As Michigan’s unemployment rate recently climbed to 8.5 percent,
budget officials estimated the state treasury will collect nearly $400 million
less next year than what had been projected just a few months ago, despite the
huge new business and income taxes the Legislature imposed in late 2007.
Those tax hikes were expected to bring the treasury an
additional $1.4 billion. The falling revenue projections prove the obvious: When
government plots to soak the taxpayer, many taxpayers don’t wait around to get
wet. They leave the high-tax jurisdiction, and new businesses never locate there
in the first place.
Michigan’s political establishment has a proven ability to postpone the hard work of truly reforming and downsizing state government.
Nevertheless, Michigan politicians pretend this doesn’t happen —
even though 30,500 Michiganders left the state last year — and that there are no
consequences to making Michigan’s tax and regulatory climates ever more
burdensome. Perhaps this "hostage-holding" mentality accounts for the disconnect
between the actions of the current Legislature and the real economy.
In 2007, in addition to those tax hikes, lawmakers adopted a
complex new business tax that shifted the burden from declining industrial and
manufacturing firms to firms in growing areas. The "sticker shock" as thousands
of job providers discover huge new tax liabilities is causing many of them to
reassess the continuing viability of Michigan as a place to do business.
So far this year, the Legislature has been busy with measures to
increase electricity prices (plus give Detroit Edison and Consumers Energy their
monopolies back), to make for-profit health insurers pay a huge subsidy to Blue
Cross Blue Shield (which already controls 70 percent of that market), and to
effectively throw away one of the few economic advantages Michigan enjoys —
abundant water resources — by forcing commercial and industrial enterprises to
run an incredible regulatory gauntlet if they use groundwater.
Pretending to be "doing something" to help is not the same as
genuinely doing helpful things, like cutting taxes and reducing regulations.
Instead, there has been a rush to grant new subsidies and discriminatory tax
breaks to particular companies and industries selected by state government
planners who believe they know best which businesses Michigan needs. This is
despite a recognition among economists that such targeted government giveaways
or tax breaks don’t improve a state’s economy.
The richness of these latest corporate welfare schemes is
breathtaking and suggests desperation among lawmakers who lack the will (and the
proper incentives) to modify their dysfunctional behavior. For example, $100
million of next year’s projected deficit is because the Legislature created an
open-ended window from which Hollywood moguls who shoot a film here can make
withdrawals from the state treasury. Another handout to a "sexy" high-tech firm
reportedly will cost some $900,000 per job created! (If every employer in the
state got the same deal the cost would exceed $4 trillion, or one-third of all
U.S. economic output.)
There is also a push for more public works boondoggles. The
House has passed measures to borrow more than $800 million for state and
university construction projects and spend another $300 million of borrowed
money to replace large urban high schools with smaller ones. Another recent
proposal would incur $1.3 billion in new debt for environmental and recreation
This credit-card budgeting has the same effect as adding a few
more belts of booze to "cure" Michigan’s recession hangover. Paying off those
bills in the future will drain the treasury and generate pressure for more tax
hikes, scaring away yet more investors and entrepreneurs from the Great Lakes
Michigan’s political establishment has a proven ability to
postpone the hard work of truly reforming and downsizing state government —
necessary prerequisites to the tax cuts and regulatory reforms that are the only
things that can save this state’s economy. That ability is not bottomless,
however. Every now and then the population throws off their blinders and changes
the incentives for policymakers by demanding a new direction.
Are we there yet?
Jack McHugh is senior legislative analyst for the Mackinac
Center for Public Policy, a research and educational institute headquartered in
Midland, Mich. Permission to reprint
in whole or in part is hereby granted, provided that the author and the Center
are properly cited.