If you really want to be a committed Michigan citizen, fully prepared to quiz the politicians when they come knocking on your door for votes later this year, spend a half-hour glancing over the brand-new, easy-to-read state budget presentations of experts like the Senate Fiscal Agency, or House Fiscal Agency Director Mitch Bean.
Or, allow us to summarize for you.
A week after the governor’s budget address, the dust is clearing and economists are weighing in on the impacts. A few quick highlights…
POSITIVE MOVES, BUT STILL NO SUSTAINABLE SOLUTION: As we applauded last week, Granholm’s budget makes some tough cuts on state employee pay and benefits and begins to restructure the outmoded state tax system for the 21st Century. But it relies heavily on more than a billion dollars in one-time federal stimulus, one-time bumps in tax revenue from tax code changes, and savings from prison sentencing reforms that face a steep uphill battle in the Michigan Senate. “It just pushes the problem after the next election,” House Fiscal Agency Director Mitch Bean said at a state budget discussion in Lansing on Thursday. “It doesn’t solve things.”
DON’T EXPECT A SOLUTION THIS YEAR: The table is set. All four corners of the Michigan Legislature – both party caucuses in both chambers – have outlined many money-saving reform proposals and Granholm has taken the lead from Business Leaders for Michigan and the Anderson Economic Group to overhaul the tax system. But don’t bet on it for this year. Granholm’s recent speeches took whacks at “pundits” who doubt Lansing’s ability to pass comprehensive budget and tax reform before the 2010 election silly season overtakes serious policy considerations. The Center for Michigan is certainly among those doubtful pundits. So are some of the state’s leading economists. “I don’t believe you can solve it in one year and I don’t believe you can solve it this year,” Mitch Bean said Thursday. “I don’t believe the political will exists to accomplish it this year. But I do believe it can be solved. The longer we let it go, the tougher it gets.” If Bean is right, it means another year of long-term uncertainty for schools and local governments dependent on the state budget and businesses whose future tax liabilities remain unclear.
NO MAGIC BULLETS TO AVOID ADDITIONAL TAXES: Granholm’s shift to a sales tax on services results in a more than half-billion-dollar net increase in tax revenues this year. (Though the switch steadily becomes “revenue neutral” by about 2014 as business taxes are reduced.) Because of the tax increase, the guv’s budget has already been declared dead on arrival by House Speaker Andy Dillon and Senate Majority Leader Mike Bishop who are maintaining a “cuts first” stance. Economists Bean and Charley Ballard contend you just can’t get there with all cuts. “There is tremendous disconnect between the political discussion, public perception, and the budget reality,” MSU’s Ballard said Thursday. Even an all-cuts budget for 2010-11 would still result in a half-billion-dollar deficit in 2011-12 because the outdated manufacturing-based state tax system is failing to capture revenues from the 21st Century services-based economy, the economists said Thursday during their lunch panel in the House Office Building in Lansing.
“If someone offers you a silver bullet to this problem, the first thing you should do is shoot them with it,” Bean said.
As we’ve written in this newsletter many times and as the economists highlighted Thursday, our state tax system includes more than $30 million in tax breaks for everyone from workers who make less than $20,000 per year to Hollywood film companies, to advanced battery manufacturers who will benefit from more than $1 billion in tax breaks that come on line in the next couple years. Altogether, the state’s inflation-adjusted economy has decreased by 3 percent in the past decade while the state’s inflation-adjusted general fund budget revenues are down 43 percent over the same time period. “A three percent decline in the economy does not explain a 43 percent drop in revenue,” Bean said. “Something else is going on and that something else is our state tax policy… We’ve done this to ourselves… Everybody loves to pass a tax cut… It’s from both sides of the aisle. They are equal-opportunity offenders.”
THE MONSTER MEDICAID BUDGET: There is no slowing the massive Medicaid system which now eats up more than one-fifth of the state general fund budget and accounts for more than 40 percent of the births and more than 70 percent of nursing home expenditures in the state. Part of the quandary is that the state gains nearly three bucks in federal money for every additional dollar in state Medicaid spending. “There is no tax structure that would keep up with this kind of spending increase,” Bean says of the ever-ballooning Medicaid budget, which nearly doubled in the last decade. “This has crowded out a lot of things in the budget over the years. I don’t know what we can do about it. This is a national problem.”
WHO WOULD PAY THE SERVICES TAX? A quick summary of how the governor’s services tax switch would work, as described by a Senate Fiscal Agency analysis released this week… By 2014, businesses get a billion-dollar cut in the Michigan Business Tax. Consumers get a half-billion-dollar cut in the general sales tax as the rate drops a half-point to 5.5 percent. Consumers and businesses would see a billion-and-a-half tax increase as the sales tax is extended to services. All in all, by 2014, it’s a wash – the system is changed to better keep up with the 21st Century services economy, but overall tax revenues are neutral. So, who would pay the services taxes and how? Two-thirds of the total services taxes would be levied on four kinds of economic activity…
• About 25 percent from taxes on personal services like dry cleaning, haircuts and other “personal care,” and funeral services.
