The MC: The Mackinac Center Blog

Where the Money from Higher Transportation Taxes Goes

A bigger budget means more money for programs beyond road repair

What if the Legislature and governor hike gas and vehicle registration taxes to fix the roads, but then hardly any extra money goes to fix the roads?

Drivers started paying those higher taxes this month, though they were enacted near the end of 2015. But at least in the short term, the main effect of these tax increases appears to be higher spending on schools and Medicaid, not road repairs.

The 7.3-cent-per-gallon tax increase motorists began paying on Jan. 1 and the 20 percent increase in the vehicle registration tax are expected to cost road users an additional $460 million this year. The money is dedicated to transportation funding — mostly to the roads, but also some for public transit.

Yet the state transportation budget will only have $160 million more this year for road repairs, not $460 million. That is because the Legislature shifted funds out of the transportation budget just as new tax revenues were coming into it.

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Gov. Snyder has been pushing for more transportation funding since he took office in 2011. Many proposals were offered and rejected over the years, and the Legislature began shifting revenue from other taxes into the transportation budget.

By last year, the amount of state General Fund revenue transferred to transportation had risen to $402 million — nearly as much as the new road tax hikes will bring in this year.

With the new road tax money rolling in, all but $9.75 million worth of General Fund revenues were removed from this year’s transportation budget. The $392 million in General Fund money previously earmarked for roads is now mostly paying for Medicaid and public schools.

Specifically, the school aid budget is getting $163.8 million more in General Fund revenue this year, and the state agency that manages Medicaid is getting $132.6 million more.

The budgetary change is a lesson in fungibility: Increased tax revenue can be shifted from one purpose to another. Moving some General Fund revenue to transportation allowed more road repairs in the last couple years than would have been the case without that money.

Such details rarely wind up in the talking points politicians use to sell the public a tax increase. You won’t see any press releases promoting the gas tax as a way to fund medical welfare programs, just as you didn’t see many complaints about there not being enough school funding last year because general fund revenue shifted to roads.

The gas and vehicle registration taxes will continue to fund the transportation budget. And lawmakers plan to send some of the income tax money to roads in the future, so there will be more road funding.

Still, drivers got more road funding the last few years without having to pay for it in the form of higher transportation taxes. When those taxes did go up starting this month, Lansing’s response, at least in the short term, was to spend more on schools and Medicaid. Taxpayers should pay closer attention to the lesson about fungibility as they listen to future state spending debates.

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July 2, 2015 MichiganVotes Weekly Roll Call

A Salute to Thomas Sowell

The great economist is retiring

When I was growing up, my family wasn’t very engaged with politics and we spent little time discussing economic policy issues. If you would have asked me when I was a kid what “economics” was, I couldn’t have given much of an answer. But my parents were avid readers of newspapers — we got two daily papers, the Chicago Tribune and the Beacon News, as well as a weekly, the Sandwich Record, covering news from my hometown in Illinois.

The economist Thomas Sowell had occasional columns in these newspapers. He, and other syndicated writers I enjoyed, led me to discover a website of writings of dozens of columnists. Very quickly, Sowell stood out. I read every article of his that I could find, and eventually, a great many of his dozens of books. His writings helped form the foundation of my political philosophy and my career.

Sowell announced his retirement at the end of 2016. The 86-year-old Sowell grew up in a low-income household in Harlem. But in his autobiography, “A Man of Letters,” he explains that despite growing up in poverty, he was able to get a good education, to which he attributes his later success.

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From Harlem, Sowell went to college where he became a Marxist. But later in life, during a job working for the federal government, his economic research led to a shift in his views and he eventually rejected Marxism and became one of the great free-market economists of this generation. He was especially gifted at communicating economic principles to noneconomists — like my teenage self.

I have compiled a collection of quotes from the great man over the years. From “The Vision of the Anointed”:

One of the never-ending crusades of the anointed is for more ‘public service.’ Like so many of the special buzzwords of the anointed, this phrase does not mean what the straightforward sense of the words seems to say. Not every service to the public is a ‘public service’ in this Newspeak. For example, those who deliver tons of life-sustaining food to supermarkets are not engaged in ‘public service,’ as the anointed use the term. Neither are those who build a roof over people’s heads or produce the clothes on people’s backs. Those who perform these vital services are activated by the incentives of the marketplace, perhaps even by ‘greed,’ another fashionable buzzword that puts the anointed and the benighted on different moral planes. . . . What is crucial is that public service not be service defined by the public itself through its choices of how to spend its own money in market transactions, but defined for them by third-party elites.

