A crowd of influential policy leaders listened to Lawrence Reed address the "state of the state."
Thank you, Chris. Hello, everyone. It’s terrific to be here
today and to get to talk to people I haven’t seen for a while.
I can’t attend these Issues and Ideas luncheons as often as
I’d like, and looking at everyone here, I’m reminded of just what I enjoy about
these events: the palpable sense of energy and the interest in the affairs of
our state — and always that sense that we can change them for the better. There
may be differences in our views, of course — though I’ll be delighted if there
aren’t any! — but this is the perfect venue for discussing new directions, which is the subject of my discussion this afternoon.
Michigan needs to strike out in a new direction, and in
describing why, I will mention some findings that may sound discouraging. But my message today is optimistic: We can head in a new direction. We only need to honestly assess where we are; where we need to go; and what we
should do to get there.
Make no mistake: Michigan really is at a crossroads. In 2005,
we can no longer evade difficult decisions in the hope that we can muddle
through, or that a miraculous change in our economic environment will save us.
This has been the approach in Lansing for the past few years,
despite many good intentions and even a few successes. State leaders have become
increasingly adept at accounting gimmicks and cosmetic fixes that optimize
revenues but minimize spending discipline. They are treating the symptoms,
rather than the disease.
It’s time for Michigan’s political leaders to pass a
comprehensive package of fundamental reforms that address the root of our
economic crisis. Given this, I will try, in the next few minutes, to answer
three basic questions about the nature of these reforms.
First, is our economic situation really bad enough to require
a dramatic change in course? Second, why have we arrived at the point where
Michigan feels threatened by a global economy it used to lead? And third, what
should we do to make Michigan, once again, a state with a surging economy that
provides good opportunities for our children and attracts the best and
Most people recognize that Michigan is not the economic
powerhouse it once was. But many aren’t aware just how serious the problem is
Consider the following five jobs, output and income figures,
based on recent federal statistics.
From December 1995 through December 2004 — years in
which the state invested most aggressively in what it calls "economic
development initiatives" — Michigan finished 50th out of 50 states in
percentage employment growth.
Even when you focus only on private-sector employment
growth and broaden the time frame to December 1994 to December 2004, Michigan
placed 50th in the nation.
Michigan was one of just two states to lose jobs in
2004, and the only one to lose a significant number. Our 7.3 percent
unemployment rate is now worst in the nation.
From 1993 to 1997, Michigan’s percentage increase in
per-capita gross state product was 18th in the nation, but from 1998 to 2003,
it had fallen to 44th, suggesting a shift from somewhat respectable at best to
dismal at worst.
Michigan is traditionally a wealthy state, but by 2003,
our per-capita personal income had dropped to 19th in the nation. Our
per-capita personal income growth was an anemic 43rd in the United States from
1995 to 2003.
This is why I say that Michigan is at a crossroads. The
state’s output and wealth measures have fallen to no better than
middle-of-the-pack — but the trends are pointed straight in the wrong direction
at the very same time that most of the nation has been experiencing three years
of recovery and economic growth. That is a sobering, if not frightening,
Why are we underachieving? In part, global and technological
trends are bringing new pressures to bear on our state. Ongoing technology gains
are driving down manufacturing employment. Heightened global competition is
putting new stress on the state’s businesses, especially in manufacturing, which
is the route to economic success for scores of developing nations. Auto
production is suffering from chronic overcapacity that squeezes profits and
closes auto plants and parts manufacturers.
But global pressures push both ways. Technology gains, free
trade and even outsourcing tend to liberate investment capital, open new markets
for our businesses and reduce costs for consumers and employers. These trends
have the potential to produce more wealth and more jobs for Michigan than they
This potential will only be realized, however, if Michigan’s
workers, entrepreneurs and financiers are free to employ their abilities and
resources to their fullest. They must be able to receive good investment
returns, exploit new technologies and expand production and jobs without undue
This is where public policy comes in. I’ll focus on state
policy, since Michigan can’t do as much about federal policy, and since Michigan
can achieve a lot by managing its own affairs better.
Indeed, the state has real room for improvement. The Pacific
Research Institute in San Francisco recently ranked Michigan 34th of the 50
states on a highly detailed economic liberty index that included regulatory,
judicial and government spending policies. Economic liberty, the study found,
had a statistically significant and "substantial impact on income levels across
the U.S. states."
Part of Michigan’s problem continues to be its tax policies.
Despite the tax cuts in the 1990s, Michigan’s state and local tax burden as a
percentage of personal income is still above the national average, according to
the widely respected Tax Foundation in Washington, D.C. The Foundation places us
36th out of the 50 states on its overall business climate index.
