Targeted Business Subsidies vs. Broad Tax Relief

State lawmakers think subsidies improve the economy more

There is a massive turnover of jobs that goes on without politicians having much say or influence.
According to data from the Bureau of Labor Statistics, Michigan added 825,800 jobs in 2016 and lost 779,810 jobs. That is the equivalent of adding and losing roughly one out of every five jobs in just a single year.

State lawmakers approved two new programs to subsidize businesses, promising that they would create jobs. At most, those programs award deals to employers for only handfuls of jobs. The state never got out of the subsidy business. The deals they sign, however, tend to cover only a fraction of the job picture. The Michigan Business Development Program, the state’s primary business expansion grant, offered 84 deals for what state officials expect to create 7,141 jobs.

Many of these are never going to show up. And for the ones that do, it shouldn’t be assumed that the projects would have only happened with state subsidies. And even then, that doesn’t justify the $64 million of taxpayer dollars pledged to these companies. There are economic consequences for business subsidy expenditures.

If all of these jobs actually happen and would not have occurred without state support and if there were no negative economic consequences to taking money from everyone and giving it to select business interests, this “economic development” program would only account for 1.1 percent of the actual job creation in the state.

And that is why the state’s economic development programs simply can’t drive the economy. Even if they could justify their costs, selective deals simply have too limited of a scope to drive a large and dynamic state economy. What can be effective are broad-based improvements to the business climate.

And the state can afford broad-based tax cuts.

The state’s two new programs authorize $1.2 billion in transfers from taxpayers to business owners. One plan would only have a maximum annual cost of $40 million, and the other authorizes its spending over 10 years, so perhaps a $20 million annual cost. That is in addition to the $627.4 million expected to be paid out in old business tax subsidies and the $170.9 million in new subsidies approved in the budget, plus another $25.7 million to administer them. All told, it’s $884 million taken from taxpayers for economic development purposes next year. And that’s not including all of the other preferences, like industrial property tax abatements, that give privileges but do not redistribute money from taxpayers to businesses.

That is enough money to bring the state income tax down from 4.25 percent to 3.9 percent. The question is whether the state would be better off if the people that made the thousands of decisions to employ more or fewer workers in the state were allowed to keep $884 million more of their money, instead of taxing it from them to give to select business interests.

There are some lawmakers that seem to believe that economic development is better served by handing subsidies out to a few companies than letting all their constituents keep it.


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More Proposals to Amend the State Constitution

July 28, 2017 MichiganVotes weekly roll call report

The Legislature is on a summer break with no sessions scheduled until Aug. 16. Rather than votes this report contains some interesting or noteworthy legislative proposals to amend the constitution. To become law these require a two-thirds vote in the House and Senate and approval by voters.

Senate Joint Resolution J: Ban elected official pay hikes until after the next election

Introduced by Sen. Curtis Hertel, Jr. (D), to place before voters in the next general election a constitutional amendment to prohibit elected officials from taking a pay increase until after the next election. Referred to committee, no further action at this time.


Senate Joint Resolution K: Lower minimum age for governor

Introduced by Sen. Ian Conyers (D), to place before voters in the next general election a constitutional amendment to eliminate the current minimum age requirement for governor and lieutenant governor, which is age 30. The bill would leave in place a requirement that a candidate have been a registered voter in the state for at least four years, which implies a minimum age of 22 to be governor. Referred to committee, no further action at this time.


House Joint Resolution Q: Propose a part time legislature

Introduced by Rep. Tom Barrett (R), to place before voters in the next general election a constitutional amendment that would limit annual legislative sessions to 90 days. Since 2001 more than 20 part time legislature proposals have been introduced. This one would establish weekend sessions once a month plus two-week legislative sessions twice a year. Referred to committee, no further action at this time.


House Joint Resolution R: Replace House and Senate with unicameral legislature

Introduced by Rep. Jeff Yaroch (R), to place before voters in the next general election a Constitutional amendment to establish a nonpartisan unicameral legislature (instead of a separate House and Senate) with 110 districts apportioned on the basis of formulas specified in the resolution. Legislators would have four year terms and term limits would be repealed. Voters would no longer see a party designation after legislative candidates’ names on ballots. Referred to committee, no further action at this time.


