(Note: When the first straws in the wind
appeared last December indicating a major tax hike push in 2007, Mackinac Center
Senior Legislative Analyst Jack McHugh began a chronicle of events he called
"Anatomy of a Tax Hike Campaign." McHugh’s impulse was prescient, and the record
he assembled turns out to be a valuable historical record.
Below is the chronicle’s "final entry" –
which isn’t really, because further additions will detail the actual
appropriation bills to be adopted this month, with post scripts as events
dictate. This much-longer-than typical entry is a description and
characterization of the huge state tax increase and budget deal from a
free-market point of view.
Readers are invited to peruse the
entire "Anatomy of a Tax Hike." In the spirit of its namesake — the
famous Michigan-based "Anatomy of a Murder" novel and motion picture — it makes
for a fascinating read, even when the title gives away the outcome!)
Sept. 30 – Oct. 1: The Final Act;
In the final hours before a shutdown of state government, to avoid cutting
spending in the fiscal 2007-2008 Michigan budget, the Legislature votes to
increase the income tax from 3.9 percent to 4.35 percent and expands the 6
percent sales tax on a wide variety of services. The income tax will take an
additional $765 million out of the private economy, and the service tax $751
million in its first full year. This combined $1.5 billion tax hike is
accompanied by a package of reforms that correct some outright fiscal
malpractice, but are not transformational for the state. (A defined contribution
pension system for school employees would have been transformational, but wasn’t
even on the table.)
The reform package includes bills to
do the following: Limit the ability of school employees to retire early with a
full pension and health insurance; make it easier for school districts to seek
competitive bids on employee health insurance; limit "double dipping" by retired
state employees who return to work as a "contractor" collecting both a salary
and a pension; and repeal a prohibition on contracting out mental health
services in state prisons.
Other measures in the reform package
are all but "cosmetic" in comparison to the magnitude of what is needed: One
bill potentially requires Medicaid recipients to adopt "wellness" measures, but
does nothing to address the skewed incentives implicit in that system. Another
addresses an issue of prison labor competing with private firms, four bills set
up "government efficiency" panels, and one requires school districts within an
Intermediate School District to adopt the same calendar. That’s all the "reform"
Michigan got for $1.5 billion in new higher taxes.
There are no substantive spending cuts
associated with the deal. Instead, there will be a little "watering the soup" in
department budgets, but no agencies or substantial programs will be eliminated or subjected
to major restructuring/downsizing. School and university budgets will go up by
Michigan’s economic malaise will only
be worsened by imposing $1.5 billion in increased taxes, especially taxes of the
most economically destructive sort. While the silly sounding items covered by
the service tax measure — things like astrology services and baby-shoe bronzing
— will get the most media attention, the truly ugly job killers are new taxes on
business services, including a $230 million tax on business consultant services,
$98 million on "office administration" services, and $50 million on janitorial
services, to name just a few. More than half the new tax revenue will come from
taxing business services, which creates a tremendous disincentive for many firms
to remain or locate here, and is particularly harmful to small businesses.
The growth-inhibiting impact of income
tax hikes is well documented; this tax falls most heavily on the investors and
entrepreneurs who are the engines of economic growth.
This budget problem was a "crisis"
only for those whose livelihoods depend on state government, not for the people
of Michigan as a whole. Not even the Lansing spinmeisters believe that the
outcome will do anything to reverse the state’s economic decline, or that we
won’t be right back in the same place in one or two years.
This time, the political class
surrendered to the special interests who benefit from the status quo in state
government and let slip an opportunity to embrace transformational change.
Given the economic trend lines, it’s likely that a real crisis will strike
the state within the next decade, where unemployment rates skyrocket well into
double-digit territory, the "last person out turn off the lights" signs acquire
real meaning, and the option to reach deeper into taxpayer pockets is not
available. It’s not too late to adopt budget, regulatory, labor law and tax
policies that would avert that, but time is running out.
Jack McHugh is senior legislative analyst at
the Mackinac Center for Public Policy, a research and education institute
headquartered in Midland, Mich. Permission to reprint in part or in whole is
hereby granted, provided that the author and the Center are properly cited.