Column: Fixing state's financial framework is do-able but unlikely in 2010

Kalamazoo Gazette staff By Kalamazoo Gazette staff The Kalamazoo Gazette
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on January 17, 2010 at 7:00 AM

The pressures of an election year and the prospects of another federal bailout of Michigan’s broken budget would seem to foreclose the possibility of any serious work getting done in 2010.

Which would be a shame since the framework for an overhaul of the way Michigan taxes business and funds education is in plain sight.

That same framework would provide a more positive legacy for Gov. Jennifer Granholm and fellow lame ducks in the Legislature. In this the last of what has been a sorry eight years, they can have their careers defined by economic decline, or by successfully and creatively responding to it.

Economic forces that have made Michigan a less attractive place to do business are the same ones that leave it less able to make the investments that would make it more attractive in the decade ahead.

A state once relatively wealthy but now projected to be in the bottom 10 is seen nationally as an undesirable place to do business. At the same time, the loss of that wealth has tax revenues plummeting so there’s less money for K-12 schools, higher education, local services and infrastructure.

A solution to both problems could lie in the tax plan being pushed anew by the reform group Business Leaders for Michigan. The key is molding it in a way that satisfies the concerns of employers and education advocates, Republicans and Democrats, whose combined support is necessary to push it through the Legislature. A plan that can’t win 56 votes in the House and 20 in the Senate collects dust.

BLM’s proposal is in line with tax overhauls of the past that seek to adjust tax burdens that are out of line with other states. Businesses are taxed at high levels relative to more successful states. Consumers, unlike those in most other states, pay no tax on personal services.

Michigan takes in about $2.2 billion from a Michigan Business Tax that levies one rate on earnings and another on gross receipts. The plan would chop business taxes in half by eliminating the 2007 surcharge on tax liability and halving the tax rate on receipts. BLM argues that the top 10 states for doing business grow at twice the rate of the other 40. While the plan wouldn’t put Michigan in that top category, it moves it closer in a way that investors would take note of.

But a billion in tax cuts on top of a projected $1.6 billion budget deficit in 2011 is neither fiscally nor politically tenable. That’s why the proposal is funded with a broad expansion of the sales tax to consumer services that are untaxed now. The sales tax rate on both goods and services would drop from 6 percent to 5.5 percent. So while you’d pay a new tax on a movie ticket or haircut, you’d pay less sales tax on a new car or TV. Taxing services helps ensure that when the economy that is increasingly services based does begin to grow, so will tax revenue.

BLM’s revenue-neutral plan seeks to thread a political needle by satisfying the competing demands of businesses that want a tax cut without further damaging the funding model for schools. School advocates say that model is already broken and say revenue neutrality locks in two years of unprecedented declines in tax receipts. And even a revenue-neutral plan asks residents to accept a billion more in tax burden that’s being lessened for business by an equal amount.

There’s a politically acceptable compromise in there somewhere that would deliver the same significant tax cut for employers while providing for schools — pre-K, K-12, community colleges and universities — an updated funding base that is stable, adequate and equitable. The public would have to be persuaded that the increased taxes they’d be paying would help finance a better economic future for the state.

Other compromises will test both time and political limits, but they are also important for producing necessary budget savings. They include requiring public employees to pay more for their health care and further reducing the time felons spend in prison. Even if Congress bails out Michigan’s budget for another year, that money could rebuild state rainy day reserves that were emptied out years ago.

Crafting a measure that would deliver both a nationally recognized tax cut for business and the educated workforce required to make Michigan a wealthy state again would also help the state rectify its reputation for political dysfunction.

If nobody gets everything they want, all of the above is achievable by Memorial Day. Then they can start the campaign.

Contact Peter Luke at (517) 487-8888 or e-mail him at