Also from “The Vision of the Anointed”:

One of the sad signs of our times is that we have demonized those who produce, subsidized those who refuse to produce, and canonized those who complain.

From an interview with the Hoover Institute’s Peter Robinson:

I’ve often said there are three questions that will destroy most of the arguments of the left. The first is, ‘Compared to what?’ The second is, ‘At what cost?’ And the third is, ‘What hard evidence do you have?’

From “Dismantling America”:

No one will really understand politics until they understand that politicians are not trying to solve our problems. They are trying to solve their own problems — of which getting elected and re-elected are number one and number two. Whatever is number three is far behind.

My favorite quote of his, which hangs next to my desk and that I often use in speeches, is the following: “There are no solutions; only trade-offs.” Politicians would be wise to heed it.

A final thought from his last column:

In material things, there has been almost unbelievable progress. Most Americans did not have refrigerators back in 1930, when I was born. Television was little more than an experiment, and such things as air-conditioning or air travel were only for the very rich. My own family did not have electricity or hot running water, in my early childhood, which was not unusual for blacks in the South in those days. ... We cannot return to the past, even if we wanted to, but let us hope that we can learn something from the past to make for a better present and future.

So long, Dr. Sowell. Enjoy your well-deserved retirement. You influenced countless people, and you can count me among them.

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Protecting Electricity Choice

2016 Michigan Energy Roundup

(This is the second article in a three part series discussing major changes made by the Michigan Legislature to energy utility regulation in the state. Those changes are now enrolled in statute as Public Acts 341 and 342 of 2016.)

Michigan’s two large utilities — DTE and Consumers Energy — have committed to prematurely close several of the state’s coal generation facilities. They are maintaining those plans in the face of Trump administration promises to ax anticoal regulations and despite the fact that the closures could lead to energy shortfalls across the state. Construction of replacement generation and the fight to protect Michigan’s small electricity program have been at the center of a major statewide debate on energy over the past two years.

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Both utilities have claimed a need to build natural gas and renewable generation to address self-inflicted capacity shortages. Of course, sizable rate increases recently approved by the Michigan Public Service Commission also ensure Michigan’s two major utilities will generate handsome profits on any newly constructed generation.

Despite those guaranteed profits, DTE and Consumers Energy have voiced concerns that alternative energy suppliers — who provide less expensive electricity to Michigan’s electricity choice market — do not fund investments in the state’s regulated energy generation infrastructure. They argued that these suppliers might leave the state, or that they lack the capacity to supply the electricity needs of their customers, ultimately forcing them to rely on electricity generated by the big utilities.

DTE and Consumers Energy had, therefore, pushed legislators to add a “capacity charge” to the electricity sold by alternative energy suppliers to help fund DTE and Consumer’s investments in new generation capacity. However, choice program generators contend that their normal operations ensure sufficient capacity for customer demand and a capacity charge would effectively charge choice customers twice. That second charge would, of course, make alternative suppliers less competitive, effectively taxing the choice market for the benefit of the big utilities.

The back-and-forth over a capacity charge had been the primary reason that major changes to electric utility legislation had stalled in Michigan’s Legislature for almost two years. However, in the waning hours of the 2016 lame duck session, Gov. Rick Snyder demanded that legislators give him a completed bill. He pushed the Legislature to compromise on a bill that would both ensure sufficient funding for new generation capacity and protect Michigan’s electricity choice program.

The final language of Public Act 341 of 2016 mandates that alternative suppliers must either build sufficient generation capacity or have a minimum of three years of contracted capacity at all times. If they fall short on their advance planning, PA 341 empowers the MPSC to hold public hearings to determine an appropriate capacity charge to pay for access to generation assets operated by the major utilities. Where choice suppliers can guarantee sufficient generation capacity for their customers, no additional charges are necessary. DTE spokesperson John Austerberry agreed that the bill “provide(s) that reliability that we think is most important.”

State representative and strong electricity choice proponent, Gary Glenn, R-Midland, discussed the compromise bill on the floor of the House, saying that “as (he understood) the bills … there are significant improvements in energy policy that will benefit rate payers” and that will serve as “a good starting point from which hopefully we will expand choice in the future.“

Michigan Freedom Fund CEO, Terri Reid, commended the House for having defended free market principles by removing “every anti-choice poison pill” from the original Senate bill. “By forcing these changes,” Reid contended that, “House members put the needs of local schools, job makers, and their constituents above the profit sheets of two massive electric utilities. They stood up against millions in advertising and an army of lobbyists and they put ratepayers first.”

Aric Nesbitt, R-Lawton, chair of the House Energy Committee, and the primary sponsor of the legislation in the House characterized it as "a win, win, win — for our ratepayers, our economies and for our long term reliability in the state.”

Looking forward to 2017, one of the key issues to be addressed will be balancing the changing nature of Michigan’s electricity generation system. As utilities plan for the closure of large, dispatchable baseload coal and nuclear plants, Michigan’s system will be forced to rely on a smaller suite of energy options — specifically natural gas, renewables, and conservation measures.

Limiting options in this fashion is likely to prove problematic as the added expense and unreliable nature of renewables will be paired with continued volatility of natural gas prices in Michigan’s regulated energy markets. Therefore, expanding access to energy choice and free market energy options is likely to become an important hedge against supply and price swings in 2017 and beyond.

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Michigan Stagnates on Economic Freedom Index

After big recent gains, this state stuck in neutral

The Fraser Institute just released its latest rankings of economic liberty in North America, covering U.S. and Mexican states as well as Canadian provinces. Michigan’s holds the same 27th place ranking among the 50 U.S. states as it did the last time Frasier produced the list — a troubling indication of stagnation after several years of gains.

The most free U.S. states in this index were New Hampshire, Florida, South Dakota, Texas and Tennessee. The least free were New York, California, Alaska, New Mexico and Hawaii, with New York and California bringing up the rear for the second year in a row.

Fraser scholars generally just report the rankings and let others draw conclusions, but with this release co-author Dean Stansel, an economics professor at Southern Methodist University, stated:

“Americans have been voting with their feet against the ‘big government’ approach of New York and California. Florida and Texas have experienced more than two-and-a half times faster population growth in recent years, and they’re among the freest states in the country.”

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Studies show that economic liberty is highly correlated with many measurements of human well-being, starting with average incomes. Per capita incomes in the 10 states ranked most free were almost 5 percent above the national average, and incomes in the 10 least free states were more than 3 percent below average. During the past three years population grew about 3 percent in the 10 most free states, but only about 1 percent in the bottom 10 states.

There is practically zero chance these correlations are just coincidence. Economists and social scientists have studied what makes nations and their political subdivisions prosper. Economic liberty — the ability to freely produce and exchange goods and services for personal gain — is a vital ingredient for prosperity. How to best identify and measure it is a perennial challenge, and Fraser Institute scholars have made a major contribution by devising ways to do so at both national and subnational levels.

The Fraser index is built around three areas: spending by government, taxes and market freedom for labor, and these areas have a total of 10 subcategories. The methodology is explained in detail by the reports’ authors and the dataset is made publicly available.

Given Michigan’s current stagnation in the freedom rankings lawmakers here should look to the index for clues on where more work is needed. For example, eliminating the individual income tax would help Michigan transform into an economic freedom and opportunity powerhouse the likes of modern Florida and Texas.

Short of repeal, the people are still waiting for the substantial income tax cut promised by Lansing politicians back in 2007. That’s when a Democratic Governor and House along with a Republican Senate imposed a “temporary” 11.5 percent income tax increase, to be rolled back starting in 2011. Since then, they have delivered a down payment of just 0.1 percentage point on that promise.

The Fraser Institute’s Economic Freedom of North America report is a scholarly measure of where Michigan fits in North America’s economic firmament. State and national economies are not static — some places are always moving up and others falling behind. You’ll know Michigan is moving the right direction when our Legislature and Governor adopt policies that advance the state above its current 27th place on the EFNA index.

