People know better how to spend their own money
With a projected $971 million surplus for next fiscal year, Michigan’s Legislature is considering cutting the state’s income tax rate from 4.25 to 3.9 percent.
The cut would be phased in over time and would be contingent upon the budget remaining in surplus. When fully phased in, this would result in a $170 annual tax cut for the typical Michigan family.
Will such a small tax cut have a major effect on Michigan's economic growth? Recognize first that this is a very small marginal tax cut, so thoughts that this policy alone will bring a new era of prosperity is just wishful thinking.
Still, the vast majority of economic studies confirm that lower tax rates result in faster growth — a result that holds for both countries and individual states (see my recent paper in the Cato Journal). Importantly, reducing the tax rate to under 4 percent would make Michigan more competitive in comparison to nearby states, such as Indiana (3.4 percent) and Pennsylvania (3.1 percent), that currently have flat income tax rates well below Michigan's. When labor and capital are mobile, tax competitiveness matters.
But promoting faster economic growth is not necessarily the most important reason to favor the proposed tax cut.
When governments run large surpluses, they have two options: take less from taxpayers or increase spending. While either might seem as good as the other at first glance, the problem is that expansions in government spending are almost never temporary. History shows that government expansions — often undertaken during times of supposed crisis — almost never return to their prior levels even after the conditions that brought about the expansion are long gone.
Instead, as Robert Higgs documented in his 1987 book, "Crisis and Leviathan," the ratcheted up government becomes the new normal. And in the long run, the economy is worse off since the increase in government spending crowds out spending in the private sector, which is generally more efficient at allocating society's scarce resources.
Returning Michigan's surplus to the taxpayers, rather than boosting government spending, will give the state far more flexibility to address fiscal challenges down the road. Furthermore, the more competitive economic environment that lower tax rates will create will make those future challenges less arduous.
Jason E. Taylor is a professor of economics at Central Michigan University. He received his Ph.D. from the University of Georgia in 1998.
Ballot backers don't think jobs will be lost
According to MIRS News, the backers of the ballot proposal that would increase the minimum wage to $10.10 per hour, "said the change would raise wages for about 940,000 people in Michigan, or 24 percent of workers."
That number is reached by looking at the number of workers currently making less than $10.10 per hour, adding in hundreds of thousands of other employees, assuming they will also get a raise and pretending that mandating a 36 percent increase in labor costs would have no effect on employment.
If that's the kind of economics minimum wage backers believe in, they are cruel to ask for only $10.10 per hour. Raising the minimum wage to $20 per hour would "affect" even more employees; $100 per hour would "raise wages" for virtually all Michigan workers.
The reason those amounts aren't called for is that it is well understood that there would be mass unemployment, skyrocketing prices and tremendous economic harm. Though not as bad, there are negative economic effects when the government institutes wage mandates at lower levels, like the $10.10 per hour, as well.
Specifically, this harms younger and lower-skilled workers. As economist Thomas Sowell has noted, before a federal minimum wage, the labor force participation for African-Americans was equal to whites. In the 1930s, just before the federal government set a minimum wage for the first time, African-Americans actually had a lower unemployment rate than whites. Today, the rate is twice as high, and even worse for young people.
Instead of sending their money to Hollywood
Proponents of the Michigan film subsidy program, which like all corporate welfare programs takes money from taxpayers and gives it to large companies in the name of "job creation," often say the incentives are temporary and needed to diversify the state economy.
Most of them say the programs eventually will be rolled back. This isn't true.
Like all groups, businesses work to get as much money from the government as possible, regardless of the economic effects or evidence. Consider what's happening in Maryland.
The state has generous subsidies and its most notable project is the Netflix show, "House of Cards." Last year, the governor of Maryland and other politicians got to hang out with stars and tout the alleged benefits the show brought to the state. Maryland spends $40 million on film subsidies, most of which goes to that one show.
But apparently it's not enough, as the Washington Post reported:
A few weeks before Season 2 of "House of Cards" debuted online, the show's production company sent Maryland Gov. Martin O'Malley a letter with this warning: Give us millions more dollars in tax credits, or we will 'break down our stage, sets and offices and set up in another state.'
