A budget to grow the Michigan economy

Governor Snyder will unveil his budget tomorrow. It will set the direction of state policy for years to come. The public conversation about his proposals will be about balancing the budget – eliminating a General Fund deficit of something like $1.8 billion. But that is the wrong metric.

Just balancing the budget is not enough.  We need to pursue an agenda to recreate a high prosperity Michigan. We can either adopt budget priorities that align with the new reality that Michigan is now one of the poorest state in the country or we can use the budget to reverse the trends.

For us which path to follow is clear: we should use the budget – state tax and spending policies – to once again put Michigan on the path back to prosperity.  As we laid out in our A New Agenda for a New Michigan that means making public investments in preparing, retaining and attracting talent the budget priority. Specifically it means reversing a decade of decline in higher education funding and helping create an attractive quality of place – particularly vibrant central cities – with increased funding for basic services and key amenities like transit, the arts and parks/outdoor recreation. (Our framework for higher education can be found here and for quality of place here.)

Governor Snyder in his campaign 10 Point Plan and in his State of the State address made the case that these are important components in his plan to create Michigan 3.0

Now comes the hard part: paying for it. To get there requires a combination of spending cuts in low priority areas, reductions in current and future public employees and retirees compensation and tax increases.

The Governor will almost certainly lay out plans for reducing state and local government labor costs, spurring local government and school consolidation and structural reforms to reduce the power of public sector unions. We need to make substantial progress on each. We need a public sector that can provide quality public services at a lower cost.

We also need higher taxes. Without it we will not produce the revenue needed to make the public investments that can help grow the Michigan economy. The reality is that for the past decade on a bi-partisan basis we have systematically given away the state’s tax base. The claim was that we needed lower taxes to grow the economy. It didn’t work.

Contrary to conventional wisdom, the reality is state taxes are taking a substantially smaller proportion of Michiganians income today than in 2000. And over that period our economy has gotten substantially worse. In 2000, when the state had an unemployment rate of around 4% and was the 18th most prosperous state in the country, state taxes were about 9 1/2% of personal income. Today, with an unemployment rate of nearly 12% and we are the 37th most prosperous state, state taxes are a little less than 7% of personal income. If state taxes were at the 2000 level of personal income we would have $7 billion more in revenue.

No one is advocating that we raise taxes back to the 2000 level. But reversing the trend and regaining some of the lost tax base is essential to funding the public investments that matter to the future of the Michigan economy.

The danger, of course, is that we continue to cut taxes. The state already has $1.0 billion in enacted additional tax cuts that come on line over the next few years. And the Governor’s plan to replace the MBT with a 6% profits tax is estimated to cut revenues by another $1.5 billion. We have more than a decade of experience to know this is not the path to Michigan 3.0.

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