House Joint Resolution S: Limit referendum on appropriations ban

Introduced by Rep. Robert Wittenberg (D), to place before voters in the next general election a constitutional amendment to revise the current prohibition on citizen referendums challenging bills that contain an appropriation. The measure would establish that the ban only applies to bills that substantially fund one or more state departments, or which are needed to close current state budget shortfalls. A 2001 Supreme Court ruling interpreted the provision to prohibit referendums on any bill containing an appropriation. In several instances since then, the legislature has deliberately added modest appropriations to controversial bills which, without the appropriation, would likely have been challenged by a referendum. Referred to committee, no further action at this time.


House Joint Resolution T: Taxpayer Bill of Rights’ spending cap (TABOR)

Introduced by Rep. Martin Howrylak (R), to place before voters in the next general election a constitutional amendment to cap annual state government spending increases at the rate of inflation plus increases in the state population, with any amount over that returned to taxpayers. Referred to committee, no further action at this time.


SOURCE: MichiganVotes.org, a free, non-partisan website created by the Mackinac Center for Public Policy, providing concise, non-partisan, plain-English descriptions of every bill and vote in the Michigan House and Senate. Please visit www.MichiganVotes.org.


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Taking the Pension Task Force to Task

Governments should stop generating new pension debt

Photo taken by Dwight Burdette.

There is a well-established pension funding principle that was missing from the recently published report of the Responsible Retirement Reform for Local Government Task Force. The principle is that governments should pay for the promises they make to employees as they make them. This means that governments should set aside enough money each year to cover the full costs of the pension benefits earned by their employees that year. This prevents pension debt from growing out of control.

Yet this remains the fundamental challenge for financing pension systems. To keep them from becoming a burden on future taxpayers, pension managers need to accurately estimate their costs. This requires assumptions about what is going to happen in the future. If pension managers use overly optimistic assumptions, governments will not set aside enough money to pay for those promises.

The task force’s report focuses on the pension debt that Michigan local governments have already developed. There is a lot of it. The report lists $7.5 billion in pension debt liability and another $10.1 billion represented by current retiree health care policies.

Task force members did not make recommendations for how to pay down these obligations, but there are only a handful of options. Local governments can look for savings in their operations and put that extra money into the retirement system. They can cut retiree health care benefits. They can raise taxes and put that money into their retirement system. Or they can ask for more money from state taxpayers.

Instead, the report recommends that the state set up an entity to monitor local government pension systems and provide recommendations and technical assistance to help local governments. Local governments would report information on their pension systems to a new board, which would identify funding problems, provide oversight and create a plan for local governments to address these issues. Task force members were not unified in whether the new board should have the power to mandate changes to local government finances.

This seems to just be a different application of the state’s current insolvency-prevention policies. Local governments are required to balance their budgets and submit “deficit elimination plans” if they overspend. The state already monitors and assists local governments when possible. And if problems continue, the state has processes in place to get more involved. Though the emphasis is different, a lot of what the task force is proposing is already policy.

There was some good news listed by the report, however. Not every government has a pension problem. Of the 1,800 different general purpose governments, only 519 have pension plans and even fewer offer retiree health care benefits. But nearly all of the larger municipal governments do and nearly all are underfunded, as previous Mackinac Center research has shown.

Despite the criticisms above, there’s nothing wrong with the task force’s recommendations. Local governments are going to face challenges for underfunding their pension systems. But the task force should have reiterated that this is a problem that should never have happened and recommended ways for local governments to stop generating more debt.

Governments must take bold action to contain their ability to generate more pension debt, such as closing pension systems and offering new employees only defined contribution retirement benefits. That’s similar to what the state just did to deal with the massively underfunded school retirement system.


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Trump Labor Secretary Joins Bipartisan Call for Licensure Reform

Obama administration also wanted changes

Learn more about licensing at www.mackinac.org/licensure.

President Trump’s secretary of labor, Alexander Acosta, called for states to reform their occupational licensing rules to encourage job creation. The Obama administration had also previously called for major reforms.

