In her 2006 State of the State address, Gov. Jennifer Granholm famously promised, "In five years, you’re going to be blown away by the strength and diversity of Michigan’s transformed economy."
We’ve been blown away alright — nearly three years ahead of schedule — but not for the reasons she claimed. In the midst of our single-state recession, Gov. Granholm and a thin majority of the Legislature just clobbered Michiganians with tax hikes of historic proportions. To close a $1.75 billion overspending crisis for the fiscal year that started Oct. 1, they imposed an immediate boost in the state income tax and a brand new sales tax on a bizarre range of services, mostly business-to-business transactions. That leaves more than $400 million to be cut from spending before a 30-day continuation budget runs out Oct. 31.
Michiganians aren’t happy. By a 2-1 margin in a poll taken before the tax hikes materialized, residents indicated they preferred spending cuts over tax increases as a way to balance the state budget. The anger is burning up the phone lines to radio talk shows and legislative offices and filling the letters-to-the-editor pages. Ten of the tax raisers — five Democrats and five Republicans — are now targets of recall election campaigns spearheaded by the Michigan Taxpayers Alliance. A broad-based coalition of business groups is threatening to put a repeal of the sales tax hike on the ballot if the Legislature doesn’t undo its damage.
The nearly $1.4 billion tax hike would be difficult enough in a robust climate, but Michigan’s tax base of people and businesses is shrinking, as evidenced by these sobering facts:
- The unemployment rate, at 7.5 percent, is 60 percent higher than the national average.
- In 2006, Michigan was tied with North Dakota for the highest outbound migration rate of any state, according to United Van Lines statistics.
- The state’s per capita income has been in freefall relative to other states since 2000. It is now an astonishing 7.8 percent below the national average — unprecedented since the Great Depression.
- Home values are plummeting as foreclosures soar to their highest level in recent memory.
- In 2001, Michigan’s average private sector wage was 9 percent below the average in state government. Today, it’s about 18 percent below. We’re becoming a poor state but with well-off public servants.
- According to the Tax Foundation, the state’s overall tax burden will rise to 12th in the country if the recent hikes take effect. (Note: On Aug. 7, 2008, the Washington, D.C.-based Tax Foundation released its newest State-Local Tax Burden Ranking of the 50 states. This report included a change in the methodology used to compute and rank tax burdens which led to a significant drop in the position Michigan held in Tax Foundation rankings — from 14th to 27th among the 50 states.) Add in the "taxing" effect of our high regulatory burden and a labor climate perceived as unfriendly and you have a toxic brew that’s driving away people and businesses every day.
This is a state rich in natural beauty and resources, skilled laborers and entrepreneurial potential but it’s being frittered away by political "leaders" who cannot muster the courage to fix the fundamentals.
Gov. Granholm dismisses the magnitude of the higher levies by claiming it’s a mere "dollar a week for the typical citizen." Funny how politicians use numbers. Suppose Bill Gates decided to gift Michigan a billion and a half bucks. The governor would be crowing about its magical stimulus for months. If a band of thieves made off with $1.5 billion from Michigan banks, she surely wouldn’t ho-hum her way through that. But if it’s siphoned from taxpayers for government to spend? Well, sheep aren’t supposed to squeal; they’re supposed to be sheared.
More than the shearing itself, it’s the crude and crazy clippers that have the flock in an uproar. After months of impasse between the Republican Senate and the Democrat governor and House, it wasn’t much of a surprise, sadly, that the budget deal struck in the wee hours of Oct. 1 raised the state’s flat-rate income tax 11.5 percent. But, as a popular joke in Lansing avers, not even the fortune-tellers, palm-readers and astrologers now subject to the new service tax saw it coming. Other services singled out for the tax include baby shoe-bronzing, lift tickets at ski resorts, house sitting, personal fitness training and singing telegrams. Two-thirds of the expected new revenue is projected to come from taxing interior design, landscaping, cabs and limos, financial and business consulting, office administration, warehousing, storage and janitorial services.
Proving once again that government is not rocket science, only one obvious pattern is apparent in the crazy quilt of services to be taxed: If you didn’t have a lobbyist in the Capitol on Sunday night, Sept. 30, you were fair game. One senator explained that he removed bowling from the list at the request of Gov. Granholm.
Almost every observer of the auto industry agrees that to survive, the Big Three must arrive at a "transformational" agreement with the United Auto Workers that gets rid of gold-plated benefits, archaic work rules and expensive job banks. This change appears to be taking place in settlements reached recently between the UAW, GM and (hopefully) Chrysler. It’s becoming just as apparent, however, that Michigan’s public sector unions and their allies in Lansing will protect their turf and resist similar transformational changes in government.
A hue and cry for tax hikes never arose from the general public in Michigan. It came from within the bureaucracy and from public sector unions such as the Michigan Education Association, which lobbied aggressively against spending reductions because they wanted taxpayers to tighten their own budgets so that government workers wouldn’t have to. Gov. Granholm shows little interest in taking on those entrenched interests, even in the face of research that identifies hundreds of millions of dollars in potential savings from simply scrapping the state’s prevailing wage law or contracting out high-cost government services.
Blame for Michigan’s mess ought to be shared by a few others too. There are the "reporters" who claim to "cover" Lansing but rarely tell their readers there are viable alternatives to raising taxes. There are the policy cranks and snake oil spokesmen who claim our economic salvation depends on throwing more money at universities, even though students are staying in Michigan for the education. It’s the jobs they’re leaving for. And then there are the regulators in state agencies like the Department of Environmental Quality, which sorely needs some adult supervision. If you can’t get past the regulatory gatekeepers, it doesn’t even matter what the tax or labor climates are.
Will the tax hikes stand? Don’t bet on it. Public ire, already at fever-pitch, will only grow if the service tax takes effect as scheduled on Dec. 1. Resentment against the governor’s union allies is so widespread it’s even fueling calls to end compulsory unionism by making Michigan the nation’s 23rd right-to-work state.
Crisis and opportunity often go hand in hand. The residents of Michigan just may yet teach the political class a lesson that will reverberate well beyond our state. In the meantime, Michiganians have every right to be angry with the shameful dearth of courage and leadership in Lansing.
Lawrence W. Reed is president of the Mackinac Center for Public Policy, a research and education 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.