Most of the questions I have received have been about how well the Governor’s budget will help in growing the Michigan economy. In addition there also is the question of how well the proposal tackles the state’s structural deficit. They both matter.
In terms of dealing with the deficit I give the Governor high marks, in terms of using the budget to grow the Michigan economy far less so. Let’s start with what is to be commended:
• The willingness to eliminate the deficit without gimmicks.This is the most serous proposal we have gotten over the decade we have had a chronic deficit. It’s about time!
• Broadening the income tax. Particularly taxing pensions. Courageous and necessary.
• Eliminating most of the special tax breaks for specific industries. Particularly the film tax credit.
• Reigning in health care costs, without reducing services that Medicaid funds. In a climate when cutting programs for the poor is rampant the Governor deserves lots of praise for preserving the health care safety net.
• Through a variety of devices – both carrots and sticks – taking on unsustainable state and local employee compensation, particularly benefits.
If these were the basic pillars of a budget designed to deal with the structural deficit it would be quite good. A balance between tax increases and spending cuts, including public employee compensation. But, of course, that is only part of the Governor’s proposal. He – like us – believes the budget should also be used to grow the Michigan economy. His strategy: a big business tax cut. Something like $1.8 billion. Larger than the deficit he inherited.
As we have written repeatedly there is no evidence that low business tax states, states that tax businesses based on profits rather than gross receipts and/or those that only tax C corporations have better economies. For every state with some combination of these features with a strong economy there is a state with the same features and a weak economy. And the reverse is true: some states without these features with both strong and weak economies.
But ultimately what is most troubling is not the big business tax cut. What is most troublesome is that the Governor has proposed a net $200 plus million cut. Tax cuts haven’t helped the economy the last decade and aren’t going to help going forward. Ultimately as we wrote previously we need a tax increase to at least partially reverse a decade of giving away our tax base. But in this political climate revenue neutral would have been the right balance.
And the Governor would have had business support for that kind of approach. A better idea was the business tax reform plan of Business Leaders for Michigan. The CEOs of Michigan’s largest corporations proposed a far more modest and balanced approach to reforming business taxes. Eliminating the MBT surcharge and other changes and offsetting the cost dollar for dollar with a sales tax on consumer services.
Why is revenue neutral now, and a net tax increase ultimately, important? Because without more revenue, funding the public investments that will best help the economy is impossible. In fact we will continue to disinvestment in them. Which, of course, is what the Governor has proposed. His education cuts are broader and deeper than before; larger cuts to universities and, for the first time, real cuts to k-12. And he continues the decade long onslaught against revenue sharing, which makes it more difficult for local governments to provide the quality of place that is key to retaining and attracting talent.
The big picture is that Governor Snyder’s budget continues the now decade-long pattern of his two predecessors: tax cuts accompanied by cuts in higher education and support for local government. It is a strategy that hasn’t worked the last decade and won’t in the future. In an economy increasingly driven by talent the strongest levers available to states to grow the economy are human capital development and quality of place. Those should be the budget priorities.