In a speech, Acosta spoke about the importance of the issue:

The growth of occupational licensing is part of a nationwide trend where we regulate, and regulate, and regulate.

In 1950, the Code of Federal Regulations ran about 10,000 pages long. Today it has ballooned to more than 180,000 pages.

In 1950, only about 1 in 20 jobs required a license. Today, more than 1 in 4 Americans need a license to legally perform their work.

Granted, many licenses have valid reasons, particularly when they focus on health and safety. Certifying skills and specialized knowledge helps consumers.

That is far different, however, from using licensing to limit competition, bar entry, or create a privileged class.

Excess licensing hinders the American workforce.

First, the cost and complexity of licensing creates an economic barrier for Americans seeking a job, especially for those with fewer financial resources.

Second, excessive licensing creates a barrier for Americans that move from state to state.

Third, excessive licensing creates a barrier for Americans looking to leverage technology and to expand their job opportunities.

In 2015, the U.S. Department of Labor, under former President Obama, released a report and a budget calling for licensing repeal. The bipartisan evidence shows that licensing laws mean fewer jobs and higher costs for consumers with little or no benefit to health and safety.

The state of Michigan licenses around 200 different occupations. In more than half the states, people working in these occupations do not need a license. Nearly 75 percent of the licensing requirements in Michigan limit people with a criminal background from finding work. Learn more at www.mackinac.org/licensure.


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‘Public Education’ Not Easy to Define

Questions raised by rally for more school funding

The Detroit Free Press reports that hundreds of demonstrators came out on Saturday, July 22, to call for more school funding. They rallied under the nondescript banner of the March for Public Education, a coordinated national effort in at least 16 different cities.

Yet the very appearance of this group raises thorny questions about what qualifies as public education and how to distinguish it from other types of learning. The group’s own definition of “public education” clearly misses the mark.

“Public schools are schools that receive federal funding towards their operation,” the March for Public Education’s founders say. “This includes the traditional neighborhood public school as well as not-for-profit charter schools.”

Yet public schools universally work with profit-making entities to advance their work, just in different degrees. About 70 percent of conventional school districts contract with private vendors for major non-instructional services, and all districts purchase books and other instructional materials from for-profit entities.

Making federal funds a litmus test produces some unusual results. Last year, Michigan’s tiny Bangor Township School District #8 received no dollars from Washington, D.C., but certainly didn’t lose its public school status. Not-for-profit charters in Ann Arbor (Washtenaw Technical Middle College) and Cedar Springs (Creative Technologies Academy) have not received any federal dollars since 2012. The Alternative Education Academies of Iosco County and Ogemaw County have never taken a dime in federal money.

Most Michigan charters, including those that contract with for-profit operators to oversee instruction, do receive federal funds. So do private schools that participate in the D.C. Opportunity Scholarship Program, which gives low-income families in the nation’s capital federal dollars to choose education options outside the public system.

Not surprisingly, the March for Public Education opposes such voucher programs, describing them as “generally funded by state governments that offer parents reimbursements for their public school costs to be used toward private school tuition.” If more federal funds supported private school operations through parental choice, though, the group would have to reassess its definition.

One of the most common ways to distinguish public schools from private schools is to say that they must accept all students. While this claim is generally accurate, it is not true that any public school must accept any student. Districts may place a special-needs child in a public center-based program or a private treatment facility. And unlike public charter schools, districts may operate magnet schools with testing or other admission standards. Detroit just converted a fourth high school to a “preparatory examination school.” Not everyone can get into that school.

If a family can’t afford to live in a district with higher-performing schools, their access is further limited. Schools of Choice allows students to enroll across district lines, but individual districts may be off-limits. Like Ohio, which has a similar law, Michigan has its share of “walled districts” that refuse to let in any students from outside.

Grosse Pointe, which was represented by a former school official at the March for Public Education podium, earlier this year debated a proposal to charge non-residents up to $13,000 in tuition to attend. While the local board ultimately rejected the proposal, a handful of other Michigan districts do in fact charge tuition for outsiders. So “public school” does not always mean “tuition-free,” and a tuition charge does not by itself make a school private.

