The federal government is showering the state with money it doesn’t need. Congress even encourages the state to spend it in ways that make government more expensive without improving its services. To try to get something that would better serve residents’ interests, the Mackinac Center worked with a coalition of business groups and free-market advocates to propose ways to allocate the state’s stimulus check.
The first thing to do is wait for administrators to clarify the rules that come with the money. Congress prohibited funds from being used for tax cuts, for instance. State law already includes an income tax reduction scheduled to start in 2023. If the federal government says that the state can’t go through with a tax policy approved before the pandemic, lawmakers ought to think twice before accepting the money.
Michigan lawmakers also cannot put the money into state pension funds. The state incurred these debts because workers earned pensions but lawmakers did not set aside enough to cover them. These pensions are protected by the state constitution and because of underfunding, lawmakers accidentally made former workers the state’s largest creditors.
Paying down pension debt would free up cash. It carries interest that will cost taxpayers billions under the current payment plan. Since Congress is writing big checks to the state, paying down these extra debts would be a win for employees and taxpayers alike, and put the state in a stronger long-term financial position. Lawmakers should ask federal officials whether they can use the stimulus checks to free up cash that they could then use to pay down pension debt.
The state has imposed COVID-related restrictions on economic activity, putting many people out of work and straining businesses. Lawmakers should see if they can use federal funds to give them temporary relief from state tax burdens.
We also recommend long-term improvements to the state’s fiscal situation, like improvements to roads. This would help the state get closer to the point where roads are being put together faster than they fall apart. Shoring up the Rainy Day Fund and the unemployment insurance fund can protect against future tax hikes.
We warn lawmakers to be careful lest spending the funds permanently increases the costs of government. Congress explicitly allows state and local governments to pay essential workers with the funds, and lawmakers should be careful that the temporary payments do not create permanent expectations of higher pay.
The letter was signed by a broad coalition of business groups and advocacy organizations, which we hope helps it gain serious consideration.
What lawmakers are going to do is unclear. The governor and the Legislature have butted heads on budget issues without much give on either side, and both the upcoming budget and the questions of what to do with extra federal funds provide more fodder for disagreement.
We hope this guidance will at least get them to debate the most productive ways to spend the federal largesse.