SPECIAL REPORT: Top 10 budget cuts & Top 10 revenue ideas

By Susan J. Demas

It’s that time of year again when the governor and lawmakers slog through next year’s budget due on Oct. 1. Given the fact that the federal stimulus money has run dry, the budget hole is pegged to be at least $1.7 billion even after a decade of deficits. And it’s an election year — no one is expecting smooth sailing.

Lawmakers, lobbyists and policy analysts are already handicapping what areas are most likely to get the axe and what revenue could possibly be raised. So the Center for Michigan has compiled top 10 lists for both as an initial guide to the unfolding budget process.

It should be noted that there’s near-universal agreement that spending cuts are far more likely than tax and fee increases to get approval from lawmakers.

“There seems to be more will to do cuts than raise taxes,” observed Business Leaders for Michigan President Doug Rothwell. “The odds are against general tax changes because they’re all so nervous to touch that issue in an election year.”

House Appropriations Chair George Cushingberry (D-Detroit), however, warns that after more than $1 billion in cuts last year, “I don’t think we can do anything to hurt the basic safety net.”

Craig Thiel, director of state affairs for the nonpartisan Citizens Research Council, said that resolving a more than $1 billion General Fund deficit will mean cuts to the “big four” – higher education, Corrections, revenue sharing to local governments and Medicaid.

“You really can’t escape the reality of targeting those areas,” Thiel said. “What specifically happens to program X or program Y, it’s hard to say at this point.”

Governor’s plan

The starting point for negotiations is Gov. Jennifer Granholm’s $47.1 billion fiscal 2011 budget proposal that she laid out on Feb. 11. The General Fund budget, which encompasses Corrections, Higher Education, the Legislature, revenue sharing and more, is $8.1 billion. The School Aid Fund for K-12 education is budgeted at $12.7 billion.

The governor proposed $566 million in budget cuts and $400 million in reforms primarily through an early-out program for teachers and state employees. Granholm also is counting on $514 million in a second federal stimulus plan. And she crafted a $550 million tax increase by expanding the sales tax to services.

Mike Boulus, executive director of the Presidents Council, State Universities of Michigan, called the proposal a “prudent and balanced budget solution.”

But Sharon Parks, president of the Michigan League for Human Services (MLHS), was less charitable.

“This budget has a $2.6 billion tax cut for businesses and no additional help for families,” Parks said. “There’s a real imbalance.”

At the onset, Granholm threatened to veto a continuation budget or one that slashed K-12 or higher education, a threat that didn’t play well with some Republicans. Senate Appropriations Chair Ron Jelinek (R-Three Oaks) said Granholm was “trying to bully us a little.”

It’s early in the process, with Appropriations meetings now under way. Right now, Republican and Democratic caucuses in both chambers are working their way through the budget and deciding what cuts they want to see and where they stand on revenues.

“Everything, everything that isn’t regulated by maintenance of effort has to be looked at if we don’t want to raise taxes – and we don’t,” said Rep. Chuck Moss (R-Birmingham), the ranking Republican on House Appropriations.

Reforms have been put forward by Granholm, House Speaker Andy Dillon and Senate Majority Leader Mike Bishop that could potentially save more than $1 billion, although much of those savings would be achieved by local governments and schools. The state could cut funding correspondingly, but lawmakers must adhere to constitutional requirements.

“Maybe we don’t have to look at as many cuts and can keep things at their present levels if we enact reforms,” Jelinek said.

The Michigan Chamber of Commerce backs the Senate GOP’s reform plan, which includes a 5 percent pay cut for public employees, higher public employee health care costs and Medicaid cuts.

“We believe that in welfare and Corrections, our fiscal priorities are out of balance,” said President and CEO Rich Studley. “We’ve been very clear that we need to invest more wisely in transportation and higher education.”

Rothwell said that if no structural reforms are adopted, higher ed and revenue sharing will get hit “just because they’re the easiest place in the General Fund.”