Notably, the Foundation ranked our Single Business Tax 50th
among the various state corporate taxes — that is, the absolute worst. This
finding dovetails with another extensive study that showed Michigan’s corporate
taxes as a percentage of gross state product to be 50 percent above other U.S.
states on average between 1977 and 1995.
Our taxes are a problem, but Michigan’s regulatory policies
likewise burden our economy. They are unnecessarily bureaucratic, unpredictable
and costly, particularly in the areas of telecommunications and the environment.
I’ll return to these later.
Another critical policy area that affects our competitiveness
in the world market is education. Too often, Michigan’s public schools are not
providing our children with the skills they need to compete successfully. This
forces them to learn those skills on the job – if they can – and it makes
Michigan’s employers and universities spend a minimum of $600 million or more
annually on remediation. That’s a kind of tax, and an especially onerous one.
The fiscal, regulatory and education concerns I’ve just
outlined are causing real trouble for Michigan. But I want to emphasize that
state officials have done some things right in response to them. Gov. Granholm
and the Legislature have avoided major general tax hikes in response to
significant state budget deficits, thus avoiding the big mistake state officials
made just 21 years ago when the income tax was hiked by 38 percent. The governor and
the Legislature have also proceeded — although with some delay — with personal
income tax cuts that were scheduled during the Engler administration, making our
income tax rates reasonably competitive.
And despite heated political rhetoric, no one is seriously
proposing to reinstitute general assistance welfare, cancel privatized health
care for Michigan prisoners or return to a defined-benefit pension system for
new state employees. These reforms of the 1990s lightened the load for
Michigan’s taxpayers and created new choices and better lives for many people. I
would also point out that in 2000, the state partially deregulated its
electricity markets, providing a number of customers with new choices and lower
rates, while increasing the state’s generating capacity.
At this point, I’d love to tell you that these successes have
done the trick and say there is nothing but smooth sailing ahead. After all, it
would give me a shorter speech — and just think of the unusual headline we’d be
handing tomorrow’s newspapers: "Mackinac Center praises state government,
recommends nothing further."
But in fact, there is much more to do. Some might say that
some of our proposals may be beyond the politically possible. But the Mackinac
Center’s job is not to tell policymakers what they will do — we leave that to
Miss Cleo and the clairvoyants among us. Our job is to suggest to policymakers
what they ought to do.
We must start by recognizing that our deteriorating economic
position is due to mistakes on the fundamentals, and that we must correct these
mistakes. Let me focus on three areas I previously mentioned: state spending and
taxing; regulation of economic activity; and education.
When it comes to state fiscal policy, the discussion in
Lansing has turned to analyzing the "price of government" and using the
principles of zero-based budgeting. These tools may prove helpful, but possibly
the greatest benefit of this approach is encouraging citizens and legislators to
answer a fundamental question: What is the appropriate scope and size of
government’s role in our society?
The Mackinac Center has often argued that state government
attempts too much and crowds out private initiative. Michigan’s waning
competitiveness is a sign that this view was correct. Accordingly, the
Legislature should focus first on the economy, which affects all of Michigan’s
citizens, and then change the state budget to match.
Improving our economic climate means reducing state taxes
decisively. We must, therefore, reduce state spending. This is simple,
mathematical logic. It’s also what fiscal responsibility is all about.
The Mackinac Center has identified a host of specific state
spending cuts that would generate hundreds of millions of dollars in budget
savings. Today, I will touch on a few of the most important examples.
One is Medicaid. Medicaid expenditures continue to run amok.
A reform that would give Medicaid recipients more control over their health care
dollars is an insurance voucher system, so that they can choose services and
insurers that most closely match their needs. A one-size-fits-all Medicaid plan
is simply wasteful, and it doesn’t serve patients well, either. Florida is
considering a Medicaid voucher plan, and Michigan should look into one, too.
Another important budget area is corrections. The state
should multiply its success with privatization here. Since 1997, the state has
competitively contracted with a private firm for medical services in its
corrections system. The state recently extended that contract, which is, by all
signs, a quality and cost-saving success.
This should encourage state officials to outsource management
of larger portions of the corrections system to private firms. In 1998,
Tennessee considered this option, and it estimated the state’s potential cost
savings at 22 percent. Similar reductions in Michigan would cut more than $350
million annually from the state’s general fund appropriation for state prisons.
This brings me to one other spending area that desperately
needs discipline: so-called "economic development." These programs, which are
overseen by the Michigan Economic Development Corporation, typically provide
subsidies, tax credits, tax abatements and other special breaks to specific
businesses or industries in hopes of facilitating economic growth.
