Straight Talk on the State Budget

Gary Olson, who is retiring as the head of the Senate Fiscal Agency, has some sound ideas on how to balance the state budget. He laid them out last week as reported by Worth reading. According to the article his recipe is primarily reducing public employee and retiree compensation and raising taxes mainly by eliminating all sorts of special tax breaks.

Why those two areas? Because they are where policy makers the last decade, on a bi-partisan basis, went over board. That’s right tax cuts and higher compensation, not spending – other than corrections and Medicaid – are the actions that have left us with a structural deficit of something like a billion and half today and likely to grow.

As Olson points out the average total cost of a state employee, a figure that includes benefits, rose 58.2 percent from $54,412 to $86,100 from 1999-2000 to 2009-10. Over the same period, the average personal income for individual Michigan residents grew 24.1 percent. On taxes – contrary to all you read and hear – it was a decade of tax cuts. Largely because of special tax breaks. Olson calculates during that same 10-year stretch, the amount of tax expenditures the state distributed to businesses and individuals – which includes tax breaks, credits and deductions – rose from $14.1 billion to $26.2 billion. So that Michigan’s total tax revenue which equaled 9.55 percent of residents’ personal income in 1999-2000 by 2009-10 was down to 6.96 percent.

With few exceptions Michigan is not providing too many public services. If anything we have cut too much the last decade. Particularly support for basic local services and higher education – the items in the budget that we believe are most important for growing the Michigan economy. Olson offers a path – by focusing on compensation and taxes – that can get us back to a structurally balanced budget and the ability to provide both public services that improve the quality of life of Michiganians and public investments that help grow the economy. It’s a path worth pursuing.

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Lou Glazer

Lou Glazer is President and co-founder of Michigan Future, Inc., a non-partisan, non-profit organization. Michigan Future’s mission is to be a source of new ideas on how Michigan can succeed as a world class community in a knowledge-driven economy. Its work is funded by Michigan foundations.

This Post Has 2 Comments

  1. Tax expenditures are indeed a major reason for the collapse of Michigan state revenues but so are tax cuts. Don’t forget that the income tax rate today is less than it was at the end of the Engler era and the business tax (without all of those incentives) was based on a formula determined to be “revenue neutral” after a $600 million cut the year before.

    Total compensation for public employees, though higher than the “average” private worker is below comparable work in the private sector when adjusted for education attainment and experience. It surprises me that you would call for increased educational attainment as a sollution for Michigan’s falling per capita income and then suggest that incomes should not be based on educational attainment.

    1. As we have written before we don’t believe public employees are over paid. And we certainly believe they do important work. But we have a large structural budget deficit that needs to be fixed and fixed in a way that helps grow the economy. We believe public investments are far more important to growing the economy than cutting taxes. To find revenue for those public investments the levers that seem to us to be the best of the worst – none of the choices are good – are raising taxes and lowering the cost of delivering services – much of which is labor costs. Olson’s data supports that choice in that it suggests they are the two areas where we were the least constrained the past decade.

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