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MichiganVotes.org Takes Accountability to a New Level: 16 Years, 30,000 Bills, 26,517 Votes

Web resource makes it harder for politicians to talk-the-talk back home but not walk-the-walk in Lansing

With the close of the 2015-16 Michigan Legislature, MichiganVotes.org completes its 16th year of describing all the bills and all the votes cast by every state lawmaker. Over this period the site has provided concise, plain-English descriptions of 30,852 bills, 26,517 roll call votes, 20,562 amendments 5,804[*] new laws, and 69,178 votes that individual legislators missed.

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The site allows users to search and sort these proposals in useful ways. For example, a person can look up his or her representative’s votes on all bills in the “tax” category that contain the word “increase,” or all “education” bills with the words “charter school.”

Thanks to MichiganVotes.org, every Michigan lawmaker who has served during the past 16 years now has an easily uncovered “permanent record” of their actions. This has made it much more difficult for politicians to say one thing back in the district, cast contrary votes in Lansing, and get away with it because nobody told the folks back home.

The value of the site’s database grows with each additional year. With term limits, the information warehouse contains the complete legislative careers of hundreds of legislators who have served their allotted time. Many of these politicians have and will move on to other positions in government, but wherever they go, their legislative record will follow them on MichiganVotes.org.

The site also allows users to create custom voting record “scorecard” spreadsheets, rating all 148 lawmakers on whatever issue or ideological standard they choose. (Here’s a recent example created by the MIRS news site, and here’s an older one created by a tea party group.)

Finally, a “Weekly Roll Call Vote Report” tells newspapers how their local lawmakers voted on just the most interesting, important or newsworthy bills of the previous week.

(Note: Portions of this post have been published in previous articles on this site.)


[*]This is not the final count through 2016.

We are the authors of a new study of state-funded tourism promotion programs that found them to be largely a waste of taxpayer money. The findings were so stark that we felt compelled to bring them to the attention of our fellow citizens and Michigan taxpayers, who will pay $34 million for this state’s promotion campaign.

Specifically, we found that every $1 million increase in state tourism promotion spending generates just $20,000 in additional lodging industry business (not new tax revenue). Other sectors of the economy get back far less. In other words, spending on this state’s Pure Michigan ad campaign is a huge loss for taxpayers. This finding is also intuitively obvious, since Michigan’s tourism businesses have chosen not to make this marketing investment themselves — with their own money.

That is why in November, we challenged officials from the Michigan Economic Development Corporation — which gets annual appropriations to run Pure Michigan ads — and the Michigan Lodging and Tourism Association — which is supposed to benefit from the program — to a public debate.

They declined, which is no surprise because their claims that the program is worthwhile are based on studies purchased under no-bid contracts that use a “dark methodology” to generate incredible “return on investment” from this spending. Even though these taxpayer-funded studies are meant to inform public policy decisions, MEDC officials keep this methodology a secret.

We written before about this problematic scheme. A cottage industry of specialty consultants creates research products that purport to show that tourism ad spending more than pays for itself. The products mimic independent scholarly research, but are neither independent nor scholarly.

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The vendor is not independent because the firm is paid by the agency seeking to justify this spending, almost always under single-source, no-bid contracts.

The research products violate the core canons of valid scientific research — transparency and replicability. Independent scholars are unable to “check the work” of the MEDC’s consultants because their methods are kept secret.

In other words, policymakers and the public are supposed to just take the word of officials and companies that directly benefit from state tourism ad spending that the spending is worthwhile. Trust, but don’t verify.

That would be a mistake, because claims that the state treasury gets back $7.67 for every $1 dollar spent on Pure Michigan ads are a scam. The figure was created by a vendor called Longwoods International, the recipient of multiple no-bid contracts from the MEDC, and whose current chair is a former MEDC official. When challenged on all this, the agency and its vendors respond with bold defiance.

In a news story about our debate challenge, reporter Justin Hinkley paraphrases the president of Longwoods as follows: “Mackinac Center’s analysis fails to account for other factors — the economy, bad weather, etc. — that can influence travel. The Longwoods study control for those factors to measure the effectiveness of the campaign.”