Unfortunately, they do not work. If they did, Michigan would
be an economic leader — not the only state to lose a significant number of jobs
in 2004. Note that during the same years of poor economic growth that I cited
earlier, Michigan was shifting its emphasis from across-the-board tax relief for
the many to discriminatory tax abatements for the well-connected few. We’ve
spent hundreds of millions of dollars on such relief, and in the past two years,
we’ve piled on with a new list of programs. The fact is that the MEDC produces
more self-serving press releases than it does jobs.
I don’t usually like to make partisan references. I am
convinced the Mackinac Center’s proposals are in the enlightened self-interest
of both major political parties. But now I would suggest that when it comes to
corporate welfare, it’s time for the Republicans, like Richard Nixon, "to go to
China." They gave these programs the legitimacy and scope of departmental
status, and they may be the only ones who can end them.
If general assistance and adult education can be cut, as they
were under the previous governor and the current one, the MEDC and its programs
can be trimmed to focusing on streamlining the rest of state government. Playing
one-upmanship with other states through selective favors is, at the very best, a
wash in the long run. Worse, it distracts the state from fundamental,
broad-based tax cuts and other needed reforms.
What should such tax cuts look like? Michigan’s personal
income tax burden could certainly go lower, but it’s actually now about average.
This suggests "Job One" is reforming the worst corporate tax in America — the
Single Business Tax.
By "reforming," I don’t quite mean what the Granholm
administration is suggesting, though there are elements of it that deserve
applause. Do we want to turn around Michigan’s economic decline in a heartbeat?
Here’s how: If the Mackinac Center’s budget cut recommendations were adopted, or
if equivalent "reprioritization" and restructuring were accomplished through the
"Price of Government" process, we could eliminate the SBT and replace it with —
nothing. This single step would move us from 50th in the Tax Foundation’s
ranking of corporate taxes to a tie for first with four other states. The
ranking of our general business climate would climb from 36th to 12th.
Just visualize it for a moment. Freed of that burden,
Michigan’s economy would rapidly blossom and offer greater opportunity. Even
state budget revenue forecasts would be more reliable. We wouldn’t be simply
jimmying the system for the umpteenth time, cutting taxes on some and raising
them on others.
Of course, we recognize that there is a state budget deficit
already predicted for fiscal 2006, so that even with the cuts we’ve recommended,
it might take two or three years to eliminate the SBT completely. But the
effects would be felt quickly: If we simply cut the SBT in half in the first
year, Michigan would move from dead last on the Tax Foundation’s corporate tax
ranking to approximately 20th place, and our general business climate ranking
would go from 36th to around 27th place.
We also recognize that some legislators may fear that they
will be criticized by their colleagues for supporting a bold tax cut. To them,
I’d make the following, simple suggestion, applying the lessons of an important
vote last September: Just say you’re voting for a shift in the collection date for the Single Business Tax — a postponement of, say, a hundred years. Really,
it’s not a tax cut!
We’re less enthusiastic about the Granholm administration’s
proposed tax reform. Granted, it appears that the plan would provide some
helpful SBT tax simplification and rationalization, and that might be a net
plus. Still, for three reasons, we believe it’s a pale thing compared to what
the state of Michigan needs, and compared to eliminating the SBT.
First, the Granholm plan is purportedly revenue-neutral and
thus forgoes most of the benefit a genuine tax cut would have. Second, it takes
one of the few areas where we reportedly have a relatively low tax rate — state
taxes on in-state insurance and financial services companies — and hikes it
hard. Third, it has a huge differential tax impact, forcing largely one industry
to shoulder the tax burden that would be removed from manufacturers and others
who are "winners" under the reform. If the plan ends up taxing faster-growing
service firms to help slower-growing manufacturing firms, it could fall into a
trap that the Chinese call "whipping the faster ox."
This brings me to the state’s regulation of commerce — and to
my second, and last, reference to political party. Gov. Granholm and Democrats
in the state Legislature should recall the Democratic Party’s great and often
unappreciated initiatives in the late 1970s on airline and trucking
deregulation. President Jimmy Carter and other Democrats recognized that the
existing federal regulations in transportation were outmoded, and that
deregulation would spur business growth and bring new choices to less wealthy
Similarly outmoded state regulations now hinder
telecommunications, which are as much a part of our commercial infrastructure as
the planes and trucks that carry our goods. The deployment of advanced wireless
and broadband technologies is much lower in Michigan than in the Asian and
European frontrunners with whom we compete.
Fortunately, Michigan’s Telecommunications Act is slated to
sunset at the end of this year, providing the Legislature and the Granholm
administration with an opportunity to eliminate price controls, service mandates
and a tangle of subsidies that keep competitors from entering the market. The
Center has detailed a range of valuable steps in its recently published
"Telecommunications Primer," which is posted on our Web site.
