legislature to implement tax reform before the SBT runs out.
Don’t hold your breath.
That’s why a day-long town hall meeting on November 13th (the Monday after the election) on business taxation policy might be interesting. Co-sponsored by The Center for Michigan, my newly formed non-profit “think-and-do tank,” and Michigan State University, the gathering will aim to cast light on the whole tax question.
A panel of budget and tax experts will review the consequences of the various tax plans under consideration – who wins, who loses, and what the impact is on the budget and the state. (Full disclosure: I’m the guy who founded The Center for Michigan; I serve as its President.)
If you’re interested, send me a note and I’ll send more details. In the meantime, if you want to have some fun by giving candidates — any candidates — for state office a hard time, just ask them about the perfect financial storm we may be soon facing.
Ask them what they propose to do about it. Then listen for the trademark distress call of the endangered politician — the sound, that is, of nervous stammering.
Phil Power is a longtime observer of politics, economics and education issues in Michigan. He would be pleased to hear from readers at ppower@hcnnet.com. These opinions and others expressed in Phil Power’s columns are individual opinions and do not in any way represent official policy positions of the Center For Michigan.
