The MC: The Mackinac Center Blog

Pure Michigan Scare Tactics

MEDC deploys 'Washington Monument syndrome'

The House Republicans recently released a proposal that would dedicate an extra $1 billion annually to roads by 2019. A chunk of the extra money comes from redirecting money from the Michigan Economic Development Corporation to the state’s transportation infrastructure.

The MEDC is the state’s corporate welfare arm, which hands out select subsidies to corporations and oversees the film incentive program and the Pure Michigan advertising campaign.

Specifically, the House GOP plan would redirect $185 million of spending on “economic development” programs to road construction and maintenance. The MEDC does not want its funding cut and responded with what is known as the “Washington Monument syndrome.” As noted by MIRS:

Steve Arwood, chief executive officer of the Michigan Economic Development Corporation (MEDC), said the plan "severely limits the state's ability to have an economic development strategy moving forward."

"Furthermore, it threatens to eliminate the entire Pure Michigan tourism effort – an industry which supports 214,333 jobs in our state," he continued. 

Here is a description of the Washington Monument syndrome, via Wikipedia:

The Washington Monument syndrome, also known as the Mount Rushmore syndrome, or the firemen first principle, is a term used to describe the phenomenon of government agencies in the United States cutting the most visible or appreciated service provided by the government when faced with budget cuts. It has been used in reference to cuts in popular services such as national parks and libraries or to valued public employees such as teachers and firefighters. This is done to put pressure on the public and lawmakers to rescind budget cuts.

Sure enough, after the press release from the MEDC, the media reports soon followed. An MLive headline said, “Pure Michigan campaign could disappear under House Republican road plan.”

The Pure Michigan advertising campaign is not nearly as valuable as the MEDC says, but it is undoubtedly more popular among the general public than the other programs the entity oversees. There are many, many MEDC programs that do a very poor job of creating jobs and those are the ones that should see a loss of funding first.

Gideon D’Assandro, spokesman for House Speaker Kevin Cotter, had a good response to the agency’s Washington Monument response: "If the MEDC needs help identifying the right priorities in their own budget, we are more than happy to help walk them through it and show them how."

Tourism marketing through Pure Michigan cost only $21.7 million out of the total “economic development” budget of over $600 million in 2014. There is plenty of room to cut before this program would need to be affected.

House Road Plan Relies on Reality

Detroit News errs in calling future tax revenue growth 'mostly fantasy'

The Detroit News calls the proposed House Republican roads plan “fantasy” because it provides additional road funding from future tax revenue growth. The plan, an editorial states, calls for finding money “out of thin air.”

Michigan is already operating on increased revenue from recent growth. The state budget spends $3.5 billion more state tax dollars than it did in fiscal year 2011.

And recent growth is expected to continue. According to the House Fiscal Agency, revenue is going to increase above and beyond the requirements of the House Republican plan. It estimates that school aid fund and general fund revenue will increase by a combined $577 million next year and $574.5 million the year after.

The estimates will change when the future gets closer. But Michigan’s growth is real and this means more money for the state budget. It is appropriate to devote some of that growth to the roads.

Last year, Michigan passed a bill that effectively prohibited the direct sale of automobiles. Caving to pressure from existing car dealerships, the state now makes it difficult to impossible for new car manufacturers, such as Tesla Motors, to gain a foothold in the state’s automobile market. As advocates of free markets and fair competition, the Mackinac Center signed on to a public letter earlier this year calling for the Michigan Legislature to reconsider this anti-competitive measure.

Michiganders should be free to choose how they want to purchase a vehicle and from whom, just like they do for most every other product. At least one legislator is trying to help: Sen. Darwin Booher (R-Evart). Last month, he introduced Senate Bill 268 that would allow manufacturers of three-wheeled motor vehicles (such as those made by Elio Motors) to bypass the protected car dealerships and sell directly to Michigan consumers. He also requested comment from the Federal Trade Commission on the issue.

The FTC replied that Sen. Booher’s bill was good first step, but encouraged him to go further and help eliminate Michigan’s unjustifiable prohibition on direct sale of automobiles. It stated, “Michigan consumers would more fully benefit from a complete repeal of the prohibition on direct sales by all manufacturers,” reasoning that “consumers are the ones best situated to choose for themselves both the vehicles they want to buy and how they want to buy them.”

