As the Legislature tiptoes up to the precipice of a substantial income tax hike, what should be first on members’ minds is the state’s crashing economy. Compared to this reality, the challenges of downsizing and reforming government pale. Here are the economic facts:
Michigan's after-inflation Gross Domestic Product actually became 0.5 percent smaller in 2006. In this broadest measure of the economic performance of a state or nation, every other state in the union grew - Michigan's economy was the only one that became smaller. Overall, the rest of the nation's economy grew by 3.4 percent.
Michigan’s unemployment rate is 6.9 percent. The national figure is 4.5 percent. Joblessness here would be much higher without the escape valve of strong job growth elsewhere because Michigan is exporting its unemployment to states with job growth.
Michigan has lost 335,600 jobs since 2000.
Since August 2003, Michigan has lost 87,000 jobs. In that period more than 7.8 million jobs have been created nationwide.
Michigan lost 46,900 jobs in the 12 months ending in April 2007. The rest of the country added 1.8 million jobs. The state lost 4,600 jobs in April, while the rest of the country added 88,000.
Per capita personal income in Michigan fell 0.7 percent in real, inflation-adjusted terms from 2001 to 2006. Nationwide, it rose 4.2 percent.
Per capita personal income in Michigan is now 6.7 percent below the national average. That’s the lowest it’s been since 1933.
In the 12 months ending March 31, Michigan was dead-last in an index of changes in house prices maintained by the Office of Federal Housing Enterprise Oversight. Prices here fell by 0.66 percent. The U.S. average was a 4.25 increase. Michigan was one of only two states that experienced four straight quarters of decline (Massachusetts was the other).
The population of Michigan is actually falling. It dropped by 5,190 people between 2005 and 2006. Nationally, it grew by nearly 2.9 million. Wayne County lost more people than any other county in the nation during that period.
According to the Tax Foundation, Michigan’s state and local tax burden as a percentage of per capita personal income is 11.2 percent, the 14th highest. This 11.2 percent burden matches a peak the state has only reached one other time since 1970. The fact that that other year was 1983 should give legislators pause. That was the last time the Legislature passed an income tax hike, and it triggered a revolt that lead to the recall of two state senators and the tipping of the Senate to Republican control under a new majority leader named Sen. John Engler.
Michigan’s tax burden per dollar of state Gross Domestic Product is the 12th highest in the nation.
In short, this state’s economy shows signs of going up in flames. Raising taxes now would be throwing gasoline on those flames.
To be fair, the budget challenges are daunting. Since 2001, revenue from state sources has been flat to slightly down in real, inflation-adjusted terms (following a revenue-and-spending bubble in the previous 5-year period). Meanwhile, the prison population has risen some from 46,000 in 2001 to nearly 50,000 today. Medicaid caseloads have risen 33.7 percent since 2001, from 1.114 million to 1.490 million last year.
To a large extent these figures are the direct result of public policy choices. On Medicaid, Michigan has chosen to expand coverage to optional population groups having higher income levels. Legislators and the executive branch have both succumbed to the "attractive nuisance" of $1.16 in federal matching funds for every $1 the state spends.
Corrections Department spokespersons warn legislators that current inmates are "really bad guys," and not penny-ante drug possession convicts. Yet as the Citizens Research Council has pointed out, compared to the average in the other Great Lakes states Michigan’s incarceration rate is 40 percent higher, and yet the average crime rate in those states is lower. ("The relationship between the higher incarceration rate and crime rates is not apparent," observes CRC.)
Yet overshadowing these considerations is one huge fact that can’t be ignored: Michigan pays too much for the government it gets. The average Michigan state employee receives a salary and benefits package worth nearly $75,000. An estimate of the comparable figure for private sector workers is approximately $58,000. Other comparisons tell the same story — the cost of government here exceeds not only the private sector, but the public sector in other places.
As long as this reality is in place, residents will not forgive legislators for adding to their tax burdens. Not to mention giving an already groaning state economy a sucker punch in the gut.
Jack McHugh is a legislative analyst and James M. Hohman is a research assistant 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.