Despite a dearth of evidence that more funding is the solution for current inequities and shortcomings in public education, that’s what those involved in the Detroit rally want. The Free Press quoted the local rally’s representatives as saying that district schools are underfunded. Yet Michigan schools spend $12,000 or more per student. Michigan’s latest budget adds $525 million in state spending for K-12 education, an increase of 3.7 percent. That comes even though the number of students enrolled is expected to drop for yet another year.

“We believe that school funding should be based on school and student need,” the March for Public Education asserts.

As many dollars as possible should follow students to the place their family believes will give them the best chance at success. Public education should be about ensuring as many children as possible are educated and prepared to succeed in adult life. Whether those schools get federal funding or are managed as for-profit institutions ought to be irrelevant as long as they do the job of public education.


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As Feds Expand Forfeiture, Michigan Looks to Restrict It

Preserving property rights is essential

The Trump administration is gearing up to expand federal forfeitures, a law enforcement tool that enables the government to confiscate people’s property before they are convicted of a crime.

Policy Analyst Jarrett Skorup writes in Forbes that this is a bad move:

Although the Department of Justice under President Obama had begun curtailing the ability of local law enforcement agencies to share forfeiture profits with federal ones, a new DOJ memo indicates a reversal of policy. The DOJ curtailed “adoptive” seizures – where law enforcement uses looser federal laws rather than more restrictive state ones – in early 2015. The recent order “plan[s] to develop polices to increase forfeitures.”

U.S. Attorney General Jeff Sessions said the new policy will still require “probable cause” before the property can be forfeited by the Feds. But that standard of evidence is way too low, and it's what has led to widespread abuse across the states. That’s why many have begun making reforms.

The protection of private property is a bipartisan issue, and the passage of new laws and amendments reinforcing our bedrock Constitutional property right have been widespread. The vast majority of Americans oppose a scheme by which innocent people can lose their property without ever being convicted of a crime. It’s past time for the Trump administration to get on board.

Skorup also discussed the new federal policy with the Detroit News and talked about what Michigan is trying to do in order to better protect the rights of citizens:

The new federal policy could make it easier for state or local agencies to pursue civil asset forfeiture in Michigan, said Jarrett Skorup of the Mackinac Center for Public Policy. In cases involving federal laws, those agencies could seize property “just based on probable cause rather than what our state standards require, which is clear and convincing evidence.”

The reform coalition supports [a] bill to require a criminal conviction [and] wants to see a larger package that also would limit what police agencies can do with cash or property they confiscate, Skorup said. “All the money goes back to law enforcement, and that creates an incentive,” he said.

Learn more about forfeiture and track what is happening in Michigan at www.mackinac.org/forfeiture.


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The Allure of Corporate Welfare

Both parties seem to agree that handing out select subsidies and tax breaks is good politics

(Editor’s note: The following is taken from a letter written to supporters of the Mackinac Center.)

The governor who once called corporate welfare “the heroin drip of state government” now seems ready to countenance a full-scale opioid crisis of sweetheart deals for big companies.

The popular Pure Michigan advertising campaign is the lipstick on the corporate welfare pig, but the pig itself is embodied in new legislation that would supercharge the kind of deals we had been winding down.

What’s not to like? They don’t work, they aren’t fair, they’re not honest, they’re secretive, they breed corruption, they’re expensive, and they provide political cover for lawmakers to avoid substantive reforms.

What’s to like? Politicians get to say they’re “doing something” about jobs, and well-connected companies get goodies and lower tax bills while everyone else pulls their own weight — plus an extra load to make up for the favored few. Oh, and the Pure Michigan commercials win awards. So we’ve got that going for us.

The continued attraction of corporate welfare is a failure to limit the powers of government, not a partisan problem. Republicans are as hungry as Democrats to hand out favors.

 


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Legislative Proposals to Change the Michigan Constitution

July 21, 2017 MichiganVotes weekly roll call report

The Legislature is on a summer break with no sessions scheduled until Aug. 16. Rather than votes this report contains some interesting or noteworthy legislative proposals to amend the constitution. To become law these require a two-thirds vote in the House and Senate and approval by voters.

