The MC: The Mackinac Center Blog

Detroit’s Special Favors Add Up

Only city in Michigan allowed to tax utility bills

Gov. Rick Snyder has proposed a partial bailout of the city of Detroit with a $350 million gift. The state has been providing special favors to Detroit for years and it hasn't prevented the Motor City from slipping into bankruptcy.

Detroit gets special rules from state policies that don't apply to any other city in Michigan. Many of these rules expand the city's ability to collect revenue. For instance, Detroit is the only city in the state that assesses a tax on residents' utility bills.

State law allows the city to assess up to a 5 percent tax on their residents’ utility bills — electricity, telephone, natural gas and steam bills. (Yes, downtown Detroit has a steam utility.) Detroit charges the maximum rate.

The act only allows a "city having a population of 600,000 or more" to assess this tax, meaning Detroit is the only city that gets to charge this tax. The population threshold used to be higher and the state has rewritten these rules so that Detroit can continue to impose utility taxes.

The revenue is general fund money, meaning that the city gets to spend it however it deems fit. Currently, the city dedicates some of the revenue to pay off bonds in its Public Lighting Authority, which is repairing and replacing the city's street lights.

In 2012, the tax raised $40 million. It's not a huge piece of their revenue — it represents 5 percent of the city's total tax revenue in 2012 — but it is an extra bump to finances that no other city receives.

It amounts to another way that the state has already bailed out Detroit.

Government Subsidies Run Amok

The private sector almost always outperforms bureaucrats investing with the public's money

Anita Folsom

(Editor’s note: The following is an edited version of commentary that was originally posted at burtfolsom.com the website of Burton Folsom Jr., a history professor at Hillsdale College and a member of the Mackinac Center for Public Policy's Board of Scholars. It was written by Anita Folsom.)

Failed government subsidies have existed in U.S. history from George Washington to Barack Obama.

But what's especially remarkable about the stream of government aid — subsidies to the fur trade, steamships, railroads, airplanes, and even ethanol today — is that private citizens, with no federal funds, almost always outperform the men whom the government endows with large chunks of cash.

In the first years of the American Republic, John Jacob Astor owned a fur company that defeated a government-funded rival — supported by George Washington himself. Astor actively traded with Indians instead of trying to tell them what they wanted and how to live.

With steamships and transcontinental railroads, the government subsidized companies that either went broke or were so politically corrupt that the public demanded reform. On the other hand, the most successful companies in steamships and transcontinental railroads were both privately owned and made regular profits in spite of the vast amounts of federal aid given to their competitors.

Another example is the Wright Brothers. Wilbur and Orville Wright used $2,000 of their own money to design and build their airplane and successfully flew the first manned flight. At the same time the government threw money at a government bureaucrat, Samuel Langley, whose two failed attempts at flight both crashed in the Potomac River.

After the Wright brothers succeeded, Wilbur Wright said, "We have not thought of asking financial assistance from the government. We propose to sell the results of experiments finished at our own expense." Reporting on the Langley fiasco, the San Francisco Chronicle, said, "The destruction of Langley's machine should put an end to Congressional appropriations of any kind in every field of experiments which properly belongs to private enterprise."

But it didn't. In fact, government subsidies for corporations have increased dramatically in the last 100 years.

Currently, one corporate giant in the race for government money is General Electric. GE's chairman and CEO, Jeffrey Immelt, has led the charge to secure more federal funds for any project connected to green energy. As we reported in our new book, Uncle Sam Can't Counthttp://ir-na.amazon-adsystem.com/e/ir?t=burtfolcom-20&l=as2&o=1&a=0062292692, "GE is the leading American producer of wind turbines, and Immelt has actively supported President Obama, serving in his administration as the jobs czar. GE has the biggest lobbying budget of any corporation in America, and the company gave more to Obama in 2008 than any presidential candidate in its history."

From 2000-2012, the U.S. spent $3,000 a second every second of that 12-year period on government subsidies — most of which, like Solyndra, were a huge waste.

