Michigan’s new fiscal year begins on October 1, but the state faces red ink already – a $1 billion deficit, according to The Detroit News. Worse, there’s no firm deadline for making up the difference. This means that the problem could extend into the next calendar year, making the inevitable adjustments even more difficult.
Worst of all, the projected deficit is a structural one. With the current mix of tax and spending systems, it isn’t going away. Quick fixes enacted this year will likely have to be re-fixed in later years.
The easy path of raising "sin tax" rates has already been taken, with Governor Jennifer Granholm and the state Legislature sending cigarette taxes up 75 cents a pack. (As Mackinac Center staff have noted, extraordinarily high taxes on cigarettes can contribute to crime, terrorism and job loss.) Taxes on Detroit casinos have been dramatically increased as well, rising from 6 percent to 24 percent. Still, the deficit remains.
Governor Granholm and legislative leaders have agreed to exempt state aid to schools from spending cuts, thereby putting the squeeze on every other area of spending. So where should the state go from here?
The governor wants to return to the "sin tax" bucket once more, this time to increase the state’s take on liquor prices. Also being discussed is an increase in the death tax, a measure that would discourage savings and job creation. And in a move that gives new ammunition to every cynic around, officials have even talked of diverting money meant to be used for the mitigation of the environmental risks of underground storage tanks.
In the midst of all this, a spokesman for Speaker Rick Johnson reportedly says that people in his office "don't feel any great sense of desperation or urgency." But for all the reasons discussed above, the situation is both important and urgent, and lawmakers will eventually realize it. They must therefore do something more valuable than merely shifting numbers here and there or, say, raising this or that tax. They should consider structural solutions to a structural problem.
In Michigan, the greatest structural problem is that state government does too many things it shouldn’t. Just as businesses exit markets that they cannot excel in, or which are not part of their core mission, the state needs to restructure.
It can, for example, sell off unnecessary government assets, such as a resort-area conference center and two state fairgrounds. Counterproductive projects, such as "economic development" programs that often duplicate each other and fecklessly try to boost overall economic health, should be shut down. Ongoing functions should be restructured for greater benefit – for instance, higher education, a common target for budget cuts, could be invigorated by taking state universities private.
All in all, the Mackinac Center has identified $3.5 billion worth of state budget savings that could be achieved by restructuring state government and redirecting its effort towards core functions.
Many of the steps won’t be popular. They will require bureaucracies to change the way they do business. They will force established industries to go without handouts they have come to depend on. They will require nonprofit groups to solicit voluntary contributions from Michigan’s citizens, rather than rely on playing politics to get involuntary, tax-based funding.
But by rethinking what government can, should, and should not do, lawmakers can use the current budget troubles to start moving the state out of structural deficits. It’s the best way to free the state’s citizens from the specter of continual tax hikes – and to free the state Legislature from the $1 billion monkey on its back.
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John R. LaPlante is an adjunct scholar with the Mackinac Center for Public Policy and a contributor to the Mackinac Center study Recommendations to Strengthen Civil Society and Balance Michigan’s State Budget. He has also written on fiscal matters for the Oklahoma Council of Public Affairs and the Taxpayers League of Minnesota.