Another misguided proposal is the Water Legacy Act, which
would impose water-use permit requirements on industrial and commercial users.
This would be a major, unnecessary expansion of regulatory power and the "the
worst possible job-killing environmental regulation," according to Russ Harding,
senior environmental policy analyst with the Mackinac Center and former director
of the Department of Environmental Quality. In fact, as Harding notes, Michigan
already has generous statutory powers to protect its water supply. We do not
need to turn Michigan’s citizens into squatters when it comes to their own water
At the same time, we can make existing state environmental
policies more effective by establishing regulatory priorities based on what
sound science — not ideology or bureaucratic politics — tells us are the
greatest threats. For instance, we should adopt a law that prohibits the DEQ
from issuing regulations more stringent than federal standards without
presenting scientific evidence that can convince a majority of the Legislature.
This proposal can be
found on our site in commentaries by Russ Harding.
This brings me to my final area of discussion: education. I
would love to talk about educational quality — the Mackinac Center has published
a great deal on the subject, and it’s the main reason we have long championed
greater choice, flexibility, accountability and innovations like our universal
tax credit for contributions to scholarship funds.
But all the education talk in Michigan these days is about
money. This focus might be easier to take if a bit of spending reform were
thrown in, but public education officials don’t seem permitted to suggest that
money isn’t enough.
So I’ll take up the job, and I’ll limit myself to two very
modest proposals about "money" that should be a prerequisite before we paste
more cash with chewing gum and bailing wire onto a rickety system that needs an
First, exempt public schools from Michigan’s archaic
Prevailing Wage Act. Mackinac Center research has estimated that forcing schools
to subsidize construction unions inflates renovation and construction costs by
$150 million per year. Ohio exempted its public schools from a similar state
law, and the savings there confirm our estimates.
This lost money reduces the value of every school bond that
Michigan’s generous taxpayers have agreed to in recent years. It even kills jobs
in the construction industry.
There is simply no good reason to keep this dinosaur alive.
You can’t be in support of doing things for kids if you’re not willing to
euthanize this pointless law.
Second, we must tackle MESSA, the health insurance provider
affiliated with the Michigan Education Association. Public school districts are
awash in soaring health care costs, and this is happening in part because many
of the districts buy MESSA insurance, whose Cadillac plans carry Rolls-Royce
But MESSA is often unwilling to provide general claims data
that would allow districts to seek competitive health insurance bids. State
legislators should challenge this by requiring district contracts to stipulate
that data generated by these taxpayer-paid policies is owned by the public.
Freeing districts to shop around for insurance would save significant sums
It is critical for state officials to recognize that their
own policies are fueling the perceived need for more money. They must also
recognize that districts are not always being conscientious with their money. An
extensive Mackinac Center survey in 2003 suggested that only about one-third of
Michigan school districts privatize food, busing or janitorial services, meaning
that many millions of dollars are being wasted. In the schools, we don’t have a
funding crisis so much as we have a management crisis. And it’s not Proposal A
that needs to be tweaked. What needs to be changed are tired, old ways of
business-as-usual, and union roadblocks that stand in the way of progress such
as a 200 million dollar private sector offer to help inner city Detroit schools.
Keeping some cost control in Michigan’s education system is
ultimately a matter of common sense and real courage. The same is true for
reforming Michigan’s fiscal and regulatory policies along the lines I’ve
Granted, defenders of the status quo will complain that
Michigan can’t afford spending cuts, tax cuts, deregulation, or education
spending discipline. Let me offer this response: If the state does not get its
economic house in order by improving the economic freedoms of citizens and the
competitiveness of our business climate, much greater cuts will have to come in
the not-too-distant future. Just as Detroit Mayor Kwame Kilpatrick recently
pointed out in a televised address, the Mackinac Center identified the need for
the city of Detroit to get its fiscal house in order years ago, and Detroit is
now paying a steep price today for not having done that then.
This price may get a lot steeper before it eases. If the
state wants to avoid a similar fate, it needs to do more than the same old
things. We need the courage to focus on the fundamentals, and to fight the
all-too-human tendency to define our possibilities down when we’re confronted
with persistent difficulty. Otherwise, we soon reach the point where simply shifting taxes
around becomes "bold leadership." Serious tax cuts, serious spending cuts and
serious reforms suddenly seem out of reach, and the state misses its crossroad,
convinced that it must plow straight ahead into a bleak dead-end.
We don’t need to make this mistake. If we do all rise to the
occasion, I’m confident we will re-establish the vitality and prosperity in
Michigan that are such integral parts of our history.