The FTC also addressed the arguments used by car dealers for their protectionism. For example, it is said that the state needs to prohibit direct sales so as to protect dealers from abuse by their suppliers. But the FTC makes the point that the current law provides a “blanket prohibition ... not a narrowly crafted provision to protect franchised dealers from abuse in their franchise relationships.” Even if this really is a problem, Michigan’s current law uses a meat clever when only a scalpel is required.

Car dealerships also argue that forcing automobile sales through dealerships creates more competition, which results in lower prices for consumers. The FTC responds, “This view is inconsistent with modern economic learning and with the Supreme Court’s widely accepted observation that ... competition between rival manufacturers ... can suffice as a source of downward pressure on price.”

The FTC urges the Michigan Legislature to reconsider its direct sales prohibition. If Michigan is going to be “reinvented,” it should not hold on to protectionist policies of the past. Banning the direct sale of automobiles limits competition, harms consumers and thwarts innovation.

Interpreting Proposal 1’s Loss

First, look at current resources

The 80-20 loss on a $2 billion tax hike will guide subsequent road funding proposals; there is no shortage of interpretations (some odder than others) of the message voters intended to send. Some assert that voters will not approve complex proposals and suggest other tax hikes. The new House proposal, on the other hand, indicates that the proper message is to first look within the state government’s current resources to fix the roads.

And it’s an easier lift than residents might think. The current transportation budget contains $284 million in general taxpayer support in addition to the revenue distributed from state gas taxes and vehicle registration fees. Recently-passed Senate and House budgets contain $159 million in further support. This extra spending shows that there are ways to devote more money to the roads within the budget.

Even though this is a long way off from the $1.2 billion target, it makes a larger difference than you might expect. The state is just not yet ready to fully spend $1.2 billion on road repair. As MDOT director Kirk Steudle observed, it will take a while for the market to respond to the needed road repair. That’s why Proposal 1 phased in road spending and expedited debt payments.

Gradually increasing road funding is doable for legislators, and this is made even easier by the growth in the state economy. Michigan added 408,700 jobs since the end of the recession, a 10.6 percent growth that is the seventh highest in the country. The treasury received $3.7 billion more in state tax revenue than it did in 2011.

Even with growth and the gradual need for road funding, legislators should still look within the state budget. The money state government spends on economic incentive programs would be better used in constructing roads. The state’s university funding does not ensure that taxpayers get the biggest bang for their buck.

The new House plan recognizes this, increasing road funding over time while diverting funding from less-needed areas like the 21st Century Jobs Fund and Film Incentives to the transportation budget. It also begins devoting more tax revenue from the growing economy to needed road funding.

It is also encouraging the see the Senate consider a repeal of prevailing wages, a step towards saving on construction costs in state, local governments and school districts.

People should be coming together around proposals that look within the state budget and the House plan is an excellent starting point. It is the safe interpretation for Proposal 1’s loss. Through the gradual need for increasing road funding, the money that policymakers already found, the growing state economy and the waste in districts, finding a feasible plan to fix the roads within the state’s resources should be an easier lift than increasing taxes.

Michigan Incentive Policies Fooled by Job Turnover

State subsidized jobs are a fraction of the entire economy

Last month, the Michigan House Tax Policy committee heard testimony about the state’s economic incentive programs. The usual justification for giving selective favors to particular firms was trotted out: Other states will capture these projects if this state does not distribute taxpayer cash to companies and developers. Without special incentives, proponents argue, Michigan is doomed to fall behind.

Yet this rationale reveals a fundamental misunderstanding of how the economy works.

Monthly job reports suggest that Michigan’s economy grows or shrinks very slightly from month to month, but this data hides the massive amount of job creation and job loss that is continually occurring. Michigan employers created 192,391 jobs and lost 205,613 jobs in the third quarter of 2014, according to the federal Bureau of Labor Statistics. In other words, over just a three-month period Michigan added and lost more than 1 out of 20 jobs.

This churn includes 7,819 new business establishments opening, adding 30,636 jobs. It also includes 11,300 business establishments closing, a loss of 37,507 jobs. Expanding businesses added 161,755 jobs and contracting businesses shed 168,106 jobs.

Over that same three-month period Michigan’s main economic development program, the Michigan Business Development Program, entered 32 deals with individual companies, pledging $35.8 million in taxpayer dollars to create 5,477 jobs. Even if all of these jobs were created — and the MEDC does not have a good record on transforming announcements into jobs — it would account for just 2.8 percent of the actual job creation and none of the losses.

The contrast with the job churn numbers show that the state’s targeted business incentive programs are more about showmanship than about improving the state economy.