Why does federal aid seem to have a reverse Midas touch? Simply put, federal officials don't have the same abilities or incentives as entrepreneurs. In addition, federal control always produces political control of some kind. What is best for politicians is not often what works in the marketplace. Politicians want to win votes, and they can do so by giving targeted CEOs benefits while dispersing costs to others.

The fact that government subsidies have failed from the start, and that they continue to fail, should alarm us when we consider the astonishing increases in federal aid given to most of the largest corporations in America today. 

The Constitution, in Article One, Section Eight, limits the power of government in economic development. If we want to preserve our nation's financial integrity for the 21st century, we need to end government subsidies and encourage the private sector to provide the goods and services that will keep our country prosperous.

Burton W. Folsom Jr. and Anita Folsom are the authors of, Uncle Sam Can't Count: A History of Failed Government Investments, from Beaver Pelts to Green Energy, (HarperCollins, 2014).

More Higher Ed Spending Questionable

Legislators, taxpayers need answers

As state politicians are primed to deliver $82 million more this year to state higher education institutions, it is appropriate to ask what taxpayers will get for this spending.

Unfortunately, there will not likely be much to show for it.

The only direct reward for state taxpayers is a promise that tuition will not increase on Michigan residents as much as it might otherwise. That's not to say that tuition will decrease because of the extra 5.7 percent in state spending. Institutions will just be limited to increases at double the rate of inflation if they want to be eligible for extra "performance funding."

Even so, a small number of Michigan residents will be directly affected by this because only a small number of Michigan residents go to state universities. There are 255,657 Michigan residents in its state universities, or 2.3 percent of the state population. This is a large payment for a limited constituency. And that constituency tends to be well-off already. Only 28.2 percent of Michigan university students receive the federal needs-based Pell grants.

Nor are there guarantees that university appropriations will lead to more college graduates. This is especially important when only 60.7 percent of Michigan public university students graduate within six years. Some funding is now based on graduation rates among other variables, but such encouragement may not deliver on their intentions.

Nor are obtaining college graduates the key to economic growth. There is no apparent relationship between the states that are successful in increasing their college graduate populations and those growing their economies.

Spending more on higher education might be appropriate if there were large spillover effects from the increase. The benefits are not seen in the data, however. A 2006 study by Richard Vedder found a negative association between state appropriations for higher education and state growth.

Some of the reasons for the pressure to increase state university funding are understandable. Universities are scattered around the state and are a large presence where they are located. During Michigan's decade-long recession, state appropriations to universities were cut. Now that the economy is recovering, legislators are letting state universities share in the gains.

But this does not justify spending additional taxpayer money, especially at a time when legislators are struggling to perform some core functions. Unless legislators can get a clear idea about what state university appropriations will actually do, they can get a bigger bang for the public buck elsewhere. 

 

Vernuccio Cited on President's Ann Arbor Visit

Most Americans can't afford a $14 sandwich for lunch

Labor Policy Director F. Vincent Vernuccio is cited in The Detroit News today regarding President Obama’s recent visit to Michigan in his quest for a higher mandated minimum wage.

Vernuccio wrote in Michigan Capitol Confidential Wednesday that some 500 economists have signed an open letter opposing President Obama’s call for raising the federal minimum wage to $10.10 an hour, and the Congressional Budget Office predicts such a move would result in the loss of 500,000 jobs.

While in Michigan, the president ate lunch at Zingerman’s Deli in Ann Arbor. Its owner, who pays entry level workers $9 an hour and wants to raise that to $11, is a proponent of a higher minimum wage. As Vernuccio wrote, Zingerman’s caters to a high-end clientele and can afford to pay its workers more than its competitors. According to media reports, President Obama ordered a small Reuben for $13.99, a salad for $6.50 and tea for $2.50.

“Paying $13.99 for a small sandwich for lunch is considered a luxury for most Americans,” Vernuccio noted. 

Amtrak Subsidy Takes Money from Roads

Riders should pay their own way

Mackinac Center contributing author Michael Farren told WWMT-TV3 in Kalamazoo that the state should stop using tax dollars to subsidize Amtrak passengers. Farren pointed out that the subsidy comes from the gas tax, which means fewer dollars are available for road maintenance.