• About 13.5 percent from taxes on sports and entertainment tickets and recreation like skiing, golf, bowling, and fitness centers.
• Another 13.5 percent from “administrative” services like waste hauling, landscaping, travel agents, and home and business security systems.
• Another 12 percent from taxes on information services like movies, and cable/satellite television.
9 Comments
If tax revenues are declining, then an increasing state budget is not revenue neutral, in my opinion. Business taxes should not be used to balance the state budget. Eliminating business taxes should be used to end the Michigan recession and increase state tax revenue. The old manufacturing economy is being destroyed by state business tax policy. Michigan chose not to compete in the new global economy of NAFTA and WTO by eliminating business taxes.
A 42% film industry expense reimbursement is bad policy if the state does not get 42% rights to the movie profits.
Tax abatements and Renaissance Zones create an uneven business playing field, for the rest of business which do not qualify.
Page 13 of Director Mich Bean has the entire story of our budget dilemma on one slide. When the amount of credits is blowing up over the past 10 years because our tax policy wants to give everyone a tax credit so they do not have to pay any taxes to support the services they get, why is it so hard to understand the huge hole we are putting ourselves in? I have seen very few articles or analysis that truly gets these issues presented in such a way that we could understand why we need to change our tax policy. I have seen the way people have treated this when I have tried to get it discussed, I almost was lynched by asking the question and the politicos and newspapers give it lip service and ignore the issue for obvious reasons.
The only way to fix Michigan is cutt, cut cut. Unfortunately unions in the state have been conditioned to get somthing in return for giving up somthing. Well, this time it’s going to be all giving with NO getting. We dug ourselves into a hole and can no longer continue any digging. The govenor is really going to struggle when this reality hits her in the head.
The Michigan FairTax is the solution!
Revenue neutral, protects low income and encourages economic growth without the state in charge of picking winners and losers in the tax system! It assures ALL businesses moving into or staying in Michigan what their tax circumstances will be going forward – ZERO!
Businesses do not pay taxes. People do!
In the budget proposal the following statement is included.
“The 54,641.5 of FTE positions included in the budget do not include the
assumed 2,236.8 positions that would be reduced due to the assumed
employment reductions associated with the enhanced retirement proposal.
Including this FTE employment reduction leads to an overall employment
decline of 2,948.8 or a 5.3% decline in State FTE employment.”
If the governor thinks we can do without these 3,000 people if we retire them;
I wonder why we can’t do without (FIRE) these people with out the retirement?
I enjoy reading all of the solutions from people who seem to have only a one size fits all approach. If you look at the spread between what we give away in tax cuts versus what we take in it equals 13 billion dollars. No matter who is in office, what party assumes power, we will be destined to a budget crisis every year until the broken tax structure is fixed. There must be a balance of reforms and revenue to make this work. You can cut further but, at what cost to the people in Michigan. It’s always someone saying it should be done to someone else rather than someone who is taking the same pain on themselves. Bishop’s plan cuts State’s workers salaries by five percent while freezing them for five years and then making them pay 20% of their health care premiums. All the while he imposes no equal pain on himself or current cronies in the government. His cuts for the State government occur after he is out of office. Where do we come up with people like him?
Business DO pay taxes, and should continue to do so as long as they receives services such as police and fire protection and the like. Those taxes should be simple (don’t need an army of accountants do figure out), predictable (you will know what your tax bill will be), and competetive with the states that surround us. Our current business tax structure fails on all three of these.
A cuts first mentality is mentally deficient. Our budget problem cannot be solved this way as it would require large cuts to necessary services. There are a lot of great reform plans out there and they will save us a lot of money, but ultimately new revenues (Taxes) will need to be generated. We all want business growth in this state, as that means jobs for Miciganders. But it takes more that low taxes to attract busines. If we don’t invest in ourselves, repair our crumbling infrastructure, consistantly support our schools, who (what businesses) will?
With all of the ’noise’ about teachers in the states budget I decided to look into it. According to Teacher Portal @teacherportal.com Michigan ranks 4th in it’s comfort score;
(The Comfort Score examined average salaries (both starting and overall) and compared that to the cost of living. We then ranked each state by this metric to find which states were friendliest to teachers – from a salary perspective.)
Apparently some one thinks Michigan is a pretty nice place to teach school.
The thing that I see as a sticking point is being as education is half of the states budget; not enough attention is paid to how the money is spent; i.e. So much in the budget, so much per student. Only 37% of the education budget is being spent on teachers. Our Legislators are being lazy.
As was pointed out when the last change in how education is funded ‘all school districts are not equal’. I think the budget should be broken down to a. Lansing administration, b. local administration c. teacher’s salaries and benefits, d. bussing, d. plant maintenance. At the very least, and should be not a percentage but according to needs.
I think that the main mission of teaching the needs of the kids has been lost.