Michigan's big budget hole

Dec 15, 2010

The incoming governor and new leaders of the legislature know they have a lot of work ahead of them.  The State of Michigan’s finances are a mess.  After a decade of cuts to education, prisons, arts, tourism and everything else, it appears more cuts are coming.  Lester Graham with Michigan Watch reports it’s not clear what the new government leaders are going to do, but they say it begins with some tough decisions about the budget.

This week, some of the incoming legislative leaders talked about the next session of the Michigan legislature at a summit jointly held by Business Leaders for Michigan and the Center for Michigan.

The legislative leaders say there’s one issue above all others.  Rick Hammel, the incoming House Minority Leader says:

For me, it’s the budget.  It’s the budget.  It’s the budget.

He says he and his fellow-Democrats are prepared to work with the Republican majority in the House to make necessary changes.  He says patching up the budget to limp through another year is not enough.

I mean, we’ve been band-aiding this budget for a long time.  And, I’ve sat in the meetings and we’ve discussed this and nobody wants to make these horrible cuts that we’ve made.  I don’t care what party you’re from, nobody wants to do it.  But, at some point, we have to balance the budget.

But to a large extent, the Democrats won’t have a lot of choice except to follow the lead of the Republicans.  The Republicans have a majority in the House, a super-majority in the Senate.

Jase Bolger will be the Speaker of the House.  He says he and his fellow-Republicans are ready to make cuts to the budget.  And he says they’re ready to make changes to the tax structure too.

“I think there’s an enormous appetite in our caucus for tax reform.  Instead of picking one particular plan at this point, however, I think we’re looking at must lower and simplify.  I think simplification is key.  I am not a believer in tax credit form of economic development.”

But there is one particular plan at this point.  Governor-elect Rick Snyder said throughout the campaign his plan is to scrap an unpopular business tax and an additional surcharge that the previous legislature tacked on to it.

“It is time to eliminate the Michigan Business Tax.  I propose replacing it with a flat six-percent corporate income tax.  Let’s take a job-killer environment and start creating jobs.  You take federal taxable income times six-percent, get a number, write a check, go run your business.  Simple, fair and efficient.”

A simple, flat tax.  People like that idea.  Companies want some kind of certainty about what they’re going to being paying in taxes.  The theory is:  it’ll draw businesses and jobs to Michigan.  There’s one problem…  it’ll bring in a lot less in taxes… about a billion-and-a-half dollars less.  Add that to the one-point-six billion hole already predicted… and… well… we're looking at more than $3-billion.

At a Michigan Radio/Center for Michigan event, we asked Governor-elect Snyder’s Chief Strategists, Bill Rustem about that.

LG:  We’ ve got this $1.6 billion hole and then we’ve got tax restructuring that we’ve heard about from the Governor-elect that would mean another $1.5 billion shortfall.  Now, we’re talking about $3-billion, if it happened soon.  That doesn’t sound as if it’s working in the right direction.

BR:  “Well, you know, things are going to evolve over time, uh, Lester.  I mean, the question of what kind of a tax system does Michigan ultimately have is one that’s going to have to be addressed over time.  And you’re going to see some proposals that aren’t going to lead to a $3-billion hole.  He’s raised questions about some of the tax credits we’ve given, some of the tax credits we’ve given to the film industry, for example.  Tax credits on batteries.  Tax credits on tax credits on  tax---

LG:  Does that add up to a billion or more?

BR:   “Absolutely.  Absolutely.  So, there’ll be a proposal that involves significant restructuring of that tax system.  Now, that’s not to say that it’s not going to be tough.  It is going to be very tough next year.

LG:  Tough on whom?

BR:  “On everyone.  Tough on everyone.    Sometimes, the cure--  when you’re very sick, and Michigan is very sick, the cure makes you a little sicker before you get better.  And that’s the way we’ve got to look at this going forward.”

So, the hope is Michigan will get well soon.  That will only happen if the economy in the state gets better after swallowing a bitter pill.