The budget deal struck by the Michigan Legislature in the wee hours of Oct. 1, 2007, represents both bad policy and bad timing. The Legislature’s limited reforms were dwarfed by tax hikes of historic dimensions — an 11.5 percent increase in the state’s income tax and a new services-related 6 percent sales tax that will make Michigan a uniquely uncompetitive location for many firms.
This projected $1.358 billion tax hike for fiscal 2007-2008 would be
difficult in a robust climate, but it is much worse in a state that’s in the
grip of a one-state recession. Michigan’s tax base of people and businesses is
beginning to crumble, as evidenced by these sobering facts:
The unemployment rate, at 7.5 percent, is 60 percent higher than the national average.
According to United Van Lines statistics, Michigan was tied with North Dakota for the highest outbound migration rate in the nation last year.
Relative to the rest of the nation, the state’s per-capita income has been in free fall since 2000. It is now an astonishing 7.8 percent below the national average.
Home values are plummeting as foreclosures soar to their highest level in recent memory.
Government statistics show that in 2001, Michigan’s average private-sector wage was 9 percent below the average state government wage. Today, it’s about 18 percent below. We’re becoming a poor state with well-off public servants.
Michigan’s state and local tax burden is estimated to rise to 12th in the country under the new taxes, according to the nonprofit Tax Foundation in Washington, D.C. (Note: On Aug. 7, 2008, the Washington, D.C.-based Tax Foundation released its newest State-Local Tax Burden Ranking of the 50 states. This report included a change in the methodology used to compute and rank tax burdens which led to a significant drop in the position Michigan held in Tax Foundation rankings — from 14th to 27th among the 50 states.)
Add in the "taxing" effect of Michigan’s high regulatory burden and the perception of an unfriendly labor climate, and you have a toxic brew that drives people and businesses away.
The extension of the sales tax to certain services is a guaranteed job-killer
that will hit small businesses particularly hard. Those are the very businesses
that create most of the new jobs; many of them are mobile enough to simply leave
the state and escape the tax completely. For those that remain, paperwork
blizzards, legal headaches and accounting nightmares await.
It should not surprise anyone that Michiganians aren’t happy. By a 2-1 margin
in a poll taken before the tax hikes materialized, likely Michigan voters
indicated they preferred more spending cuts than tax increases to balance the
state budget. Since passage of the new taxes, 10 of the legislators who voted
for them — five Democrats and five Republicans — have become targets of recall
election campaigns, and a broad-based coalition of business groups may put
repeal of the taxes on the ballot if the Legislature doesn’t reverse the damage.
Will higher taxes truly put the fiscal 2008 budget into the black? If people
line up like sheep to be sheared, maybe. More likely, the dynamic disincentive
effects of a bigger tax burden will accelerate the decline in Michigan’s ability
to produce new tax revenues. The Legislature will almost certainly be grappling
with yet another shortfall soon.
Legislators and the governor can do the responsible thing and repeal the tax
increases. If they don’t, it is possible the people will do that for them
through a ballot initiative. Either way, the issue of spending reductions and
meaningful reform of state government must be revisited — the sooner the better.
The Mackinac Center for Public Policy has offered many suggestions over the
years to help resolve the state’s fiscal problems. With the folly of the
midnight budget deal now apparent to almost everyone, the state’s immediate need
is for spending cuts and cost-saving reforms in the current fiscal year, thus
eliminating the need for the tax hikes just passed.
This document recommends specific state spending reductions, clearing the way
for urgently needed transformational reforms and government restructuring. The
time for gimmicks, Band-Aids, distractions and punitive tax hikes is over. The
moment for real remedies is long overdue.
Will the governor and Legislature muster the courage to do what’s right by
undoing what’s wrong? Our state’s future hangs in the balance.
Lawrence W. Reed
Mackinac Center for Public Policy
Oct. 17, 2007