Business Tax Climates
The Tax Foundation’s index of state business tax climates shows Michigan’s to be worse than both the national and Great Lakes states’ averages.

Michigan is at a crossroads. Its economy is reeling, while the state budget staggers under an acute structural deficit. State officials now face a stark choice: Free Michigan’s economy by lowering its taxes, deregulating its markets and tethering state spending — or pursue a mirage of cosmetic fixes by hiking taxes, dabbling in the marketplace and praying our economy will struggle on.

The state’s economic woes are real. As the Mackinac Center reported last September, federal statistics have shown that from December 1995 through December 2003, Michigan finished 50th out of 50 states in percentage employment growth. We placed 48th in percentage per-capita income growth during roughly the same period. From 1995 to 2001, we fell from above the median (23rd) to below the median (30th) in per-capita gross state product. From January to November 2004, Michigan was the only state to lose jobs.

The world economy is relentlessly, ruthlessly competitive. Michigan has no entitlement to a healthy economic future. Unless Lansing finds the courage to abandon “business‑as‑usual,” the state’s economy — and the people of Michigan — will fall further and further behind.

Not surprisingly, state government has struggled this year to close a $1 billion deficit, and a $270 million deficit remains. The potential deficit in fiscal 2006 is estimated to be at least $500 million. But it’s the economy, not the budget, on which state officials should focus first. The economy directly affects the people of Michigan, and its weakness is the cause of lagging state revenues.

Legislators like to boast of the business climate improvements of the 1990s, but these are old news. Michigan’s state and local taxes as a percentage of personal income are still above the national average, according to the widely respected Tax Foundation. The nonprofit Pacific Research Institute recently ranked Michigan 34th of the 50 states on an index of economic liberty that included regulatory, judicial and government spending policies. Similarly, the Tax Foundation ranks Michigan’s business climate 36th, while rating its corporate income tax the worst in the country. If you add a downsizing manufacturing sector and a history of difficult labor relations, you get economic bleeding.

Yet rather than adopt urgent and fundamental tax, regulatory and spending reforms, our political establishment has flinched. State spending of state-raised revenues is projected to rise $157.6 million this year, and Gov. Jennifer Granholm just handed government workers a 10 percent raise over the next three years. In fiscal 2006, Medicaid, the 800-pound budget gorilla, will gobble $600 million more in state revenue than it did last year, according to the state budget office.

On the tax front, the Legislature recently approved tax and fee hikes worth more than $500 million annually. This does not include such new annual levies as millions in “regulatory user fees” on specific industries; $85 million in extra capital equipment taxes squeezed from job providers by hired-gun auditors; and $30 million to $500 million in taxes on Michigan citizens’ out-of-state Internet purchases.

On the regulatory side, the governor wants to impose water-use permit requirements on industrial and commercial users — a major, unnecessary regulatory expansion that former Department of Environmental Quality Director Russ Harding calls “the worst possible job-killing environmental regulation.” At the same time, the state’s failure to allow full competition in electricity supply has kept Michigan’s energy rates higher than the regional average; dubious workplace “ergonomics” regulations are being drafted; and missteps in telecommunications policy have delayed investment in new technology, such as high-speed Internet services, and made Michigan less attractive to business.

Such measures have smothered a state economy that is already desperate for air. Michigan is being challenged by a decline in manufacturing employment wrought by relentless productivity gains, but vigorous reforms in state policy can free the state’s economy to attract new jobs and investment.

The Legislature needs to rein in its runaway Medicaid budget by reducing the portion that goes to nonmandated services — reportedly as much as 40 percent — and by giving Medicaid recipients more control over their health care dollars through an insurance voucher system. Legislators should also sell the state’s conference center for state employees, cut corporate welfare and save schools at least $150 million annually through prevailing-wage reform. The Mackinac Center has identified more than $2 billion in specific budget-savings opportunities.

Meanwhile, Gov. Granholm needs to reverse course on her command-and-control water-use permitting and lead the way on telecom and electricity deregulation, recognizing that it ultimately benefits consumers, particularly the poor. The state’s political leaders should also eliminate the Single Business Tax and capital equipment taxes, replacing most of the revenue with spending cuts.

The world economy is relentlessly, ruthlessly competitive. Michigan has no entitlement to a healthy economic future. Unless Lansing finds the courage to abandon “business-as-usual,” the state’s economy — and the people of Michigan — will fall further and further behind.

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Jack McHugh is a legislative policy analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.

Summary

Michigan’s economy is reeling, producing not just low employment and income growth, but weaker state tax revenues. The governor and state legislators can improve the economy by rejecting their recent mistakes and timid “business-as-usual” tactics. They must control state spending, lower taxes and help consumers by deregulating key services.

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