Farren has written about the issue here and here.

Center Adds New Scholar to Team

Jason Taylor, CMU professor and economist

The Mackinac Center is pleased to announce that Jason E. Taylor has accepted an invitation to join its Board of Scholars. Taylor is the Jerry and Felicia Campbell Chair Professor of Economics at Central Michigan University, and a well-established scholar of 20th century economic history in the United States.

Taylor has been published widely in scholarly journals, including The Journal of Law and Economics, Journal of Economic History and Southern Economic Journal. He is also editor-in-chief of Essays in Economics & Business History. He recently published a paper examining the impact of marginal tax rates on U.S. growth in the Cato Journal. His work has also been published in Forbes, The Wall Street Journal, USA Today and The Detroit News. In 2010 he was invited to present his research findings as official testimony before the U.S. Congress.

As a member of the Board of Scholars, Taylor will contribute to the Center’s work of educating the public about sound public policies that can improve the quality of life in Michigan.

Center Scholar in Wall Street Journal

Mark Perry on alleged gender pay gap

Mark J. Perry, a member of the Center’s Board of Scholars and a professor of economics at University of Michigan-Flint, writes in today’s Wall Street Journal about the alleged gap in pay equity between men and women.

RIP Ranny Riecker

Mackinac Center mourns loss of founding director

Margaret Ann "Ranny" Riecker

(Editor's note: Funeral services for Margaret Ann "Ranny" Riecker will be held at 11 a.m. on April 14 at Memorial Presbyterian Church in Midland, Mich. A full obituary can be found here.)

The Mackinac Center for Public Policy mourns the loss of one of its founding directors, Margaret Ann “Ranny” Riecker, who passed away Monday at the age of 80 in Midland, Mich.

The Mackinac Center and the people of Michigan have lost an inspirational giant of informed public policy, civic service and philanthropy.

Ranny was one of five Michigan residents who formed the Mackinac Center's board of directors after its founding in 1987. When she left the board in 1994, the organization was emerging as a strong voice in Michigan policy and a leader in a nationwide movement of state-based policy research centers. Then-Gov. John Engler wrote, "When the Mackinac Center speaks, we listen."

Ranny, along with Midland resident Alan Ott, co-chaired the Center's $2.4 million building campaign in 1997 that produced its current headquarters on Main Street in Midland.

In 2004, the Mackinac Center dedicated its board room to Ranny and her husband, John Riecker, who said at the dedication ceremony, "Ranny and I look upon the Mackinac Center as an anchor to windward, a seeker of true economic and political principles …." John joined the board in 2006 where he remained a director until his passing in 2008.

Ranny was a trustee, and later also president, of The Herbert H. and Grace A. Dow Foundation, which has supported major Mackinac Center projects in education policy, science education, and more since the mid-1990s.

Ranny was also a founding trustee of the Council of Michigan Foundations, the chair of the Mid-Michigan Medical Center, and a trustee of Central Michigan University and Carleton College (her alma mater), as well as the Harry A. and Margaret D. Towsley Foundation. She held additional leadership roles with numerous other organizations including the Gerald R. Ford School of Public Policy at the University of Michigan and the Republican National Committee.

Ranny's imprint is etched into our goal to improve people's lives through policies enlightened by the nation's founding principles.

I could always count on Ranny for straight talk and a reminder to stay true to first principles. She was always amazingly prepared to discuss or debate any subject. I knew if I could make my case to Ranny, I was ready for any challenge.

RIP, Ranny Riecker.

April 4, 2014, MichiganVotes Weekly Vote Report

Bills on militarized police, tax assessors, topless bars

The House and Senate are on a two-week spring break. Therefore, this report contains several recently introduced bills of interest.

