The MC: The Mackinac Center Blog

Electricity Competition in Illinois

Consumers save $240 annually

What could your household do with an extra $240 per year?

A new study estimates that Illinois electricity consumers have saved $37 billion from 1999 to 2013 as a result of increased electricity and natural gas competition. That works out to a total savings of $3,600 per household, or $240 annually. Illinois now boasts the lowest electricity prices in the Midwest.

The report calls these consumer savings "a triumph of market-based public policy." It outlines the process by which the Land of Lincoln transitioned from providing electricity through a state-controlled monopolistic system to one centered on competitive, level and open markets. As centuries of research on trade markets would predict, Illinois consumers win when electricity firms compete for their business.

The report notes that Michigan is a state with "extremely limited customer choice." Not coincidentally, we also have some of the highest electricity rates in the country.

There's a debate right now inside Lansing about whether Michigan will follow a path similar to Illinois and open the provision of electricity to more utilities, or whether it will continue using a legal monopoly to guarantee 90 percent of the electricity market to just two firms.

If Illinois is any example, Michigan electricity consumers should favor opening this state up to the positive cost pressures of a more competitive electricity market.

Other Michigan Cities in Pension Debt

Not just a Detroit problem

Detroit's pension woes are in the news, but municipal employees around Michigan should not presume that their pension systems are secure.

Indeed, in most Michigan cities the underfunding problems are worse than those in Detroit.

On paper, the unfunded liabilities for Detroit's police and fire system are $147 million, and its general employee pension system underfunding comes to $838 million. That translates into 96 percent and 77 percent funded, respectively. That is, for every dollar in pension benefits earned by an employee, the city has an average of 87 cents saved.

That's not good, but the 2012 financial statements of Michigan's 35 largest cities found that 90 percent of municipal pension plans were underfunded, with total underfunding stated at $2.1 billion.

It may be even worse. Pension funding policies can mask the magnitude of underfunding.

For example, to prevent a single very good or very bad year in the stock market from skewing the value of their investments, pension systems typically use a "smoothing" method to average the values over a period of several years.

Detroit uses an eight year smoothing window. This lengthy period means that its pension fund valuations do not yet fully incorporate the effects of the great recession. At current market prices, the system's assets are $1.35 billion below their "smoothed" values.

Moreover, Michigan's cities also tend to offer retiree health care benefits to employees, even though few private sector employers provide such coverage. Unlike pensions, these benefits are not protected by the state constitution. They amount to gratuities that can be revoked at any time. Importantly, these "other post-employment benefits" are rarely prefunded.

With prefunding, employees know there's some money set aside to pay for what they were promised. Just as important, the cost of each year's service is largely paid for during the same year. When benefits go without prefunding, the certainty that benefits will be provided as advertised is diminished. This is especially the case in the Michigan cities that have lost residents and jobs. Without prefunding, the costs of long-gone government employees' service must be paid by a shrinking tax base.

Underfunding is not the only reason Detroit is seeking to trim the pensions of retirees. The city also is insolvent. That is, it lacks the cash to pay its bills when they come due — including constitutionally mandated pension prefunding contributions. Insolvency coupled with underfunding risks pensions, and the increasing costs of catching up on unfunded liabilities can drive some governments to insolvency.

It wasn't supposed to be like this.

Delegates to Michigan's 1962 constitutional convention wanted cities to pay for pensions as they are earned, and not defer the costs of current employees to future taxpayers. The provision they wrote into our current state constitution amounts to an instruction to city managers to make good, reasonable assumptions about the future value of investments made today, and deposit enough each year to cover the future costs of another year's worth of benefits earned.

The reality of underfunding shows that they have not made good assumptions, and are still assuming excessively rosy scenarios. As a first step, this should change.

Beyond that, the only sure way to avoid digging even deeper holes in the future is to follow the lead of a handful of municipalities that have closed their conventional defined benefit pension systems to new members and offer defined contribution retirement plans instead.

McHugh Discusses Budget on WILS

Focus on smarter spending, not more spending

Senior Legislative Analyst Jack McHugh was part of a roundtable discussion on “The Tony Conley Show” on WILS AM1320 in Lansing Tuesday, discussing wasteful government spending and how Michigan can use the tax dollars it takes from us more wisely and more efficiently.

Part 1

Part 2

Part 3

Part 4

Why Good Tax Reform is Difficult

Special interests battle Rep. Camp's plan

The best tax systems include low rates, a wide base and limited exemptions that minimize the distortions caused by policy, while easing the burdens of paying the tax.

But many of the provisions that make the tax code so complicated are advocated for, and relied upon, by a variety of special interest groups, meaning changing the system is extremely difficult.

But that's what Congressman Dave Camp, R-Midland, is trying to do. The chair of the House Ways and Means Committee has introduced a plan that would overhaul the tax system.