The rosy news releases about the fruits of these selective benefits also assume that none of the projects would have located here without the state’s subsidies. There was one time the state called off a deal — because the city of Novi refused to extend local tax benefits to a company the state was negotiating with — and the business still located in Michigan without the special treatment.

Even if the state were successful with its targeted efforts, landing these companies results in taxpayer costs, and those costs have economic impact as well. The Mackinac Center's 2009 study of the issue found negative results from the Michigan Economic Growth Authority program, since ended but considered the "flagship" of such efforts at the time.

Thus, the cost of chasing after special deals is larger than the benefits. The state is likely to obtain these kinds of investments without doling out selective favors, and even then, the incentivized projects do not have a large enough scope to improve the economy. Broad-based improvements to the state business climate are more effective at bringing that goal to fruition.

Mackinac Center Road Solutions Prescribed in Detroit News

Experts lay out a path to funding Michigan's roads

In the May 12 edition of the Detroit News, Policy Analyst Jarrett Skorup and Assistant Director of Fiscal Policy James Hohman propose ideas of how Michigan taxpayers can fund the state's roads.

In their suggestions, most of the revenue comes tax-funded projects that offer little to no value to the average Michigan taxpayer.

Michigan Income Taxes Already Progressive

State Democrats want new power to institute a graduated income tax anyway

Michigan effective income tax rates.

Currently, the Michigan Constitution requires the state to use a flat income tax, where everyone pays the same percentage (4.25) of their income. But some want to scrape this and allow state legislators to set different rates for different people.

A recent poll from EPIC-MRA ostensibly suggests there’s support for a graduated income tax among Michiganders, with 66 percent favoring the concept. At their convention last weekend, Michigan Democrats proposed a constitutional amendment that would enable the Legislature to create a progressive income tax. Over the years, similar bills have been introduced on the issue.

The liberal Eclectablog says that “the domination of the wealthy and the skewed influence of corporations” ensures this won't move through the Legislature. But, it continues, “Republicans and corporatists” fear a voter-led ballot initiative to amend the constitution, because it would “bring Democrats to the polls in droves.” The blog predicts it would be a “game changer” for Democrats.

Perhaps. But it should be noted that changing from a flat tax to a graduated system has been attempted in Michigan three times and has always failed overwhelmingly: In 1968 it got 23 percent support; in 1972 it got 31 percent; in 1976 it got 28 percent. That was a long time ago, but ballot attempts to raise taxes or change from a flat tax in other states have not gone well in recent years. Since these proposed tax changes commonly promise to raise overall state revenue, it’s difficult to determine if voters are rejecting the taxing mechanism or the revenue boost to government.

Even with a flat income tax, Michigan’s tax system is already quite progressive. An analysis from the Michigan Department of Treasury shows that tax exemptions and credits means that the average taxpayer doesn’t actually owe state income taxes until their income exceeds $18,000 (see image nearby). These exemptions and credits also lead to a higher effective tax rate for higher levels of income — mimicking a progressive income tax scheme.

As noted by William McBride, chief economist with the Tax Foundation, the best research shows that higher taxes harm economic growth. He writes:

So what does the academic literature say about the empirical relationship between taxes and economic growth? While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy. In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth. Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes.

Michigan legislators should not change the flat tax. And if it ever gets to the ballot, citizens would be wise to reject a progressive income tax once again.

Mackinac Center Experts Show Cigarette Tax Increase is Counterproductive

Michael LaFaive and Todd Nesbit, Ph.D. cited in Providence Journal

The May 8th edition of the Providence Journal features an article written by Director of the Morey Fiscal Policy Initiative Michael LaFaive and Board of Scholars member Todd Nesbit, Ph.D.

The experts show how smokers turn to lower-cost alternatives when the price of cigarettes increase.

LaFaive and Nesbit show smuggling rates among all states in a statistacal analysis found here.

Snug as an Official Bug in a Rug

Politicians can find themselves deciding things of low value

Excessive cynicism can be an occupational hazard of those who pay close attention to actions of legislatures and politicians. Honest debate over important policy issues is important, but political observers can be quite disappointed if they consider everything their elected officials work to decide.

For example, on April 28 Rep. Edward McBroom (R) introduced a bill to establish the ladybug as the official insect of Michigan. The proposed legislation does not specify any particular variety, although Wikipedia reports some 5,000 types worldwide.

The bill could trigger a Battle of the Bugs on the House floor, because in recent years no fewer than four bills have been introduced to declare the monarch butterfly to be the state’s official insect. The conflict could grow even more intense, because in 2010 legislation was introduced to establish as the green darner dragonfly as the official state bug.