Senate Bill 682: Impose additional charter school restrictions, mandates and taxes
Introduced by Sen. Hoon-Yung Hopgood, D-Taylor, to impose property taxes on charter schools; prohibit for-profit firms from managing charter schools; prohibit charter school authorizing bodies from authorizing any new schools unless students in the ones they have already chartered outperform conventional schools in the same school district by at least 20 percent; and more. Referred to committee, no further action at this time.

Senate Bill 689: Authorize "patient centered" Medicaid alternative
Introduced by Sen. Bruce Caswell, R-Hillsdale, to create a "patient centered" alternative to the Medicaid medical welfare program that would include low-cost "direct primary care" contracts between individuals and a physician for routine and preventative health care services, high-deductible type insurance plans, health savings accounts and more. Also, to ask federal permission to allow employers subject to the federal health care law (Obamacare) employer mandate to provide high-deductible insurance policies to workers as an alternative to paying the mandate's penalties. Referred to committee, no further action at this time.

Senate Bill 706: Restore ban on nude entertainment in liquor license law
Introduced by Sen. Rick Jones, R-Monroe, to ban fully nude performers at topless bars, or the display of explicit pornography at bars. This relates to a 2007 federal appeals court ruling that struck down Michigan's previous law banning fully nude performers in bars, holding that it was a violation of the First Amendment. Referred to committee, no further action at this time.

Senate Bill 727: Give new school employees 401(k), not pensions
Introduced by Sen. Mark Jansen, R-Gaines Township, to close the current defined benefit pension system to new school employees, and instead provide 401(k) benefits. Employees could contribute up to 5 percent of salary to their account, and the local school district would have to contribute an amount equal to 80 percent of this. Referred to committee, no further action at this time.

Senate Bill 732: Ban employers asking about employee contraceptive use
Introduced by Sen. Jim Ananich, D-Flint, to prohibit employers from asking employees or job applicants about their use or nonuse of contraceptives. Referred to committee, no further action at this time.

Senate Bill 743: Repeal mandate that lawyers belong to certain private organization
Introduced by Sen. Arlan Meekhof, R-West Olive, to repeal the law that an individual who has attained a Michigan attorney license must also belong to and pay annual dues to the Michigan Bar Association, a private organization for lawyers, as a condition of being able to practice law in Michigan. The bill has been dubbed "right to work" for lawyers. Referred to committee, no further action at this time.

Senate Bill 789: Transfer concealed pistol license board duties to county clerks
Introduced by Sen. Michael Green, R-Mayville, to eliminate county concealed weapon licensing boards, and transfer the responsibility for issuing concealed pistol licenses to county clerks, with the State Police performing the background checks required by the law. The bill revises a number of other details in the CPL law. Reported from committee, pending before full Senate.

Senate Bill 843: Authorize establishment of welfare agency police force
Introduced by Sen. Rick Jones, R-Monroe, to give the Department of Human Services (the state welfare department) the authority to appoint agents with the same powers as peace (police) officers and warrantless arrest powers. Referred to committee, no further action at this time.

House Bill 4914: Require militarized police agency disclosures
Introduced by Rep. Tom McMillin, R-Rochester Hills, to require law enforcement agencies with SWAT teams to file reports every six months disclosing the number of times these were deployed, where, the reason, the legal authority for the raid, the result, the number of arrests made if any, the type of evidence and property seized, whether a forcible entry was made, whether a weapon was discharged by a SWAT team member, and whether a person or pet was injured or killed by a SWAT team member. Referred to committee, no further action at this time.

House Bill 4965: Impose tax on horse-drawn vehicles
Introduced by Rep. Joel Johnson, R-Clare, to empower counties to impose a registration fee (tax) of up to $50 on horse-drawn vehicles. A vote of the people would be required. Referred to committee, no further action at this time.

House Bill 5079: Let more cities impose additional public safety property tax
Introduced by Rep. Marilyn Lane, D-Fraser, to allow cities with more than 15,000 residents impose special assessment property taxes to pay for police and fire services. These taxes would be imposed over and above regular property taxes, and would require a vote of the community. Referred to committee, no further action at this time.

