Tax Shots Across the Budget Bow

On Thursday, Gov. Jennifer Granholm introduced a budget proposal recommending almost $400 million in new taxes in order to steer Michigan’s fiscal ship to a balanced budget for fiscal year 2005.

This constitutes a disappointing departure from her first year in office, in which she worked not to raise taxes and to make some real budget cuts. In the process, she rightly showed that schools, arts funding, and other parochial interests were not sacrosanct, and should be “on the table” for purposes of balancing the budget. The Mackinac Center for Public Policy praised her budget courage time and again. It is now much harder to do so.

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According to testimony provided Thursday by Mary Lannoye, the governor’s budget director, the new tax component of the state budget involves:

  • Raising the cigarette tax .75 to a whopping $2.00 per pack, making Michigan second only to New Jersey in cigarette taxes. This hike is expected to raise an additional $295 million in new revenue;

  • Raising the state tax on liquor, which is expected to generate an additional $30 million;

  • Establishing a Michigan “death tax” — also called an estate tax — independent of the federal government’s. This is expected to raise $130 million annually;

  • Collecting property taxes six months earlier than scheduled in order to create a pool of resources to fund future state revenue sharing payments.

Of course, the major problem with this approach to balancing the budget is that it will hurt Michigan’s economy. The Mackinac Center for Public Policy uses the well-known State Tax Analysis Modeling Program (STAMP), produced by the Beacon Hill Institute for Public Policy Research at Suffolk University in Boston, to analyze the impact of tax and other state policies on the state economy. According to the model, Michigan would lose more than 5,000 jobs in the next 12 months from the cigarette tax increase alone.

Michigan can ill afford such losses. Late last year the Senate Fiscal Agency reported that since 2001, 23.3 percent of all job losses in the country came from Michigan. Pat Anderson of the Anderson Economic Group in Lansing, reports that “tax policy alone explains between 25 percent and 50 percent of the changes in jobs among all states in the Midwest, East, and South of the U.S. in the 1990s,” and that Michigan’s employment gains in that decade “are predicted almost exactly by its change in tax policy.” After years of cutting taxes Michigan is slightly below the national average for per-capita state and local tax burden. The Great Lakes State cannot afford to raise taxes if it wishes to remain competitive.

Second, the tax on cigarettes will increase illegal smuggling from southern states. In 2000, the FBI arrested smugglers who were running cigarettes from North Carolina to Michigan to take advantage of the tax differential (5 cents in North Carolina versus 75 cents in Michigan). The smugglers were using their profits to fund at least one Middle Eastern terrorist organization with cash and equipment. This is not an isolated event. Raising Michigan’s cigarette tax to $2.00 would make us 2nd only to New Jersey in taxes per pack. Michigan could become a smuggler’s paradise at such a rate, as it would make the practice — and others such as cigarette truck hijacking — more profitable.

Third, gimmicks such as advancing property tax due dates deprive taxpayers of revenue earlier than scheduled, forcing them to lose out on interest they might have otherwise collected. This particular measure only serves the interests of state bureaucrats, who want revenue to come in early enough to use it before the fiscal 2005 budget begins in October.

Worst of all, these proposed taxes may only be a pre-cursor to future, additional taxes. Legislators in Lansing have recently introduced four bills to effectively tax Internet purchases by Michigan citizens. If passed into law today, these taxes could strip an additional $300 million-plus annually from taxpayers. The aforementioned STAMP model estimates that a $300 million use-tax hike would kill approximately 2,300 jobs in the next 12 months. The administration has shown its willingness to cut taxes for specific companies, such as Electrolux in Greenville, to save 3,000 jobs. It should refuse to raise taxes and save even more.

Gov. Granholm and House Speaker Rick Johnson, R-LeRoy, have also publicly expressed interest in expanding Michigan’s sales tax to services, in addition to the current tax on merchandise sales. The governor has said she thinks such a change should be “revenue neutral” (raise no more than our tax system raises now), but what’s the point of such a move if not to expand the measure farther down the road? Government has an insatiable appetite for revenue.

If Michigan lawmakers want to balance the state budget in ways that won’t hurt the state economy, they must oppose the Granholm budget proposal with a platform of serious, sensible spending cuts and real structural changes in the way state government operates. There’s no secret about where the cuts can come. The Mackinac Center for Public Policy has long recommended a host of such cuts, both large and small — for example, eliminating revenue sharing that is not constitutionally mandated, privatizing the University of Michigan, contracting for private prison management, and selling the state-owned and run motel/conference Center in Roscommon, just to name a few.

These are some of the larger and more controversial items that may take time to get passed into law. But state officials have a wealth of possibilities at their disposal. In March of 2003 the Mackinac Center published a document recommending more than $2 billion in savings from the General Fund/General Savings component of the state budget, where lawmakers have the most discretion. After all, the state does not really need to subsidize 4-H fashion shows, publish a wine magazine, or subsidize smoking prevention programs.

Gov. Granholm should return to the policy her administration pursued in its first year. She and the Michigan Legislature should put their heads together and come up with a plan that cuts irresponsible or wasteful spending from the budget, and manages state resources better, before pushing the state tax burden higher and more jobs from the state. There is still plenty of room to cut the budget before reaching deeper into the pockets of Michigan taxpayers.

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Michael LaFaive is director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich.