Fiscal Policy in Michigan

(Mackinac Center Director of Fiscal Policy Michael D. LaFaive gave a longer version of the following remarks at recent meetings of the Mackinac Center’s Boards of Advisors, a collection of Michigan scholars and business leaders who provide advice to the Center in their various areas of expertise.)

Thank you for that warm welcome. I am very pleased with this opportunity to speak today.

I have always fancied myself as one of the lucky ones: I am one of the few who can’t wait to go to work in the morning. That’s the case because I get to research and discuss the thing for which I have a great passion: economic liberty.

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Over the years, the Mackinac Center’s "Fiscal Policy Initiative" has evolved to include four primary areas of research and writing; the state budget, taxes, privatization and economic development. I will focus most of my talk on the budget and economic development.

Mark Twain once said, "I saw an unusual thing today. It was a politician with his hands in his own pockets." No government budget is created without some officials reaching into your pockets.

In my eight full years of work with the Mackinac Center for Public Policy, I have not seen an issue so prevalent in public discourse and in the media as the current condition of state and local budgets. As all of you know, our last economic boom effectively came to an end after March 2000. Since 2001, lawmakers have been grappling with a series of budget shortfalls, some more substantial than others.

By the time Governor Granholm introduced her first budget, officials recognized that she would have to close a gap between revenue and expected expenditures of $1.7 billion in the general fund/general purpose and school aid portions of the state budget. The General Fund is the area over which politicians have the most discretion.

Fortunately, the Mackinac Center saw this problem coming in the summer of 2002, and its scholars set to work on a series of commentaries and studies that helped address the shortfall. In January 2003, the Center released an analysis of spending at the state Department of Agriculture that recommended $5.1 million in general fund savings and an additional $59 million in new revenue from the sale of state fair property.

Its release set off a surge of interest in anything the Mackinac Center had on rescuing the state budget. It was clear to us that there had been a dearth of solutions offered, and that the Center was filling a void at just the right moment.

Two months later, we introduced our full-length study "Recommendations to Strengthen Civil Society and Balance Michigan’s State Budget," which detailed how the state could close the $1.7 billion deficit through spending cuts, user-fee increases and property sales. We put far more on the table than would have been needed to balance the budget, but that’s because we wanted legislators to better understand the composition of state spending and force them to prioritize. It also meant that some of those line-item recommendations were controversial, but that’s the nature of any meaningful work on the state budget.

Over the course of the next five months, the Center produced another six budget-related press releases, nine "Current Comments," and a dedicated "Hot Topics" section of our Web site that contained Center work and budget-related stories from the general media. The "Current Comment" section of our site, for those of you who do not know, is where we post new material every weekday. It is our way of getting our ideas into the marketplace quickly. We have found that newspapers pick up our Current Comments and frequently run them as op-eds.

The result of our timely budget work was obvious to us: we became a one-stop source for budget information for policymakers and the media. Indeed, I personally did 110 press interviews in 2003, more than half of which were budget-related.

One reason our ideas received so much attention is because so little is actually known about the state budget. Until the Center got involved, few people in the state realized that Michigan owned and ran its own ski resort, that it subsidized the distribution of Christmas Tree corsages at the New Buffalo rest area, and that it held an annual "Michigan Equestrian Princess Pageant," and a "Horse of the Year Ball."

To her credit, Gov. Granholm balanced the fiscal 2004 budget without a general tax increase. She was the only Democratic governor in the country to close her budget deficit without one.

Of course, her first budget was not without its low points. She delayed the scheduled income tax cut six months, attempted to close tax "loopholes" that were legitimate deductions and signed into law a $300 fine for not carrying proof of automobile insurance proposed by Senate Republicans. The latter was a transparent attempt to bring more money into the state’s general fund, and it was quickly repealed once drivers started getting tagged with the fine.

Unfortunately, Michigan’s economy did not quickly jump back from its downturn. Weakness in the state and national economies and structural spending demands, such as meeting Medicaid obligations, placed her second budget — the expected fiscal 2005 budget — about $1 billion in the red before she had the chance to introduce it. This time, sadly, she went to the tax well in a fairly big and harmful way to balance the budget for the Oct. 1 deadline.

When 2004 began, it was clear the deficit would be a whopper. We were asked repeatedly by different legislators for ideas on how to balance the budget. So many requests poured in that we decided to update our original study and add several ideas, including selling off "racino" licenses and redirecting tobacco settlement revenue to the general fund. We also authored more press releases, posted 12 Current Comments, and conducted scores of interviews.

This time, the governor pushed through tax hikes, spending cuts and a clever property tax "shift" to balance the budget. Mackinac Center Legislative Analyst Jack McHugh explained in an essay how the tax shift is actually a tax increase and gave several interviews that led to the initial proposal being killed. Unfortunately, Granholm came back and twisted enough arms to get it passed. The result, despite Michigan’s economic troubles, is the second-largest state budget in nominal terms in Michigan history.

We expect to make additional contributions to the budget debate in 2005, as Gov. Granholm is planning to "restructure" the state tax system in response to the expected "single business tax" phase-out in 2009.

Gov. Granholm probably does not plan to eliminate business taxes without some sort of replacement. The early indications are that her administration may seek to expand the sales tax to services to replace lost SBT revenue.

To date, Gov. Granholm’s public comments suggest that she will seek a "revenue‑neutral" switch to such a system. My instinct tells me that the opportunity to make these changes a little more than neutral will be too tempting, and we may end up with a net tax increase.

This brings me to the subject of economic development, on which the Center has spent considerable time and energy. Indeed, in 1989 — during the Blanchard years — the Mackinac Center published its very first study on the subject.

The Mackinac Center for Public Policy’s vision is easily summarized with the phrase "a fair field and no favors." Such a vision still recognizes that the cost of doing business in Michigan is too high, but emphasizes general, across-the board changes in policy as the best tool for stimulating economic development. For instance, instead of targeting business tax relief to 220 businesses through the Michigan Economic Growth Authority, we would recommend cutting the SBT for every one of the more than 100,000 Michigan businesses that have an SBT liability; passing "Right-to-Work" legislation; reforming worker’s compensation; improving the state’s schools and roads; and properly deregulating telecommunications and the state’s utilities to drive down the cost of energy.

We recognize that our ideas have been controversial in government, the press and even among our supporters. But I must underscore two important arguments when responding to those who favor government economic central planning.

First, on net balance, the strategies don’t work. Consider the following trends, which are drawn from the most recent available data, and which Lansing’s programs had the chance to influence:

  • Between December 1995 and December 2003, Michigan finished 51st among the 50 states and the District of Columbia in employment growth, with a total of just 1.4 percent new jobs created.

  • Between 1995 and 2001, Michigan dropped from 23rd to 30th among the 50 states in per-capita gross state product.

  • Between 1995 and 2003, Michigan finished 49th among the 50 states and the District of Columbia in per-capita income growth.

Second, let’s take the notion of using government planners to pick winners and losers in an economy to its extreme — as the Detroit City Council members have recently done. Perhaps you are aware that some city council members wish to form a so-called "African Town," which is an economic development strategy designed to provide low-interest loans and outright grants based on race.

Some may scoff at the notion that current state and local economic development efforts are on the same plane — or have even inspired — such unquestionably counterproductive job creation efforts as the African Town proposal. But in defending the African Town proposal, city council member JoAnn Watson specifically cites Detroit-based Compuware, which has received both state and local incentives, and she refers to government subsidies for Comerica Park and Ford Field. Happily, since this speech was written, Detroit has backed away from its proposal to target incentives only to African Americans.

But the African Town proposal highlights the corrupting nature of such programs. Those in power will watch such redistribution and wonder how they can get in on the act themselves.

That’s why the Mackinac Center’s very proactive view of economic development and growth is so important. It limits the ability of elected officials to redistribute other people’s money in the name of the latest good idea. What has hurt black entrepreneurship and economic growth in Detroit is not a lack of government subsidies, but the same thing that has hurt entrepreneurs of every other race or ethnicity in Motown: high taxes, overregulation and poor services.

Removing expensive and unnecessary "barriers to entry" is vital to the economic well‑being of our state and its cities. That’s why half the population has fled Detroit in the past four decades, and it’s why the Mackinac Center for Public Policy has spent so much time emphasizing privatization.

Indeed, the Center has viewed privatization as such an important tool for reducing the size and scope of coercive and expensive government that two of its first three studies involved privatization. In January of 1993, the Center began publishing the Michigan Privatization Report.

It is designed to:

  • keep the privatization message in front of decision-makers;

  • provide the media with story ideas;

  • offer the Center the opportunity to introduce bold concepts;

  • publicize studies produced by the Center and our friends; and

  • to serve as a calling card for our many policy leaders.

In 2005, the Center will continue publishing Michigan Privatization Report, conduct its Third Biennial Summer Survey of school district privatization and explore opportunities to expand privatization in Michigan school districts.

In conclusion, I would like to note that despite small setbacks here and there, those of us who believe in limited government are winning. It is a sign of progress for the movement that fear of public backlash has prevented Michigan’s political establishment from increasing general sales, income, property and business taxes. Indeed, even during a recession, the best that statists could do was delay a small income tax cut by six months.

Government officials have sustained spending with one-time bookkeeping gimmicks and narrow tax and fee hikes targeted at politically weak groups like smokers, gamblers and bad drivers. Even the governor’s property tax shift — a relatively moderate tax increase — squeaked by with just one vote.

A generation ago, the case for higher taxes would have been made forthrightly, and most citizens would have bought it. When Gov. Blanchard was faced with a big deficit, he just hiked income taxes by 38 percent.

The Center works to educate the public and individual legislators to recognize that when government refuses to balance its budget, families are forced to rebalance theirs. And that’s a point we will continue to make.


Michael D. LaFaive is director of fiscal policy at 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.