House Joint Resolution L: Allow private school vouchers for special needs children

Introduced by Rep. Tim Kelly (R), to place before voters in the next general election a constitutional amendment to require the state to provide financial support for children with special needs to attend the school of their choice, including a nonpublic school, up to the amount that would be provided if the child were enrolled in a regular public school. Referred to committee, no further action at this time.


House Joint Resolution M: Eliminate state board of education

Introduced by Rep. Tim Kelly (R), to place before voters in the next general election a constitutional amendment that would eliminate the current structure of an elected state board of education that selects a superintendent of public instruction who also directs the state Department of Education, and replace it with a governor-appointed department director like other state departments. Referred to committee, no further action at this time.


House Joint Resolution N: Reduce number of legislators

Introduced by Rep. Michael McCready (R), to place before voters in the next general election a constitutional amendment to change the number of state representative districts from the current 110 to 76, which is twice the number of state senate districts.


House Joint Resolution O: Place Democrat election law proposals in constitution

Introduced by Rep. Jon Hoadley (D), to place before voters in the next general election an amendment that would place in the constitution a number of election law changes that Democratic lawmakers have pursued with bills amending state statutes, including streamlined voter registration and absentee ballot procedures, automatic voter registration when getting a driver license and, early voting by means of no-reason absentee ballots and more.


House Joint Resolution P: Define legislature’s authority to rein in state university speech restrictions

Introduced by Rep. Jim Runestad (R), to place before voters in the next general election a constitutional amendment establishing that the legislature may provide by law for the protection of free speech, expression, and assembly rights at state colleges and universities, which shall supersede any inconsistent restriction prescribed by one of these institutions. Referred to committee, no further action at this time. Referred to committee, no further action at this time.


SOURCE: MichiganVotes.org, a free, non-partisan website created by the Mackinac Center for Public Policy, providing concise, non-partisan, plain-English descriptions of every bill and vote in the Michigan House and Senate. Please visit www.MichiganVotes.org.


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A Solution to Local Government Debt

Pension and retiree health care liabilities are in crisis and the time to act is now

Local government retiree liabilities in Michigan have grown to at least $17 billion. Retirement debt costs are the fastest-rising expense for many municipalities, crowding out spending on core government services and have led to higher taxes.

Gov. Rick Snyder created a task force early this year that produced a new report. There is agreement that local debt is a problem, but there was little consensus from the task force on how to fix it. Union representatives seem to think this problem can be solved simply by getting more revenue from the state or by raising taxes. Local government groups similarly see tax hikes as a solution to the problem and want the power to more easily raise taxes.

But the primary problem is not lack of revenue — local government revenue has been pretty robust, increasing above inflation, on average, despite a decade-long recession. And though there are some cities which have seen real declines in revenue, the skyrocketing cost of pension and retiree health care liabilities dwarfs these revenue problems.

Take the city of Lansing as an example. Over the past decade, if property tax revenue and state revenue sharing had grown to keep pace with inflation, the city would have an extra $10 million to spend. But over that same period, the city added $270 million in retiree debt, making that hypothetical extra money almost meaningless. Many other cities are facing similar scenarios.

The problem is clear: Local government leaders are promising benefits to workers and have failed to put aside enough money to pay for them. For every $1 in health care benefits promised to future retirees, cities have saved only 19 cents. Almost no city or county is prefunding retiree health care, meaning they are essentially making empty promises to workers about what they can expect to receive in retirement.

The positive side to this challenge is that local governments have the tools to deal with this problem and many have been starting to use them. The solution is to stop letting today’s elected officials make promises to future retirees that they don’t have to pay for. This means only offering workers defined contribution, 401(K)-type retirement plans and prefunding the retiree health care part of these plans.

But not all municipalities are taking this problem serious enough. Too many are still holding on to the hope that they’ll be able to ignore these costs a little longer and grow out of this problem. But as the city of Lansing example demonstrates, this is unlikely to fix the problem. To that end, lawmakers might need to step in and create incentives for local governments to deal with these issues now, before they get even worse.