U.S. Rep. Camp

The plan appears to generally lower rates and expand the base of filers while eliminating or limiting many credits, like deductions for education and housing loans, breaks for state and local taxes, subsidies for ethanol, and write-offs related to oil and gas fuels. The number of individual tax rates is dropped to just three: 10 percent, 25 percent and 35 percent (for a very small number of people). The plan deserves more scrutiny and a fuller description can be found here.

But eliminating exemptions means interest groups that receive those special deals are working hard to retain them. An article from the Associated Press features a series of quotes from those who want to keep their tax breaks:

American Fuel & Petrochemical Manufacturers President Charles T. Drevna also thought the proposal needed revising. "Although Chairman Camp's intent was to make the tax code tax simpler and fairer and to level the playing field, he unfortunately missed the mark. To date, the tax reform debate has been fixated on a one-size-fits-all approach of lowering the corporate rate to a certain percentage across the board, while eliminating various existing deductions. We urge Congress to take a comprehensive look at how different tax structures impact different sectors of the economy and use such analysis to develop a comprehensive tax reform."

Ray Gaesser, Iowa farmer and American Soybean Association president, issued the following statement: "The farmers of the American Soybean Association commend Chairman Camp for his willingness to tackle the difficult task of tax reform. ... We are significantly concerned, however, in the proposal's elimination of the biodiesel tax credit. … ASA believes the biodiesel tax credit is worthy of extension given the many benefits it provides, including support for jobs, economic development in rural communities, diversity in our energy sources, and reduction in greenhouse gas emissions, among others."

Sen. Chuck Schumer, D-NY, said, "Any proposal that eliminates the deduction for state and local taxes, as the Republican plan would do, is dead on arrival."

The National Association of Realtors issued a statement saying it "supports reforms promoting economic growth, but we strongly oppose altering the rules that govern ownership and investment." That particular embrace of the general and rejection of the specific was a reaction to Camp calling for a reduction in the home mortgage tax deduction, part of his overall plan to reduce or eliminate some breaks in exchange for lowering rates for all.

Clarence Anthony, executive director of the National League of Cities, said Congressman Camp's work was well-intentioned, but added: "It will reduce cities' ability to promote construction jobs and build the foundations for future growth. Municipal and private activity bonds are used to build schools, roads, bridges, hospitals, and develop blighted areas of the community."

Part of the economic theory of public choice explains how interest groups have an oversized influence on the political process. In sum, as I have noted in the past, "When a small segment stands to benefit greatly from some policy, it will fight much harder for it than the larger segment that is harmed will lobby against it since the harm is either hidden or so small that it is not rational for the individuals making up the larger segment to spend a lot of time fighting the policy."

A few years ago, the state of Michigan passed a significant change to its tax system. As in Washington, D.C., the incentive was to chip away at the simplicity by adding more special deductions rather than lowering rates further, which is what the fight is about right now.

Principled citizens who want the best overall government should work to hold the line or further simplify the tax system.

Detroit News, Free Press Cover MCLF Lawsuit

MEA sued over more teacher bullying

The Detroit News and Detroit Free Press are both reporting on a lawsuit filed by the Mackinac Center Legal Foundation on behalf of Susan Bank, a 39-year teaching veteran who is being threatened by the Michigan Education Association because she chose to stop paying union dues under Michigan’s right-to-work law. 

Patrick Wright, director of the MCLF, also discussed the case on "The Frank Beckmann Show" on WJR AM760.

House Bill 4168, Repeal mandate for sheriffs to kill unlicensed dogs: Passed 36 to 0 in the Senate

To repeal a 1919 law that requires county sheriffs to locate and kill all unlicensed dogs, and which defines failure to do so as nonfeasance in office.

Who Voted "Yes" and Who Voted "No"

 

Senate Bill 631, Revise carrier pigeon licensure mandate: Passed 34 to 0 in the Senate

To prohibit a person from getting a state-mandated carrier pigeon license if his or her facilities do not meet regulations imposed by the local government, but preempt locals from banning carrier pigeons outright.

Who Voted "Yes" and Who Voted "No"

 

House Bill 4855, Expand lottery winner government debt garnishment: Passed 107 to 1 in the House

To revise a law that requires the state lottery bureau to deduct any unemployment benefit overpayments, child support arrearages or debts to the state from the winnings of a person who wins $1,000 or more. The bill would also require any debt or liability to the state welfare agency to be deducted from the winnings.

Who Voted "Yes" and Who Voted "No"

 

Senate Bill 630, Let Lansing TIFA extend debt duration: Passed 110 to 0 in the House

To let a “tax increment finance authority” in the city of Lansing refinance debt with new loans that have maturities beyond what is currently allowed, and exempt these new loans from a 2001 law that restricts refinancing loans if there is no overall benefit to the municipality. Lansing wants to stretch out its loan repayments for cash flow purposes, because the extra tax revenue it presumed would result from projects funded by the debt (garage structures) has not been forthcoming. This would be the second time the legislature has allowed Lansing to extend debt in a manner not permitted by that 2001 municipal debt reform.