Siegel either doesn’t understand our model well enough to properly critique our effort or doesn’t care.[*] If he does understand econometric research methods then his response is at best disingenuous.

Moreover, until Siegel is willing to reveal Longwood’s own precise methodology he should recuse himself from commenting on the work of independent scholars who follow the canons of valid econometric research.

The contrast is almost amusing: The reason Siegel knows about our study’s methods is because we were 100 percent transparent about their underlying logic, construction and data sources. In contrast, the only reason the world knows that Longwoods did try to factor weather and state economic growth into its calculations is because Siegel revealed this in the media stories about our debate challenge!

The text of the Longwoods research product that generated the extraordinary “return on investment” figures revealed only that “we control for the effects of internal and external factors that could otherwise influence the result.”

In other words, they revealed nothing.

Our new study demonstrates how valid research should be done: It was published only after a thorough review of existing scholarly research on the issue; its statistical methods are both transparent and robust; and its data sources are publicly available and the results were peer-reviewed by other economists. Any competent and legitimate scholar can replicate the work. These are the hallmarks of valid scholarship.

MEDC officials have strong incentives to pretend that the Longwood’s products and claims are valid and to ignore or besmirch our research. Lawmakers are being bamboozled by this agency into wasting tens of millions of state taxpayer dollars every year on a worthless program.

Policymakers should not accept this, and taxpayers should insist on it.


[*] No key variables were excluded from the Mackinac Center study. It employed a “fixed effects” model and examined annual state-level data covering a 39-year period. Such models are explicitly designed to minimize or eliminate the risk of excluding vital variables. The study includes trend variables for weather and other factors, and controls for effects that are particular to states over time: annual rainfall, forest coverage, and miles of waterfront and average variations in temperature. Our model also controls for such things as economic differences between states and over time, including recessions.

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(This article is the first in a three-part series discussing major changes made by the Michigan Legislature to energy regulation in the state. Those changes are now enrolled in statute as Public Acts 341 and 342 of 2016.)

After a marathon two-day, lame-duck session, the Michigan Legislature completed and enacted new electric utility legislation that has been the focus of debate for the past two years. Ironically, the original purpose of the proposed legislation — to accommodate sweeping new federal regulations ordered by the Obama administration — appears obsolete after Donald Trump won the presidential election on Nov. 8.

But pressure from the state’s major utilities, and two years of lobbying, helped push the Legislature to move ahead anyway, even though the President-elect has promised to rescind the Obama administration’s energy regulations as one of his first acts in office.

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The final wording of the new law appears to protect Michigan’s small electricity choice program — a win for electricity choice customers. However, the measure also continues a problematic “net metering program” that does help diversify electricity sources across the state, but does so by subsidizing household solar installations. The legislation also expanded a mandate that now requires utilities to get 15 percent of their power from renewable sources (up from 10 percent).

Throughout the debate, utilities focused on the need for system stability that was endangered by proposed Obama administration regulations. Heavy-handed federal regulation and tight market conditions made closure of several DTE and Consumer’s Energy coal generation plants seem unavoidable and these utilities warned that Michigan faced potential energy shortages.

The big commercial utilities responded by promoting plans to build new natural gas and renewable generation facilities (for which they receive a guaranteed profit). They also continued to advance conservation programs within their operating territories — for which the utilities benefit through a variety of state and federal programs.

However, while they warned about threats to system reliability, the big utilities simultaneously undercut that message by promising to “keep building renewables and … retire our coal fleet,” regardless of what happened in the regulatory realm. But replacing low-cost, reliable, easily dispatchable generation capacity like coal with unreliable, nondispatchable, and subsidy-dependent capacity like renewables actually diminishes energy system stability.

As debate on the new Michigan law entered its final phase, I advised using a wait and see approach — there was nothing to be gained from rushing through legislation devised to respond to the Obama administration’s regulatory plans. The legislation's proposed changes may become unnecessary and obsolete under a Trump administration. Plans to close coal generation plants in Michigan leave the state vulnerable to any future electricity shortages or price spikes; completely avoidable and self-inflicted wounds.