Cutting away

With a structural budget deficit and tax revenue continuing to slide as part of Michigan’s decade-long recession, almost everyone believes cuts are inevitable in fiscal 2011. Across-the-board budget cuts could be adopted, although it’s likely that some areas will be whacked harder than others.

Here’s a look at the most likely areas on the chopping block:

1. Higher education

At $1.61 billion, aid to Michigan’s 15 public universities is almost 20 percent of the General Fund. Funding for schools was held harmless in the governor’s proposal.

“The governor has stated emphatically that she’d veto any budgets with cuts to education,” said Boulus. “That doesn’t mean they won’t cut us. We know we’re on both the Senate and House leadership’s hit list.”

But he said that Michigan would need to apply for a federal waiver from maintenance of effort requirements attached to stimulus money. Budget Director Bob Emerson said that would be necessary if more than $50 million was cut.

Lawmakers know that universities can raise tuition to compensate for cuts, Boulus said. Universities have been sliced 14 percent since 2000, he added, while enrollment has risen by 13 percent.

2. Revenue sharing

After deep cuts of 11 percent in fiscal 2010, Granholm has kept statutory funding for cities, villages and townships frozen at $311 million. County funding is up $59 million, as part of a previous budget agreement that had delayed payments.

Although Cushingberry insists revenue sharing is “off limits,” it could be cut if reforms are passed and even if they’re not.

3. Corrections

At almost $2 billion, prisons eat up the biggest share of the General Fund. Granholm has marked $130 million in savings via proposed changes to truth-in-sentencing laws to allow “good time” for prisoners. That would reduce the prison population by another 7,500 and close four to five facilities.

However, Senate Corrections Appropriations Subcommittee Chair Alan Cropsey (R-DeWitt) has said the plan is D.O.A.

“She’s coming up with things that she knows won’t fly,” he said.

The Michigan Chamber, Business Leaders for Michigan and other business groups back Corrections reforms. But Rothwell thinks significant cuts there are unlikely, noting that prisons were whacked in the fiscal 2010 budget. But he said if more federal stimulus money isn’t on the way, the likelihood of Corrections reforms goes up.

The Department of Corrections has been identifying savings in food service, transportation, warehousing and other areas. Many lawmakers, particularly Republicans, would like to see privatization to cut costs.

4. Medicaid provider cut

Granholm has proposed a physician’s tax, or Quality Assurance Assessment Program (QAAP), that would generate $133 million. If that doesn’t pass, there’s a $133 million hole in the Department of Community Health budget. That would equate to an 11 percent provider cut on top of the 8 percent cut they took in fiscal 2010.

5. K-12

The $165 per-pupil cut in fiscal 2010 will stand, but Granholm has insisted that there be no further cuts. Dillon said he supports “keeping it level,” and House Education Committee Chair Tim Melton (D-Pontiac), who also sits on Appropriations, is looking for efficiencies to close the $425 million School Aid Fund gap.

“That’s 3 percent of the budget,” Melton said. “If we can’t find that in savings, we’re not doing our jobs.”

However, Senate Republicans are not married to the idea of holding K-12 harmless, especially when schools only saw a 3 percent cut last year, far less than other areas were slashed.

Emerson said that there are maintenance of effort requirements attached to federal stimulus dollars, making cuts potentially problematic. Moss agrees. The administration is in contact with the U.S. Department of Education to see what amount of cuts is acceptable, but Emerson stressed that it will be difficult for Michigan to attain a waiver.

6. College grants and scholarships

Granholm has frequently targeted the Michigan Tuition Grant, which provides private college scholarships — and this year is no exception. The $31.7 million was wiped from her fiscal 2011 proposal, as she restored $6.8 million of the Michigan Promise grant through a $4,000 tax credit. The $75 million Promise started by the governor was eliminated to balance the fiscal 2010 budget.

