Public-sector average compensation grows while private sector's decreases

At the beginning of 2010, the conventional wisdom in Lansing seemed sober and self-evident: The state had for many dark months balanced the budget on the backs of teachers and state employees while holding the line on taxes. It was time now — and only fair — to levy a modest tax on services that would address the inequities of an antiquated state tax structure and spare the public another brutal round of cuts to state services. This measured rhetoric and the state's pressing budget shortfalls lent these arguments an air of inevitability.

Then along came James Hohman, who single-handedly crumpled every pillar of intellectual support for the pro-tax arguments. At the same time, the Mackinac Center fiscal policy analyst helped Morey Fiscal Policy Director Michael D. LaFaive spearhead a withering attack on a series of economic development claims by state government meant to create the illusion of a friendly state business climate. This second line of attack against tax-hike apologists made inroads: LaFaive's work was widely reported and garnered 70 media interview requests through May, including a live national television interview with Stuart Varney on the Fox Business channel.

These efforts paid off. Five months after unveiling a tax "restructuring" plan that included the creation of a sales tax on services, Gov. Jennifer Granholm said at a July press conference that she had given up on the Legislature adopting her proposal. While many factors may have contributed to the tax hike's demise, Hohman and LaFaive — at times lone voices — helped create an informed environment where the plan was recognized as unnecessary and destructive.

Early on, LaFaive and Hohman were beset by speech, interview and commentary requests from across the state, thanks in part to Gov. Granholm's final State of the State address, fiscal 2011 budget proposal and tax hike recommendations. But it was also due to Hohman carefully explaining fallacies in arguments advanced by tax "restructuring" proponents.

For example, the state's "Legislative Commission on Government Efficiency" argued that the state's tax system was "no longer appropriately linked with state's resources/tax base." The commission cited as evidence the fact that revenues to the state Treasury have fallen far short of the state's Headlee Amendment that capped them at 9.49 percent of personal income. But Hohman examined Michigan government revenues going back to the late 1970s and found that the state's benchmark is a poor measure for tax affordability, because the revenues include transfer payments (sometimes described as "welfare"). When these dollars are excluded, Hohman noted, the numbers show that the state extracts $1 billion more from taxpayers than would be allowed under the Headlee Amendment. Since 1978, transfer payments have jumped from 11.2 percent of state personal income to 18.8 percent.

Hohman also pointed out that Michigan's tax system is "juiced" relative to other states. That is, as revenues have declined in state treasuries across the country, the Great Lakes State generated more tax revenue per capita than 35 other states.

Hohman also discovered and published one of the more remarkable numbers employed by the Mackinac Center in the last decade: $5.7 billion. In Michigan, that is the staggering difference between the value of nonsalary benefits, such as health insurance, paid to employees in state and local government and public schools, and the value of nonsalary benefits paid to workers in the private sector. To put that figure in perspective, that amount of money could eliminate the state's hated business tax and related surcharge and still leave $3.3 billion for balancing the budget and improving roads.

Not content with knocking down the arguments of tax-and-spend advocates, Hohman turned his attention to employment numbers for Michigan's film industry. In his analysis, Hohman found — to the shock of many — that there are fewer Michigan people working in Michigan's film industry than before the state's movie subsidy program began. This finding generated headlines across the state and prompted one state senator to declare, "As a job creator, film subsidies have failed in Michigan ... With the budget problems we face, we cannot afford this generous subsidy."

Hohman and Adjunct Scholar Gary Wolfram analyzed claims made in a National Institute on Retirement Security study titled "Out of Balance," which purported to show that government employees are underpaid compared to their private-sector counterparts. Hohman explained that the paper's authors used a convoluted, inappropriate method for arguing that government employees are undercompensated.

Hohman's work resulted in media coverage throughout the state, including radio appearances on WJR with Frank Beckmann, WKZO in Kalamazoo, WTCM in Traverse City, WJRW in Grand Rapids, WBCK in Battle Creek, WKLA in Ludington and TalkLansing.net. Hohman also published tax- and budget-related editorials in the Detroit Free Press and The Oakland Press.

While Hohman was busy smashing tax and spending myths, LaFaive was focused on both broad and narrow topics of economic development, detailing for legislators, university professors, students and the public where Michigan has been and where it may continue to go economically. As part of his research, LaFaive zeroed in on decade-long interstate migration patterns, demonstrating that since 2000, Michigan lost more than 540,000 people while Texas added 848,000 — in part a function of differing state public policies. LaFaive's Viewpoint on this topic was carried on opinion pages in newspapers throughout Michigan.

LaFaive also worked with Communications Specialist Kathy Hoekstra for several months on an investigation involving a possible Michigan Film Office deal for "Hangar42," a Grand Rapids-based movie studio project with such state secrecy that Mackinac Center staff nicknamed the deal "Area 42" after the famed Area 51 military base in Nevada.

With a hard-hitting video and accompanying essay, LaFaive and Hoekstra publicly raised questions about the deal's finances and the lack of government transparency. The Grand Rapids Press, WOOD radio, WOOD-TV and WWMT-TV all used the Mackinac Center's work as a springboard for their own coverage. (Look for more developments on this story in the next issue of IMPACT.)

Continuing the factual bombardment against policies that would create higher taxes for Michigan residents and businesses, LaFaive on June 15 released the results of an analysis performed to measure the impact of Gov. Granholm's February tax hike proposal. The governor's plan would total some $940 million over three years.

The analysis was done in conjunction with the Beacon Hill Institute of Massachusetts and found that the first-year job losses would total more than 30,000, dropping to 13,500 by the end of year three as supposed offsetting tax cuts were phased in. The model also showed that the tax proposal would produce a $264 million drop in total investment in the state in the first year.

When Michigan Capitol Confidential reporter Tom Gantert contacted Liz Boyd, spokeswoman for Gov. Granholm, about the findings, she was dismissive. "The governor's tax restructuring proposal was actually based on recommendations from the Business Leaders for Michigan," she wrote in an e-mail.

A letter to Gantert from the Business Leaders for Michigan disputed that characterization, however. "Our plan has been compared to Governor Granholm's tax reform plan," the letter read. "While some elements of the Governor's plan may have been influenced by ours, Business Leaders for Michigan's business tax reform plan is not the same as the Governor's."

In the end, it did not matter. Facing an array of influential tax hike proponents, Hohman and LaFaive effectively exposed every erroneous argument and dissected every example of specious scholarship that claimed the state needed more revenues. With the apparent death of the governor's tax-hike proposal, both are determined to restructure an antiquated tax debate that has focused too often on Michigan taxpayers' leaving more money for state government — not the other way around.


Media Impact: Radio Free Michigan - click to enlarge