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How did we get in this budget mess?

You can talk about tax structure and decisions by governors and legislatures in the past, but above all, the state's financial difficulties have to do with the economy.  

Because Michigan has been heavily reliant on manufacturing, specifically the automakers and their many suppliers, Michigan has been hit especially hard.

Mitch Bean is the Director of the House Fiscal Agency.  Basically, he’s one of the economists who keeps the legislature informed about the economy and the state’s budget.

Bean says when the U.S. economy started to dip in 2000, Michigan ended up suffering more than most states. 

“The difference between Michigan and these other states is Michigan never came out of the 2001 recession. We lost jobs every year, net job loss, for ten years in a row. That didn’t happen in other states. Now, consequently Michigan every year has been looking at the budget. We’ve made a number of very, very tough decisions over the years that other states didn’t have to make, very significant cuts to the budget and to services. Now, we’re at a point where it’s more difficult for us to go forward because we’ve been at this for ten years whereas other states had a period where they came out of the last recession and had some growth, we haven’t. Our economy is smaller than it was ten years ago.”

A smaller economy means less in tax revenues.  But Michigan’s tax revenues have shrunk even more than the size of its economy.

According to a legislative briefing from the House Fiscal Agency, revenue that goes into the state’s General Fund has decline by more than 40% in the last 12 years relative to the size of the state’s economy.

That briefing shows much of that drop in General Fund revenue is because of the growth in the number and amount of tax breaks.  Things like credits for the high-tech battery technology and movie industry and many, many more business and personal tax credits.  There are tax exemptions such as no sales tax on services, a huge loss in potential revenue as the economy has shifted from a largely goods-based economy to a service-based economy.  And, these days there are more deductions available under the state tax code. That lowers revenue going to the state.

As a result of the slump in the economy we were already seeing and the housing bubble more recently, the housing market collapsed.  That’s reduced property tax revenue.  People have lost their jobs, so state income tax collections have declined, and people haven’t been buying as much, so state sales tax collections have declined.  All the while, those tax breaks grew faster by billions of dollars.

A recent report by the Michigan Department of Treasury  indicates those tax breaks add up to about $34-billion in lost revenue to the state this year.  State taxes are projected to bring in a little more than $22-billion.   So, there are more in tax breaks than taxes collected.

David Zin is an analyst with the Senate Fiscal Agency.  He says those tax breaks mean either others pay more in taxes or the state falls short in what it needs to run the government.

“Economists generally favor having a broader base on taxes, lower rates. It produces less distortions in economic activity and it creates less of what economists call a dead-weight loss in terms of things. So, generically, from that criteria, you would tend to favor broader bases and lower rates and the nature of exemptions, deductions and credits is exactly against that.”

So, the choices were either to 1) raise taxes or 2) cut some of those tax breaks, or 3) cut government services or some combination of those choices.

The state has implemented new taxes and fees, but those new revenues have not kept up with the decline in overall revenue. 

As mentioned earlier, tax credits, exemptions and deductions have only been growing.

But, we have seen cuts.  Higher education has been cut, prisons have been closed, money for public schools hasn’t kept up with inflation for years, and many state agencies have seen cuts.

According to that House Fiscal Agency legislative briefing we mentioned earlier, the number of state employees has declined by more than 18% since 2000.  But there have been increased costs for health insurance and pension contributions for employers hired prior to 1997.  Newer employees are in a defined contribution retirement plan, kinda like a 401-k.  

Bottom line… state government is smaller, but the costs of pensions and healthcare for retired employees… and those who will retire under the pension plan are costing the state and the state hasn’t kept up with those obligations.

The budget is a mess. 

The reason we’ve been able to put off these tough decisions so far is some accounting tricks and a lot of federal dollars through programs such as the American Recovery and Reinvestment Act.  Those dollars now end. 

Past legislatures have not done enough to fix the problem.  Most of the time legislators were hoping the economy would improve and those problems would disappear.  That’s not happened.  And few in Lansing are optimistic the economy will improve fast enough to bail the state out of its fiscal crisis now.

So there are tough choices ahead.  Governor Rick Snyder and the legislature have to do a re-evaluation.  It starts with what should state government be doing for its people.  Once that political question is decided, they need to determine how to provide those services for the least cost.  And then the third decision… how to raise the money.

Mitch Bean at the House Fiscal Agency says getting that money out of the economy through taxes needs to be done in the most efficient way that does the least harm to the economy.

"Now the way that you do that in my view and the view of most economists that I know is you want a tax system that’s pretty diverse, that reflects the economy, that has rates that are absolutely as low as you can get them and you do that by making the base as broad as possible. So, you eliminate or reduce a lot of exemptions, credits, deductions, really flatten out and broaden that base and that allows you to keep rates absolutely as low as possible. So, it’s a three-step thing: you decide what should be done, you decide how much resources you need to do it, then you decide what’s the best way to get the resources out of the economy.”

All three of those decisions will mean a firestorm of debate in Lansing.  It’s already begun. 

Democrats want to preserve the social safety net.  With the economy so slow in recovering, more people than ever need the public assistance to survive until they can get back into the workforce.  For most of the last decade about 1.2-million people have relied on some kind of public assistance.  In the last few years, that’s ballooned to 2.9-million, almost one-out-of-every three residents.  And advocacy groups are working to remind the politicians that fully half of those 2.9 million Michigan residents are children.

In his inaugural address, Republican Governor Rick Snyder said no one would be left behind.

Republican legislators have said everything must be reviewed including the idea of cutting some of those those tax breaks, scaling back the social safety net, cutting government services, cutting state employee benefits… basically anything but increasing taxes so that Michigan can attract businesses.

A former state treasurer says Michigan can fix its other problems, once it’s dealt with the economy.  Doug Roberts served under Republican Governor John Engler.

“I would argue any policy, any policy debate right now is will it help or hurt reviving Michigan’s economy and that should be the fundamental question and that’s what we need because everything else will flow from it. I’m absolutely convinced that the problems we have will become easier as we put people back to work and revenues begin to increase. That is our problem.”

But, advocates for the people who don’t have a lot of money… and not a lot a lot of clout in Lansing…. say what should not be lost in the debate… is the fate of those people who have suffered most because of the dismal economy, the poor and working poor.

Lester Graham reports for The Environment Report. He has reported on public policy, politics, and issues regarding race and gender inequity. He was previously with The Environment Report at Michigan Public from 1998-2010.