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Why Michigan Pension Reform Matters

Michigan now a national leader on fixing pension problems

The passage of the 2017 public school pension reform is a transformational change for Michigan. The new reform places Michigan at the forefront of states that have gotten a grip on out-of-control government employee legacy costs.

Michigan had accidentally made school employees its largest creditors and this imposed huge costs on taxpayers. The new law limits that damage by making it much harder for lawmakers and state officials to promise pension benefits to new school employees and then push the costs onto tomorrow’s taxpayers.

All employees in Michigan’s public school districts, community colleges and a few other institutions are mandatory participants in the state’s school pension system. It covers 189,761 people, meaning roughly about one out of every 24 individuals employed in this state are earning benefits from this system.

But the pension fund is underfunded. The state owes the system’s members $29.1 billion, the difference between how much it has saved to pay for their pensions and the amount the system’s managers expect it to cost.

This is not a new problem. In 42 out of the past 43 years the pension system has not had enough money to cover the costs of the benefits it has promised.

The underfunding makes the plan more expensive, but it provides no boon to members. Michigan taxpayers are now paying 37 percent of school payroll to keep this system afloat, with 89 percent of those contributions going to catch up on unfunded liabilities, rather than being set aside to pay for the pensions being earned by current school employees each year.

The benefits pensioners receive are not especially lavish, even with these high costs. Half of school employees don’t even become eligible for pension benefits, failing to meet the eligibility requirement of logging 10 years in the public school system.

The key problem is that the politicians responsible for the pension system have weak incentives to pay for the promises they make. They make choices each year of how many scarce resources to allocate to pensions. Pension funding typically ranks low on the list of priorities, especially when competing against spending that produces more immediate political benefits. The $29.1 billion unfunded taxpayer liability demonstrates how little of a political return there is for a well-funded pension system.

The new law addresses this problem. New employees will get substantial employer contributions to a 401(k)-style, defined-contribution plan. Alternatively, new school employees can still choose to enroll in a conventional pension plan, but they will have to share the cost if managers fail to properly fund it.

Lawmakers also limited that plan from getting out of control. If the plan’s funding falls below 85 percent of the total liability for two consecutive years, it will automatically close and no new employees will be enrolled from then on.

The chances of that are reduced by another change: the new law says that pension fund investments can only be assumed to earn a more conservative 6 percent return over time. The state’s other retirement systems use more optimistic rates of 7 percent and 7.5 percent, which contributed to underfunding when pension managers don’t hit these investment targets.

The new reform leaves the benefits of people working today unaltered. So lawmakers will need to ensure that benefits are properly funded for current workers and retirees even as it contains its ability to underfund benefits for new employees.

This is unusual among the 50 states. Total state and local government pension underfunding in the U.S. is at least $1.1 trillion and perhaps as high as $4.8 trillion. There have been some reform efforts elsewhere, but politicians tend to focus on the wrong problem — tweaking systems by reducing benefits or requiring higher employee contributions. What they should address is how the persistent mismanagement of these systems allows inadequate pension fund contributions to go on for years on end.

In 1996 Michigan took a leap forward in containing the ability of managers to underfund lifetime benefit promises when it stopped granting defined-benefit pensions to new state employees. Local governments, which are not required to be part of a state-run system, have also started transitioning to 401(k)-style benefits for new hires.

One other major reform has been implemented here. Under a law passed in 2012, Michigan no longer gives post-retirement health insurance coverage to new state or school employees. Instead they get contributions to a retirement health savings account. Local governments have likewise started to move in this direction. This also prevents shifting the costs of today’s government services onto tomorrow’s taxpayers.

That last point is the purpose of all these reforms: Michigan is getting closer to paying all the costs of today’s classrooms and other government services today, rather than pushing those costs onto the next generation of Michigan residents.

This honors the intent of the statesmen who drafted Article IX, Section 24 of Michigan’s state constitution, and the voters who adopted it in 1963. It puts this state firmly on the path to solving a fiscal problem that threatens states and communities across the country. And it protects government employees and taxpayers alike.


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