House Bill 5097 and Senate Bill 850: Exempt public safety from no-contract "step pay hike" ban
Introduced by Rep. John Walsh, R-Livonia, and Sen. Patrick Colbeck, R-Canton Township, respectively, to exempt law enforcement and fire department employees from a 2011 law that banned automatic seniority-based automatic pay increases for individual government employees (step increases) while the previous union contract has expired and no replacement has been negotiated. Referred to committee, no further action at this time.

House Bill 5133: Require agencies disclose federal aid requests to legislature
Introduced by Rep. Mike Shirkey, R-Clarklake, to require state agencies that apply for any form of federal or other financial assistance to notify legislative leaders, relevant committees and the legislature’s fiscal agencies within 10 days, with the notice including any conditions or stipulations associated with receiving the assistance. Referred to committee, no further action at this time.

House Bill 5143: Reduce allowable truck weights
Introduced by Rep. Marilyn Lane, D-Fraser, to reduce the maximum weight of trucks allowed on Michigan roads from 164,000 to 80,000 pounds. This would not reduce the maximum weight per axle. Referred to committee, no further action at this time.

House Bill 5172: Ban assessors entering property without written permission
Introduced by Rep. Robert Genetski, R-Saugatuck, to prohibit government property tax assessors from entering a private dwelling or structure without the written permission of the owner, and prohibit assessors from increasing assessments based on an assumption that unobserved improvements may exist. Referred to committee, no further action at this time.

To read more about these bills, and others in the Michigan Legislature, go to michiganvotes.org.

A Better Way to Protect Detroit Pensioners

Make it a 'contract city'

Recent press accounts describe the potential for steeper pension cuts for Detroit retirees if they reject a bankruptcy proposal made in February, and instead accept a new plan that, among other things, would insulate works in the city's art museum from potentially being sold off to satisfy both pensioners and creditors. The amended plan would also require a partial state bailout of the city.

LaFaive

Pensioners and residents would do better if Detroit took a more aggressive approach to selling assets, contracting out some services and eliminating others that are "nice to haves" rather than "need to haves."

The best outcome for retirees would probably come if Detroit dramatically downsizes city government, in effect converting itself into a "contract city" along the lines of Sandy Springs, Georgia, or Pontiac.

The Mackinac Center for Public Policy has argued it is unfair to use state dollars to once again bail out the Motor City rather than address other critical statewide needs. Moreover, the state's bailout-for-art deal doesn't actually solve Detroit's financial or infrastructure problems. And by inflicting greater losses on lenders, it may also risk increasing borrowing costs for other communities in the state.

Gov. Rick Snyder and the leaders of some large foundations want the state to commit $350 million to Detroit over 20 years. That would be enough to annually fill more than 875,000 potholes around the state for the next two decades.

That's one measure of the price a state bailout would inflict on residents in other communities who were not responsible for the well-known fiscal and managerial malpractice committed for decades by politicians Detroit voters chose.

Michigan taxpayers have already been forced for years to help fund Detroit's mismanagement through generous financial favors.

For example, a 2013 Citizens Research Council report showed that in 2010 alone Detroit received $335 per person in state support, compared to the second most generously supported city that year, Pontiac, which got $176 per person. Mackinac Center researchers James Hohman and Jarret Skorup have detailed many other ways in which Lansing politicians have previously bailed out Detroit.

The Mackinac Center has warned that a pension reckoning was inevitable without reform. It has offered many constructive proposals for this, such as a special issue of the Mackinac Center's Michigan Privatization Report back in 2000 that focused on Detroit. 

There was simply no excuse for dismissing the warning signs years ago, when the city may have been able to prevent the cuts in their long-term obligations that are being discussed now.

This should not be rewarded with yet another special deal. Indeed, doing so creates the likelihood that other municipalities will also demand bailouts.

Pensioners and creditors both stand the best chance of being kept whole by the city fundamentally rethinking how it delivers services to residents, dramatically downsizing its bureaucracy, selling off more assets, aggressively contracting out many services and ending certain others altogether. 

These steps also increase Detroit's potential to become a vibrant regional center that attracts residents and employers rather than driving them away.