However, on the evening before the close of the lame-duck session, Governor Rick Snyder mounted a last-minute push, demanding the new law be passed. The Governor’s involvement forced a compromise between the state’s two major utilities and alternative energy suppliers, addressing concerns that Michigan’s small energy choice program was in danger of being killed off. That agreement was sufficient to reassure House Republicans and, the following afternoon, the main bill in the proposal passed easily in a 79-28 vote. The Senate followed up, approving the updated bills in a 33-4 vote. Gov. Snyder signed the bill — now Public Act 341 of 2016 — on December 21.

High Taxes on Cigarettes Increase Smuggling

New study looks at national rates

High taxes on cigarettes lead to high rates of smuggling, according to new research by the Mackinac Center for Public Policy and the Tax Foundation.

The update to previous research on cigarette taxes and smuggling was published in December and supported previous research finding that high taxes increase the rates by which people illegally move cigarettes across borders. According to Moody on the Market:

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The authors estimated total smuggling rates by comparing the published smoking rates of adults in 47 states to the legal paid sales of cigarettes in those states. The difference between the two is attributed to smuggling.

Michael LaFaive is the Director of the Morey Fiscal Policy Initiative at the Mackinac Center here in Michigan. He says, “It’s important for policymakers to understand that cigarette tax increases typically lead to increased rates of smuggling.” LaFaive is a study coauthor, and he adds, “Cigarette smuggling is often associated with increased violence and other crimes, and these factors should be considered when lawmakers debate cigarette tax increases.”

Michigan has seen its smuggling rate drop, LaFaive told WSJM.

We were ranked tenth in the nation overall for the amount of inbound smuggling that’s occurring in Michigan, but we’ve dropped to 12th, so our position is getting better, and I expect that to continue getting better as states raise taxes.

New Hampshire, because it is surrounded by states with high excise taxes, is the state that sees the most cigarettes smuggled out, according to a report by WIRX. New York’s high cigarette taxes have led it to be the state with the highest rate of goods smuggled in.

Read the article at Moody on the Market.

Read the report on WSJM.

Read the report on WIRX.

Read more about the study.

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The Herbert H. and Grace A. Dow Foundation is continuing its support of the Mackinac Center for Public Policy with a $500,000 grant for education policy.

The gift will be used to help provide scientific research and information needed to create policies that improve schooling in Michigan.

Mackinac Center President Joseph G. Lehman was quoted in the Midland Daily News as saying, “The Mackinac Center is honored to partner with the foundation to develop policies that bring expanded options and greater accountability to public education."

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Past support from the Foundation helped the Mackinac Center create the elementary/middle school and high school Context and Performance Report Cards to assess how well or poorly schools are doing. The reporting system, which the Center will encourage lawmakers to incorporate into its rubric, considers students’ socio-economic backgrounds and performance growth.

Read the full article in the Midland Daily News.

Learn more about the grant.

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Ruling says union and district violated right-to-work law

Four years after Michigan’s right-to-work law passed, teachers in the Taylor School District are finally free to choose whether or not they wish to be part of a union.

In Mid-December, the State of Michigan Court of Appeals ruled in favor of teachers Angela Steffke, Rebecca Metz and Nancy Rhatigan, who were represented by the Mackinac Center Legal Foundation. The trio sued the Taylor Federation of Teachers Local 1085, the Taylor School District Board of Education and the Taylor School District over a 10-year-long union security agreement that would have forced them to remain in the union into 2023.

“The 10-year union security clause prevented us from holding our union accountable,” Steffke, a special education teacher, was quoted as saying in DBusiness. “We’re grateful the court affirmed our rights as sovereign individuals within a union and we’re grateful to the Mackinac Center for helping us ensure our right to work.”

As explained by the Associated Press, “The side contract between the Taylor district and the union was signed just weeks before the right-to-work law took effect in 2013. The law says workers can't be forced to financially support a union to keep their job.”

Senior Attorney Derk Wilcox, who spoke with WJR’s Frank Beckmann after the ruling, said the court agreed with the Michigan Employment Relations Commission’s 2015 ruling that the union security agreement was an “excessive and unreasonable” attempt to circumvent Michigan’s right-to-work law.

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Read more on the ruling.

Read the full article in DBusiness.

Read the full article by the Associated Press.

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Court of Appeals Rules Union and District Violated Right-to-Work Law

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