(Note: The following is a an interview with Mackinac Center for Public Policy fiscal policy director Michael D. LaFaive that appears in the Winter 2005 issue of Business Wisdom Delivered, a Michigan-based business magazine)

Question: In broad terms, how would you describe the financial "state of the state situation?"

In absolute terms the state of the state government’s fiscal situation appears to be improving, albeit very slowly. Net revenues flowing into the treasury are generally at higher levels than in recent years (due in part to a cigarette tax hike, higher fees, and more federal aid) but Michigan remains an economic laggard relative to other states. Our concern, however, should not be with whether the government is getting wealthier, but whether people and enterprise are thriving.

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In 2004 Michigan was one of only two states to lose jobs (more than 46,000). Ohio was the only other state, losing just 200. Through May of this year Michigan had an unemployment rate of 7.1 percent, tying Mississippi for worst in the nation. This is just one indicator of course, but there are many that suggest Michigan’s future is not as bright as it could be.

Consider one anecdotal, but illuminating metric. Every year since 1977 United Van Lines has reported on their customers’ destinations. At the end of 2004 they reported that Michigan’s outbound traffic was at its highest point since 1982, when the state had an unemployment rate of more than 15 percent. Economists might call these changes in population a "revealed preference," in that people are showing their preference for particular locales through their actions. In other words, people are voting with their feet and at present they are not voting for Michigan. According to state demographer Kenneth Darga, the 2004 increase in Michigan population was just 3/10ths of 1 percent, ranking the state 41st among the 50 in population growth.

Q: What are some of the reasons that Michigan seems to be struggling with finances recently?

It’s a combination of factors. The last recession was difficult for most states. Michigan could have weathered the storm better if its officials had restrained spending more and attempted to change the "structural" nature of the budget while times were good. By structural I’m referring to the fact that the state has legally obligated itself to pay the expenses of certain programs even if the cost of those programs spiral upward while revenues to the state decline.

In the summer of 2000 state lawmakers were surprised to learn that, due to good economic times, the state treasury was flush with more than $600 million than was anticipated. Did they save it or return it to taxpayers? No. Instead, they went on a spending spree, which included the purchase of a new polar bear exhibit for the Detroit Zoo. Combine this type of spending pattern with large increases in the cost of running certain programs along with a nationwide recession and you’ve got a recipe for trouble to begin with. But Michigan maintains additional burdens: it has an onerous business tax system (the Single Business Tax), a contentious labor climate and increased competition from abroad, especially in manufacturing. Worse, regulation proposed last year by the governor would severely limit the ability of businesses and farmers to use water without state permission, thus reducing a major competitive advantage the state has enjoyed for years.

Q. What tax area would you change if you were in control and how?

The Mackinac Center for Public Policy has been calling for the elimination of the Single Business Tax with matching dollar-for-dollar cuts in state spending. Such a move would announce to the world that Michigan intends to be much less hostile to commerce than it is today.

Q. What are the biggest areas for concern in Michigan’s economy (areas that might be keeping Michigan from thriving)?

I’ve already mentioned some of the biggest items. The state is chasing financial and human capital across its borders by remaining relatively unattractive to people and businesses looking to improve their fortunes. As long as the state maintains a relatively unfriendly business, labor and regulatory climate, people are going to move from Michigan, just as they moved from Detroit in recent decades.

Q. What exactly needs to happen for Michigan to improve its future outlook? What needs to happen?

The state should take an economic Hippocratic Oath by promising "first, do no harm." That means policymakers should not hike taxes even further or pile new, harmful regulations on top of the old ones. Other policies that need to change include eliminating the Single Business Tax, passing Right-to-Work legislation, and preventing the passage of the Water Legacy Act as it is written today.

Q. What are some of the things that Michigan is doing (or trying to do) right, and with regard to economic growth?

It’s actually having a debate on this very issue with competing proposals — some of which are very bold — coming from different camps.


Michael D. LaFaive is director of fiscal policy 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.