This move could spark a fight with lawmakers on both sides of the aisle. Cushingberry said that the Michigan Tuition Grants are critical for low-income students in his district. He also took a swipe at the Promise, which had been awarded to all college students.

“We can’t do that, especially when we’re giving money to families in Bloomfield Hills,” he said.

7. Medicaid recipient cuts

Senate Republicans are eyeing cuts here by eliminating optional services and kicking some groups off the rolls.

Parks, of the Michigan League for Human Services, said the state has to meet stimulus requirements and can’t cut too much. Some optional groups, like 19- and 20-year-olds, can be taken off the rolls. Optional services can also go, although many, like dental and podiatry services have already been axed. Mental health, substance abuse, pharmaceutical, adult home health and medical supply services could be on the chopping block, Parks said.

The governor has proposed axing a $3.7 million program that provides transitional health insurance designed to help the poor who are coming off Medicaid.

Granholm last week also issued an Executive Order creating a Health Services Inspector General to oversee waste, fraud and abuse in Medicaid and other health care programs. It’s estimated it will save $3.7 million.

8. Department of Human Services and welfare

Granholm cut $39 million in her budget, but the Michigan Chamber and some Republicans want to see more welfare cuts. But Parks argues that’s trying to get blood from a turnip.

“Human Services has just been cut to bare bones,” she said. “There’s just not room in that tattered safety net to get very much out of it.”

However, there are about 400 new child protective services workers added, as the state has to comply with a legal settlement.

“That takes a large proportion of that budget off the table,” said Thiel of the Citizens Research Council.

But with historic caseloads for Medicaid, food and public assistance, DHS has asked Appropriations Committee members for 800 new caseworkers. That seems highly unlikely, however.

9. Libraries

They’ve been chopped for years and last year, Granholm eliminated the History, Arts and Libraries Department. In fiscal 2011, the governor cut the Library of Michigan by another $1.1 million, down to $4.6 million. State aid to libraries is down $150,000 to $6 million.

10. Michigan State Police

While the governor hasn;t proposed cutting any state troopers this year, after a bitter fight over eliminating 100 last year, the idea is not off the table. Senate Appropriations State Police Subcommittee Chair Valde Garcia (R-Howell) said he’s trying to look for efficiencies to prevent that scenario.

However, the MSP’s Capitol security guard program could get the axe. Seven officers would be eliminated under Granholm’s proposal at a savings of $543,000.

Revenue battle

The Vegas odds on a tax increase this year appear to be a longshot right now.

“If it didn’t happen last year, it’s harder to get it now in an election year. So it doesn’t seem likely even to get small things – which won’t add up to ($1.7) billion anyway,” said Sen. Mickey Switalski (D-Roseville), the ranking Democrat on Appropriations.

Just to be sure, the Michigan Chamber, Tea Party organizations and other business groups have been vocal against any general tax increase.

Although Granholm backs a general tax hike, she has yet to see significant support from Democrats in either chamber. House Speaker Dillon said he supports tax reform, but only after the Legislature passes a budget.

“I support reforms first,” Dillon said. “A tax increase should be the last resort after we make all the cuts we can stomach.”

Switalski said even the Senate Democrats, who have been more likely than their House counterparts to back the governor’s agenda, aren’t on board.

“It’s a tough sell to sell any kind of tax,” he said. “But the idea makes perfect sense to modernize the sales tax. . . . Being realistic, it’s an election year, and it’s an uphill climb even in my caucus.”

But not all Democrats have given up on revenue. Rep. Shanelle Jackson (D-Detroit), who sits on Appropriations, told Granholm at her budget presentation that her constituents want to see the state raise revenue.

“The most important thing for us as a state, as the late (Sen.) Bill Ryan used to say, is meeting the basic human needs of all of the residents,” said Cushingberry. “I’ll introduce whatever they (House leadership) ask, whatever the Senate might move.”

There could be some minor tax increases so that lawmakers “won’t have exposure to ‘raising taxes,’” Rothwell said, but he warned that this won’t do much to solve Michigan’s longer-term budget woes. “It just gets us through the current year.”

Thiel agreed that targeted tax hikes like the physician’s tax or a beer tax hike will produce a “relatively small pot” of revenue.

“But with $100 million here and there, pretty soon, you’re looking at real money,” he added.

Switalski said the picture could look different after Nov. 2.

“Up until the election, it will be very difficult for any Republican to vote for a tax increase,” he said. “But I think they’ll warm to it. The first one inevitably will be transportation.”

Here are the revenues that are in the mix right now:

1. Sales tax on services

In 2007, the Legislature passed a 6 percent tax on a hodgepodge of some services as part of an 11th hour budget deal. After clamoring from the business community, lawmakers quickly repealed it, replacing it with the Michigan Business Tax (MBT) surcharge.

This year, Granholm has a new plan. The governor would raise $555 million for the School Aid Fund by dropping the sales tax rate from 6 percent to 5.5 percent and extending it to most services. Business-to-business, health care and education services would be exempt. That would create a $235 million surplus in the SAF this year, according to the Senate Fiscal Agency.

“It’s unlikely to see any action, but if so, the service tax is at the top of the list,” Rothwell said.

“We’ve been talking about this for how long?” Boulus added rhetorically.

Parks said the MLHS is concerned is that 5.5 percent won’t yield enough money for critical programs.

Granholm has tied this proposal to a business tax cut. She wants to eliminate the MBT surcharge over two years starting in 2011 and reduce the gross receipts tax from 0.8 percent to 0.6 percent over three years. The proposal would bring in $330 million in fiscal 2012 and be revenue neutral by 2014.

This is opposed by all business groups, even BLM, which came up with a revenue-neutral version of the service tax. Studley calls it “laughable” and “lunacy.”

2. QAAP

The physician’s tax would raise $133 million, which Parks said is the way to “salvage” Medicaid. Emerson said that as long as a physician had 4 percent of his patients on Medicaid, he would receive a higher government reimbursement.

But while Cushingberry said the “pressure is finally building,” many doctors and the Michigan State Medical Society remain opposed. Jelinek said he’d be “very surprised” if it went through. Even Switalski, the architect of last year’s plan in the Senate along with Sen. Roger Kahn (R-Saginaw), called it an “uphill battle.”

3. Roads funding

Granholm backs shifting the gas tax from a flat rate to a percentage of the wholesale price to raise more money for roads.

Lawmakers also are on the transportation funding case. Rep. Pam Byrnes (D-Chelsea) and Rep. Dick Ball (R-Laingsburg) have proposed a 4-cent-a-gallon gas tax hike for this year. It would rise to 8 cents by 2013. Sen. Jud Gilbert (R-Algonac) has a so-called “diesel parity” bill that would raise the diesel tax. It passed a Senate committee last year and would generate $5.3 million for repairing bridges.

This won’t balance the budget, but Michigan is primed to leave $500 million in federal dollars on the table because the state road fund is down, something Studley called “unconscionable.”

“After years of being told the sky is falling, now it’s falling,” Thiel said.

4. Tax loopholes or expenditures

According to the Treasury Department, Michigan shells out $36 billion on tax credits every year including church property exemptions; income tax exemptions; tax credits for historic preservation, the film industry and advanced battery technology; and the Earned Income Tax Credit for low-income workers.
Expenditures are growing at a faster rate than state tax revenue. The MLHS estimates that between 2005 and 2008, expenditures jumped by about 15 percent compared to 8.8 percent for state tax revenue.

“The only thing we get excited about is movie credits,” Boulus said. “We should look at all of it.”

Rothwell said that it’s “hard to get your arms around that quickly” but expenditures should be examined. Parks agreed that this might not yield much immediate savings, although the MLHS strongly supports loophole closures.

5. Federal stimulus II

Granholm allots $514 million in federal aid in her fiscal 2011 budget. Senate Fiscal Agency Director Gary Olson notes that this is not unprecedented; former Gov. John Engler made assumptions of federal funds in the budget process.

Legislation has passed the U.S. House and there appears to be hope in the upper chamber, although it’s not clear how much states would see.

“That may just be a fantasy,” Moss warned.

Olson points out that “other states are in the same boat” and Michigan will know within the month if help is forthcoming.

“If it’s there, it’s there. If it’s not, there will be a $514 million problem in the budget to deal with,” Olson told lawmakers this week at a joint House and Senate Fiscal Appropriations subcommittee meeting.

Parks thinks it’s likely to come through and Granholm “wasn’t wrong to put it in.” She said this is probably the “best shot” for revenue this year.

“The flip side is that it delays the pain even further,” she said. “It’s a bailout for us – which we definitely need – but it delays the inevitable.”

6. Fees

Rothwell says there’s a “grab bag” of options in terms of fee increases, but “nothing brings in a lot of money.”

Granholm has proposed $8.6 million in increases for fiscal 2011. There’s $500,000 for migrant labor housing inspection fees, $500,000 for dairy inspection, $2.6 million for state fire services, $3.2 million for fingerprint services and $1.8 million for name-based criminal history lookup.

Jelinek said the Agriculture fees have a good shot, but Garcia is skeptical about the state police fee increases.

Other options are on the table. Cushingberry has just introduced a bill raising vehicle registration fees. The way Michigan funds its state parks will likely change. There’s a bipartisan, bicameral agreement for a $10 fee people can opt into when they renew their vehicle registration with the Secretary of State. Park fees currently generate $11.7 million. If 25 percent of people participate in the “parks passport” plan, that would be $17.5 million.

Hunting and fishing license increases could win the support of the Michigan Chamber, Studley said, if they’re “within reason.” He notes the concern about Asian carp and said that an increase could help fund environmental protection.

7. Earned Income Tax Credit

The Michigan Earned Income Tax Credit for low-income workers was enacted in 2006 and went into effect in 2008. It is 20 percent of the amount a person is allowed to claim for the federal EITC amount for tax year 2009.

Many Republicans have been interested in rolling back or eliminating the tax credit even before it could be claimed. Rep. Bill Caul (R-Mt. Pleasant) inquired at the budget presentation if it wasn’t too late to do so for tax year 2009, but state Treasurer Bob Kleine warned people have already filed their taxes and that would “create an administrative nightmare.”

The MLHS is concerned that the EITC will take fire again this year.

“We give everyone else a tax credit,” Parks argued. “We don’t think it should be a place to go. It would be grossly unfair and counterproductive.”

8. Beer and wine taxes

It’s been decades since either the beer or wine tax saw an increase, but this doesn’t appear to be on the radar of the House, Senate or governor at the moment. Granholm briefly floated a plan last year that met with heavy opposition from the Michigan Beer and Wine Wholesalers. The current beer tax is 2 cents per can. Raising it to 6 cents would generate $100 million more annually.

9. Rental car tax

Slapping a $2.50 per-day rental car fee would mean $13 million for tourism funding. It’s in the governor’s budget, but the idea already died in both the House and the Senate last year, so this idea doesn’t appear to have legs at the moment.

Both chambers are looking at alternative funding mechanisms. A one-time $9.5 million appropriation for Pure Michigan has passed a Senate committee.

10. Graduated income tax

The fact that this would take a constitutional amendment makes a graduated income tax highly unlikely. “We booby-trapped ourselves” with the constitutional provision against graduated rates not just for personal income taxes, but for business income taxes, as well, Thiel said. But Boulus said there’s an alternative. The Legislature could pass tax credits based on income to make it more progressive – which would not take an amendment.

The MLHS is one of graduated tax’s biggest supporters, although business groups are strongly opposed.

“The graduated income tax is dead,” Rothwell said. “I don’t see any willingness to take it on.”