Slump Pushes Tax Cut Back into Spotlight

State must decide on delaying trims or enlarging them

This article originally appeared in the Detroit News on October 23, 2001 at http://www.detnews.com/2001/politics/0110/23/a02-325142.htm

By Mark Hornbeck and Gary Heinlein / Detroit News Lansing Bureau

LANSING -- Michigan's worsening budget crunch has made tax cuts the hottest debate topic in the state capital.

Should the state delay already approved personal and business tax reductions in an effort to stanch the fiscal bleeding in Lansing? Or should lawmakers pass even deeper cuts in hopes of reviving the sluggish economy and eventually creating more tax revenue?

It's a classic battle of economic philosophy, pitting the conservative, tax-cutting supply-siders vs. those who say cutting taxes right now will only make a bad fiscal situation worse.

The state's top economists will meet today to figure out just how big the fiscal mess really is. But those on both sides of the issue have already started the public debate over whether Michigan can afford to continue to roll back state income and business taxes. The tenth-of-a-percent cut in each levy would cost the state budget around $240 million in the fiscal year that started Oct. 1.

"We're already in a hole. And when you're in a hole the first thing you do is stop digging," said Rep. Michael Switalski, D-Roseville, a member of the House Appropriations Committee.

But the conservatives say postponing the cuts will take money out of the pockets of taxpayers at a time when the economy needs consumer spending.

"Any delay in tax cuts would cause an economic meltdown in Michigan," said Sen. Bill Schuette, R-Midland.

Schuette is among a dozen Republican lawmakers who subscribe to a Michigan Chamber of Commerce and Mackinac Center for Public Policy plan to make 5 percent budget cuts, accelerate the scheduled tax cuts and also slash levies on home sales, payroll and telecommunications property taxes. They say these cuts will stimulate consumer spending, the housing market and communications investment.

They're following the lead of President Bush, who has offered an economic stimulus package that includes more federal tax reductions.

For his part, Gov. John Engler has resisted plans to delay the income tax and single business tax cuts already on the books. But he also takes a dim view of further tax cuts, aides say.

"As far as accelerating tax cuts, at this time it doesn't seem that would be fiscally responsible," said Susan Shafer, Engler's spokeswoman. "We need to look at the concrete numbers, be realistic and see what we can do."

The tenth-of-a-percent cut in the state income tax would save a family of four with $50,000 household income about $40 a year.

Economic consultant Robert Kleine said it makes sense to delay the tax cuts.

"That would be the most responsible thing to do," he said. "Cutting taxes does not do much for the economy, especially in the short run," he said. "By the time these cuts have any impact, we'll be well out of this recession."

Lawrence Reed, president of the Mackinac Center, a free-market think tank based in Midland, strongly disagrees.

"Tax cuts will help stimulate the economy and they can be paid for with a 5 percent cut in state government spending," Reed said.

The three agencies that will fine-tune the state budget picture today -- the Senate Fiscal Agency, the House Fiscal Agency and the Treasury Department -- estimate the current budget will increase by a slim 1 percent over last year. But their estimates are $700 million to $800 million short of projections they made in May.

State universities have already approved steep tuition increases because of lower state allotments. Lawmakers are trying to protect public school aid, but there's a projected $260 million shortfall in that spending plan.

Other cuts could affect Medicaid, environmental programs, state police patrols and further delay the opening of a new prison.

The Senate already has approved a $300 million withdrawal from the state's rainy day fund, which would reduce the budget cushion account to $700 million. The House decided to hold off on that move until after today's revenue estimating summit.

You can reach Mark Hornbeck at (517) 371-3660 or mhornbeck@detnews.com.

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