Who Voted "Yes" and Who Voted "No"

 

House Bill 5108, Repeal ban on ticket scalping: Passed 66 to 42 in the House

To repeal a state law that bans ticket “scalping” at sports and entertainment events, or reselling tickets at a higher price through some service or agency.

Who Voted "Yes" and Who Voted "No"


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 http://www.MichiganVotes.org.

Mackinac Scholar in Wall Street Journal

Smith on IRS scandal and media failure

Bradley A. Smith, a member of the Mackinac Center’s Board of Scholars and former chairman of the Federal Election Commission appointed by President Clinton, writes in a Wall Street Journal commentary that the media’s lack of coverage of the IRS scandal “betrays a remarkable, if not willful, failure to understand abuse of power.”

What Right-to-Work Means

A view from a union contract

One could hear several varieties of apocalyptical claims while Michigan was in the process of becoming the 24th right-to-work state in the nation.

Rep. Sander Levin called it "frightful ... for the people of the state of Michigan and for the middle class." The Associated Press said it was a "devastating and once-unthinkable defeat to organized labor." And one union in Michigan claimed it was "a violation of the prohibitions against involuntary servitude." In other words, a form of slavery.

Now that the law is in effect, however, and one can see what right-to-work actually does in practice, these claims seem way out of line. Right-to-work is actually quite simple. It prohibits employers from forcing employees to join or pay a fee to a union to keep their job.

The teachers union contract from the Spring Lake school district demonstrates this change. Here's what its pre-right-to-work contract stipulated: "The [school board] agrees that it shall be a condition of employment that all teachers" do one of the following: 1) "[J]oin the Association and pay the periodic dues ... or; 2) not ... join the Association but ... pay it a representation fee in an amount established in accordance with Union procedures." If teachers still failed to pay the fee, however, the school board agreed to "deduct [it] from the [teacher's] wages and remit same to the Association."

Essentially, the option was join or not join, but either way, pay the union. And if you couldn't do that on your own, it was done for you.

The new Spring Lake contract language regarding union membership is very different, but not nearly as radical or detrimental as some critics of right-to-work made this policy out to be. It simply states: "Teachers shall either elect to join the Association and pay the periodic dues, or teachers may elect not to join the Association and not pay dues."

As this contract demonstrates, right-to-work primarily impacts the relationship between employees and their unions. It gives individuals an opportunity to refuse to financially support an organization they do not feel compelled to support. In other words, it establishes unions as voluntary associations, instead of forced associations.

As Vinnie Vernuccio, director of labor policy at the Mackinac Center for Public Policy, put it: "Right-to-work does not affect collective bargaining in any way except to take away unions' ability to fire workers for not paying them. It makes unions accountable to their members."

Tuition Plan Would Make College More Expensive

Spalding and Skorup in The Detroit News

Audrey Spalding, director of education policy, and Jarrett Skorup, research associate, explain in a Detroit News commentary today why proposed legislation that would create what backers are calling a “pay it forward” program for college tuition would end up costing students and taxpayers potentially billions of dollars and drive up college costs.

Why Michigan Needs a Tax Cut

People know better how to spend their own money

Taylor

With a projected $971 million surplus for next fiscal year, Michigan’s Legislature is considering cutting the state’s income tax rate from 4.25 to 3.9 percent

The cut would be phased in over time and would be contingent upon the budget remaining in surplus. When fully phased in, this would result in a $170 annual tax cut for the typical Michigan family.

Will such a small tax cut have a major effect on Michigan's economic growth? Recognize first that this is a very small marginal tax cut, so thoughts that this policy alone will bring a new era of prosperity is just wishful thinking. 

Still, the vast majority of economic studies confirm that lower tax rates result in faster growth — a result that holds for both countries and individual states (see my recent paper in the Cato Journal). Importantly, reducing the tax rate to under 4 percent would make Michigan more competitive in comparison to nearby states, such as Indiana (3.4 percent) and Pennsylvania (3.1 percent), that currently have flat income tax rates well below Michigan's. When labor and capital are mobile, tax competitiveness matters. 

But promoting faster economic growth is not necessarily the most important reason to favor the proposed tax cut. 

When governments run large surpluses, they have two options: take less from taxpayers or increase spending. While either might seem as good as the other at first glance, the problem is that expansions in government spending are almost never temporary. History shows that government expansions — often undertaken during times of supposed crisis — almost never return to their prior levels even after the conditions that brought about the expansion are long gone.

Instead, as Robert Higgs documented in his 1987 book, "Crisis and Leviathan," the ratcheted up government becomes the new normal. And in the long run, the economy is worse off since the increase in government spending crowds out spending in the private sector, which is generally more efficient at allocating society's scarce resources. 

Returning Michigan's surplus to the taxpayers, rather than boosting government spending, will give the state far more flexibility to address fiscal challenges down the road. Furthermore, the more competitive economic environment that lower tax rates will create will make those future challenges less arduous.

Jason E. Taylor is a professor of economics at Central Michigan University. He received his Ph.D. from the University of Georgia in 1998.