Michigan on the Wrong Track?

Early in her new administration, Gov. Jennifer Granholm won high marks for addressing tough issues without damaging Michigan’s business climate. She closed a nearly $2 billion budget gap with some real spending cuts and without resorting to general tax increases. Gov. Granholm said all the right things about retaining jobs, and even ordered her Department of Environmental Quality to speed up air quality permits for industry. The Mackinac Center awarded the governor a "B-" for her first year.

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However, a number of recent Granholm administration actions threaten to put Michigan on the wrong track in terms of improving our economic vitality. Hopefully these missteps are aberrations, but it is not too early to raise a red flag by listing some of the bad policy moves:

Tax Increases. To sustain the state’s big spending ways, Gov. Granholm has proposed $425 million in new taxes. A 75-cent tobacco tax increase would give Michigan the second highest cigarette tax in the nation. Mackinac Center Director of Fiscal Policy Michael LaFaive used a respected economic modeling program to project that this could cost 5,000 jobs in the next 12 months.

Her proposal for a brand-new Michigan estate (or "death") tax may have even worse long-term effects. The measure would impose an estimated $130 million in new taxes per year on Michigan families. The message to elderly rich people is, "move away before you die, and take with you the jobs that your income and assets provide." The tax could significantly reduce the inheritances that Michigan baby boomers would otherwise use to strengthen our economy and provide for their own old-age security. The relatively low estate-value threshold for the tax means it will pinch middle-class families who have watched the value of their suburban homes and 401(k) stock funds grow.

Protectionism. For the first time in generations, the Democratic Party has nominated a presidential candidate who unabashedly embraces the protectionist impulses of the Great Depression’s Smoot-Hawley tariff. On March 22, Gov. Granholm lent rhetorical support to this position, with executive directives authorizing new paperwork requirements for state contractors, who will now have to demonstrate that the work they do for the state is not "outsourced" overseas. Given that Michigan is the fifth largest state in exports to foreign markets, shipping out some $32.9 billion in merchandise in 2003, the governor and her allies (who are from both parties) are playing with protectionist fire, and Michigan workers could be the ones who get burned.

Ergonomics. Last November, Washington State voters resoundingly overturned workplace ergonomics regulations that state bureaucrats had imposed on businesses. This came after a 2001 vote in Congress to throw out a similar set of job-killing rules the Clinton administration initiated during its final days. You would think they would learn, but no, a "work group" convened by Gov. Granholm’s Michigan Occupational Safety and Health Administration is busily crafting ergonomics rules for Michigan’s current job providers. I say "current" job providers, because when prospective Michigan employers take stock of the costs, they may give Michigan a pass.

Brownfield tax credits. The "cool cities" hype popularized by Carnegie Mellon professor Richard Florida has been debunked with data presented by Steven Malanga of the Manhattan Institute, but not in time to prevent Gov. Granholm from threatening the future of one of Michigan’s environmental and economic success stories.

Brownfield tax credits are a popular incentive for cleaning up and redeveloping abandoned industrial sites. But in order to work, the situation still requires an entrepreneur with a potentially profitable use for a site. But Mackinac Center Senior Environmental Policy Analyst Russ Harding reports that fewer credits will be issued because of an order from the governor to base brownfield tax credit eligibility on "cool city" criteria, mandating that more projects be in "core communities" near downtown areas. To the extent that these sites hold no interest for developers, the limited brownfield credits will not be used, and other contaminated sites with greater economic potential will not be cleaned up.

Voice Over Internet Protocol (VOIP). Arguably, one of the leading causes of our recent economic downturn was the destruction of $2 trillion worth of market valuation in publicly traded telecom companies, leading to the loss of 500,000 jobs in the past three years, as outlined by Mackinac Center Director of Science, Environment, and Technology Policy Diane Katz in a recent report. The destruction came about because federal and state regulators have tried to shoehorn 21st century telecommunications networks and technologies into a 19th century regulatory model.

"VOIP" is a new technology that transmits voice over the Internet. It has the potential to reignite the telecom sector — if the regulators keep their hands off. Michael Powell, chairman of the Federal Communications Commission, has called for a "light regulatory touch." The Michigan Public Service Commission (MPSC) may have a different idea, however. MPSC Chair Peter Lark is a Granholm appointee. In a recent press report announcing potential new VOIP regulations he said, "The commission has the responsibility to telecommunication customers in Michigan to protect ... users of Voice over Internet Protocol ... " If past performance is any measure, new regulations are most likely to "protect" VOIP users by making sure there aren’t any.

Water Withdrawal Permits. One of the reasons Michigan has more industry than, say, Arizona, is our abundant water resources. Michigan enjoys a comparative water advantage that partially compensates for our disadvantages in climate, labor costs and tax structure. Nevertheless, a handful of well water conflicts in a part of the state with limited groundwater have unleashed a frenzy of regulatory proposals.

Until recently Gov. Granholm mostly steered clear of these ill-conceived schemes. That changed on March 3, when she threw her support behind a radical proposal to require state permits for new plants or farms that withdraw 100,000 gallons or more of water per day. This is an extremely dangerous proposal that sends an unmistakable "new job providers need not apply here" message.

These are some highlights, but there have been other missteps. As mentioned, it is still early, and there is plenty of time for the new governor to "get back on track." Also, on some of these issues Republicans are hardly presenting a profile in courage. On cigarette tax increases and protectionism in particular, the response of many GOP leaders has been "me too." The lack of budget-cutting backbone among Republican legislators is making tax increases all the more likely.

That said, what gives her GOP opponents sleepless nights is the prospect that Gov. Granholm may be a Democrat who is not afraid to stand up to the big-government lobbies of her own party, adopt pro-growth policies, and generate a Michigan economic revival. Thanks to the policy missteps cited here, the governor’s partisan adversaries are sleeping more soundly these days.


Jack McHugh is editor of MichiganVotes.org and legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich.