Is the New State Budget a Quick Political Fix?

The following article originally appeared in the March 8, 2002, issue of the MIRS newsletter in answer to the question, "The state budget: getting us through the tough times, or a quick political fix?"  

On the eve of Gov. Engler's proposed 2003 budget, which debuted in early February, speculation was rife that like so many other states, Michigan would halt and perhaps reverse its progress toward a better business climate through lower taxes.  But the salient (and in my view the most laudable) aspect of the governor's budget was his renewed commitment to keep in place the scheduled, phased reductions in both the personal income and single business taxes.

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Making tough decisions in difficult circumstances, keeping faith with one's long-term vision, respecting the pocketbooks of those who work hard to pay state government's bills-that's what real leadership is all about.  Leaders of lesser note would have whined about "forces beyond our control" and raised taxes so state government could be spared the challenge presently facing Michigan families-reprioritizing budgets and finding ways to stretch limited resources.  But the governor for the most part stayed on course and crafted a budget that retains the scheduled tax cuts, trims spending, and will likely get us through as the economy recovers.

It's certainly true that there's a lot of hope built into the 2003 budget-hope that indeed the economy is turning around.  Critics were quick to express skepticism on this score.  The respected House Minority Leader Buzz Thomas, for example, said "They are hinging a lot of our revenues for this budget on economic growth, which is a big question mark right now.  We have to do more than knock on wood and hope for the best."

But in government, the bias is almost always in the direction of more-more government, that is.  Big spenders who pay little attention to the state of the economy, future revenue forecasts, or the pocketbooks of hardworking families when they propose new programs suddenly assume the mantle of what sounds like fiscal responsibility when it comes to keeping tax cuts on schedule.  It's as if we can somehow always afford spending hikes; it's just tax cuts about which we have to be ever cautious and parsimonious. 

This unfortunate, regressive mentality translates this way: "It's riskier to leave money in the pockets of those who earned it than to take it and have somebody else spend it for them."  That thinking is downright medieval.

Michigan's overall tax burden is better than it was a decade ago, but still higher than the national average.  The latest figures from the Tax Foundation indicate that we rank 16th in that regard.  That means that two-thirds of the states manage to get by with less of their citizens' resources siphoned through government than does Michigan.  We have more progress to make on that front, but raising state spending and taxes in a time of recession would be a dumb idea all by itself in any event. 

With signs of recovery beginning to accumulate, there are good reasons to believe the economy is indeed on the mend and that revenues will soon resume a healthy track, so a budget built on that assumption is not at all unreasonable.  The governor's budget envisions a slight cut in General Fund expenditures and about a 3.7 percent increase in overall spending.  (Much of that total or gross budget increase is driven by federal revenues and cash reserved for specified purposes like transportation.)  While I would have preferred deeper spending cuts, this relatively flat budget ("squeaky tight" as some administration officials put it) roughly mirrors what the average Michigan family is doing at home right now-drawing down rainy day reserves, paring back expenditures here and there, avoiding big new, expensive commitments.  It's always refreshing to see state government's behavior reflect average families more than average big spenders in Lansing.

The governor deserves praise for his creativity in the current economic environment, but that doesn't mean current spending levels are acceptable in the long run.  In current dollars, actual state spending from state sources, excluding K-12 school aid, is little changed from where it was when Gov. Engler took office in 1991-despite the fact that unemployment and welfare rolls are less than half what they were then.  The best moment for a strict state spending diet was during the last several years of brisk economic and revenue growth, but the opportunity was not fully embraced.  Inefficient and outmoded programs were left on "autopilot."   Politicians seeking a "kinder and gentler" image were unwilling to take on the contentious debates that cuts would entail.  The greater efficiencies brought about by sensible cuts at that time would have benefited not just taxpayers, but those who are now turning to government for help due to slow economic growth.  If just half the $625 million squandered in one election year's pork-laden budget bill in 2000 had instead been "banked," the revenue decline from this year's scheduled income and SBT cuts would be fully covered.

One of the governor's proposed spending reductions should be especially noted and applauded-a 23 percent cut in General Fund appropriations for the overgrown Michigan Economic Development Corporation.  While Michigan entrepreneurs risk their own money and actually do the heavy-lifting when it comes to job creation, the MEDC has been running advertisements that make the breathtaking claim that its own bureaucracy is "the number-one driving force behind business growth in Michigan"  (see   The target of the governor's proposed reductions in MEDC funding is job training subsidies (using one business's tax money and that of all taxpayers to train the employees of a competitor, for example), but let's hope for the sake of truth in advertising, those ads get the ax, too.

To the surprise of many, the governor proposed a $200 per student hike in school funding for '03 (raising the foundation grant to a record $6,700).  While the knee-jerk reaction from many quarters is to praise the increase (indeed, to praise any increase any time for anything with the education label affixed to it), certain inescapable, real-world facts should cool our enthusiasm: Since Proposal A of 1994, spending for public education in Michigan has soared well beyond the rates of inflation and population growth.  Studies upon studies have documented little if any relationship between more money and better student performance.  Michigan public schools generally are vastly underutilizing their bargaining power and managerial ability to secure significant savings through competitive contracting for teacher health insurance, transportation, and a host of ancillary services including food and custodial. 

As pointed out in a Detroit News editorial on Feb. 8, "Spending for central school administration in Michigan rose 17 percent in three years, a rate much faster than spending on classroom instruction, according to Standard & Poor's School Evaluation Services."  Bureaucracy-stifling, crippling, expensive bureaucracy-is alive and well in public education, especially within our mammoth inner-city districts that are also generally underperforming.  

More importantly, we should be asking "For the extra $200, what additional accountability, choice, or systemic school improvements are we assured?"  Answer: none. 

The money for the increase in public school spending will come from moving up winter tax collections next year by six months, from December to July.  That will transfer about half a billion dollars from the 2003-'04 fiscal year back into the 2002-'03 fiscal year.  Some, but not all, of that near-term tax increase is to be offset by a one-time cut from 6 mills to 5 mills in the statewide homeowner property tax.  Creative, but still a net tax hike for many Michigan citizens.

Taking $100 million from the Merit Scholarship Fund to help balance the budget and keep the tax cuts intact is actually a better idea than the merit scholarships ever were in the first place.  Things like fiscal responsibility or health care represent more appropriate uses of the source of the scholarship money-Michigan's share of the national tobacco settlement. 

Does the governor's budget pass fiscal problems on to the next chief executive and legislature?  The claim that it does is based largely on his proposal to draw down the Rainy Day Fund to an eyelash above $250 million, his plan for moving those property tax payments forward, his shifting of monies from various funds, holding the line on university and community college appropriations, and perhaps a scattering of minor accounting gimmicks.  But by and large, these measures are defensible in light of current economic circumstances, and far better than what most of the critics would prefer-more spending and taxing.  If the economy falters and revenues take an unexpected further plunge, all of us will have to take a much closer look at every line of the state budget.  For now, the 2003 budget proposed by the governor deserves more praise than criticism.

"The governor deserves praise for his creativity in the current economic environment, but that doesn't mean current spending levels are acceptable in the long run."