These gratuitous acts of officialdom are hardly unique, and sometimes they even generate lobbying and contentious committee hearings, as occurred when a law was proposed to establish an official state Scottish tartan. But which tartan? A clash of the clans was narrowly averted when Gov. Jennifer Granholm took executive action to establish an official tartan, heading off what might have been a reenactment of the tragic rising of ’45.

There really is an apparent earnestness of those involved as you can tell by the video (below), but does that make it a proper function of government?

Other acts of officialdom introduced (but not necessarily passed) by lawmakers involved an official state poem, poet Laureate, birding county (that would be Iosco), official bird-of-peace, cookie, nickname and more. One observer proposed that lawmakers should officially declare themselves to be the state’s official busybodies.

It all gives weight to the claim of part-time legislature proponents that Michigan’s full time lawmakers may have too much time on their hands.

Guest Post: Kansas Excise Tax Hike Proposal a Bad Choice

The unintended consequences of higher taxes

The following blog post was first published by the Kansas Policy Institute on May 4, 2015.

Various proposals would raise excise taxes on cigarettes, one by as much as $1.50 per pack among other items. This is a bad — if not irrational — choice for Kansas given the large raft of unintended consequences associated with it for little in the way of public health advances. 

Raising cigarette excise taxes by almost 190 percent would mean Kansas would be surrounded by states with lower — sometimes dramatically lower — excise taxes. The tax-driven price difference between cigarettes in Kansas and nearby states will represent an opportunity by both casual and organized smugglers to profit handsomely from tax avoidance and evasion.

The Michigan-based Mackinac Center for Public Policy annually estimates the degree to which cigarettes are smuggled in most states. Its statistical model tells us that through 2013 Kansas had a smuggling rate of 15 percent, ranking the Sunflower state 19th among the 47 in the study.

But that estimate reflects a tax rate of 79 cents, not $2.29 per pack. At the higher rate, however, the model tells us that Kansas’ smuggling rate will leap to a stunning 46.5 percent of the market. That is, of all the cigarettes consumed in Kansas after this excise tax increase nearly 45 percent will be a function of tax avoidance or evasion. At this rate Kansas will sport the third highest smuggling rate in the nation, behind New York and Arizona.

It is not hard to see why. In addition to being surrounded by lower tax states Kansas is located next door to the lowest tax state in the union, Missouri, at just 17 cents per pack. This is probably why the model also tells us that 26.5 percent of total smuggling will be of the “casual” variety, such as individuals grabbing a carton while in other areas of KCMO.

Lest the reader believe that these estimates are outrageously high consider that the Mackinac Center is not the only institution attempting to measure smuggling rates among states. On February 19 of this year the Institute of Medicine and National Research Council published a study on tax evasion and tax avoidance and pegged Kansas’ 2011 smuggling rate at 21 percent, far higher than the Mackinac Center’s own estimates.

The study, titled, “Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences” pegs the national market for illicit smokes at between 8.5 percent and 21 percent. The latter figure is cited from others scholars’ “plausible estimates” published in 2013 and based on data from 2009 and 2010.

These smuggling numbers are why lawmakers should never confuse changes in legal paid sales of cigarettes with quitting. Time and again burgeoning illicit markets undermine the health goals of very well-intentioned public officials.

In his 2004 study titled “Cigarette Tax Avoidance and Evasion,” economist Mark Stehr reports that up to 85 percent of the after tax change in legal paid sales can be attributed to avoidance or evasion. That is, official sales are declining, but people aren’t necessarily quitting.

The authors of a 2014 study in the academic Journal of Economic Inquiry titled “Do Higher Taxes Reduce Adult Smoking?” argue that “considering all the evidence, we conclude that there is insufficient justification for the widespread belief that raising cigarette taxes will significantly reduce cigarette consumption among adults, even young adults.”

The reason is probably fairly straight forward. People like to smoke and are willing to turn to less expensive roll-your-own products or to the illicit market or both to acquire tobacco.

Of course, smuggling is not the only unintended consequence of higher tobacco taxes. High tax states like New York or Michigan have also seen violence against people, police and property as well as thefts at the retail and wholesale levels.

Lastly, Kansas doesn’t need to raise taxes on this or any other activity. The Kansas Policy Institute informs us that the state is planning to spend nearly $1 billion more (adjusted for inflation) than it did in 2004.

The budget must be balanced but perhaps lawmakers should kick the spending habit before taxing those with a smoking habit.