A similar letter went to the speaker of the House of Delegates, Michael E. Busch (D-Anne Arundel), whose wife, Cynthia, briefly appeared in an episode of the Netflix series about an unscrupulous politician — played by Kevin Spacey — who manipulates, threatens and kills to achieve revenge and power.
This shouldn't be surprising. Movie studios have pulled the same stunt in other states to try to secure more perks.
What would be a true Hollywood ending in Michigan, which spends $50 million per year on film subsidies, is if politicians would finally stand up for taxpayers.
Emergency manager's plan filed in bankruptcy court
The city of Detroit published its plan of adjustment detailing how it intends to solve the city’s financial and other problems. It contains important references to privatization of certain services, though it doesn’t go far enough.
A bolder vision might spare city retirees and creditors from as deep of cuts.
Page 116 of the Disclosure document makes it clear that Emergency Manager Kevyn Orr is prepared to contract out for some if not all the operations now provided by the Detroit Department of Transportation. This was a recommendation made by the Mackinac Center for Public Policy in late 2000. At the time, we estimated that the city could save $60 million a year by doing so. If it had saved just half of that since 2000, Detroit would have accrued $360 million in savings by now.
Additionally, the emergency manager's report alludes to the possibility of outsourcing city airport work and redeploying city parking assets.
On balance the reforms laid out by Orr "give short shrift to outsourcing and asset sales," said Leonard Gilroy of the Reason Foundation, a national expert in privatization, although the city did recently sign a contract for refuse collection.
"While it's encouraging to see proposals for sensible privatization initiatives in transit operations, parking, payroll administration and airport operations, these are drops in the city’s fiscal bucket," Gilroy said. "There's still a lot of low-hanging fruit left untouched in terms of cost-savings opportunities through privatization, particularly in areas like public works, fleet operations and various administrative support functions."
There is much more that could be done by the city that would maximize revenue to the city: Sell more properties and other assets, aggressively contract out more services and end them where possible.
Pontiac cut its general fund spending by 43.5 percent with such an aggressive program and its employment rolls from 495 to a proposed 20 in just 5 years.
Cutting 43.5 percent out of Detroit's general fund would mean a nearly $480 million decline in spending — revenue that would go a long way toward reducing the cuts that may be imposed on the city's retirees and creditors.
LaFaive, Lockwood at Reason Foundation event
Michael LaFaive, director of the Mackinac Center’s Morey Fiscal Policy Initiative, and Mackinac Center board member Rodney Lockwood both spoke at a roundtable discussion Thursday about the future of Detroit, according to The Detroit News. The event was hosted by the Reason Foundation.
Lockwood discussed his idea to turn Detroit City Airport and the area around it into a freight center. Lockwood earlier proposed buying Belle Isle from the city for $1 billion and turning it into a low-tax commonwealth.
Reason Foundation roundtable discussion
(Editor’s note: The following are prepared remarks by Michael LaFaive, director of the Morey Fiscal Policy Initiative, presented at the Reason Foundation’s “Revitalizing Detroit After Bankruptcy” roundtable discussion held at the Crowne Plaza Pontchartrain in Detroit on Feb. 20, 2014.)
Thank you and good morning. Professor Savas has mentioned a number of cities that have reformed themselves with bold public-private partnerships, asset sales and competitive contracting. The city he did not mention, however, may be the best example: Pontiac. Five years ago today a financial emergency was declared by the state and the first of three emergency managers was appointed to remake the city’s finances.
Today the city’s general fund budget is 43.5 percent smaller than it was in 2009. Since fiscal 2009 city employment has fallen from 495 to a proposed 20, excluding court employees. In other words, the three EMs have effectively turned Pontiac into a “contract city,” whereby valuable services are performed by contractors and not more expensive city employees.
For example, police and fire services are now provided by Oakland County and Waterford Township, respectively, and together save the city $5.8 million per year. These savings were accomplished while services appear to have improved.
There are now 25 more officers patrolling Pontiac streets than at the low point of the city’s staffing in the past five years. Response times have dropped from over 76 minutes in 2010 to 6 minutes, 22 seconds in 2013. The Oakland Press reports that since the county took over, homicides are down 22 percent, robberies are down 25 percent and assaults have dropped 38 percent.
In Waterford Township, fire response times have actually fallen (by 15 seconds or about 3.3 percent) despite very public fears that the opposite might occur, according to Fire Chief Ron Spears. The township has also invested in Pontiac’s fire-fighting infrastructure and increased fire prevention and investigation visits to local businesses.
The city golf course was sold for $700,000 last year and the new owner is working hard to upgrade it, investing his own money to improve the clubhouse and purchase better grass maintenance equipment along with 65 brand new golf carts for patrons. As a bonus the property is now on the city’s tax rolls. The city also sold off more than six of its parking facilities and one of them — Lot 9 — has already seen about $250,000 in new investment for resurfacing, according to the city administrator. Again, all of these are now tax paying as opposed to tax taking properties.
Emergency Manager Lou Schimmel monetized the city’s water and sewer system by selling excess capacity. The initial transaction was worth about $55 million. The money was used to pay off bonds that will save $2 million in interest payments from the city’s GF annually. It allowed them to deposit $4.2 million in the city’s police and fire health retirement fund that had been neglected in previous years and avoid a court-ordered property tax increase. Lastly, the sale of the excess capacity will allow the city to avoid rate increases to make necessary capital improvements.
If Detroit truly wants its long awaited Renaissance, it needs to adopt a game changing policy strategy moving forward. The city can start by looking north to Pontiac.
Explains the benefits to MLive readers
Discussed DBusiness article on WJR
Senior Economist David Littmann writes in the latest edition of DBusiness Magazine that it is “Full Steam Ahead for State’s Economy.” In the article, Littmann discusses why certain factors — including increased auto sales, lower state taxes and Michigan’s right-to-work law — make for an optimistic outlook in 2014 for the state’s economy.
Littmann also discussed the article on “The Frank Beckmann Show” on WJR AM760.
Give instant feedback to your legislators
WOOD Radio in Grand Rapids and WWJ AM950 in Detroit are both reporting on the Center’s new VoteSpotter app, which allows users to give instant feedback on how their legislators vote on key bills. Executive Vice President Michael Reitz also discussed the app, which is powered by MichiganVotes.org, on “The Frank Beckmann Show” on WJR AM760 in Detroit. Leader Publications, which prints the Niles Daily Star and Dowagiac Daily News, also reported on the app.
UAW loses when secret ballot is allowed
The recent defeat of a unionization effort by the UAW at a Volkswagen plant in Tennessee was not only a major setback for the union, but also for those pushing "card check" legislation.
Card check legislation, officially known as the "Employee Free Choice Act," was introduced in Congress in 2009 and would "authorize the National Labor Relations Board to certify a union . . . when a majority of employees voluntarily sign authorizations designating that union to represent them."
In other words, employees would "vote" by signing a card in the presence of a union representative, rather than voting in the normal democratic procedure using a secret ballot.
For the UAW vote in Chattanooga, the union claimed that more than half the workers at the assembly plant signed cards favoring the unionization. If the card check law had passed, the UAW would represent the workers. But when the votes were tallied from a secret ballot, the UAW lost 53 percent to 47 percent.
The Employee Free Choice Act legislation was a big deal a few years ago. Every major public- and private-sector union supported it and the Michigan House voted 66-40 for a resolution supporting the federal legislation.
But the 2009 federal card check bill went down, despite Democratic majorities in both chambers of Congress and the support of President Obama. Some senators backed off under pressure from constituents and other leaders on the left.
For talking so much about the importance of democracy, unions have shown they don't care much about one of its staples — the secret ballot. The VW vote adds to the examples where a union has claimed to obtain a majority of employee signatures but then lost when employees actually voted in private.
The card check idea should be put to rest for good.