It was the day after Windsday, but a blustery Thursday in February will not soon be forgotten in Michigan.
We all remember A.A. Milne’s story, right? This zany day in the Hundred Acre Wood saw Pooh getting himself caught in the honey pot, Piglet was flying around like a kite, only to return to terra firma to find that his house had been given to Owl by Eeyore. Meanwhile Pooh got a hero’s welcome when he really hadn’t done much to deserve it yet.
So where did Snyder’s budget winds blow things? On the expenditure side of the ledger:
- The Center for Michigan calculates that the proposal only reduces state spending by less than $135 million. On a combined General Fund/School Aid Fund budget of $46.6 billion, that’s less than a 0.3% spending reduction. So when you hear people talking about “cuts”, by and large this is a misnomer. Shift is a more accurate description.
- Education spending took the biggest hit – over $920 million. We’ll look at this more closely below.
- Despite reams of data pointing out problems in this area, corrections spending actually increases in Snyder’s budget. This has me more depressed than Eeyore. No expenditure in the General Fund consumes a greater proportion than corrections. Taming a budget without addressing your greatest, and growing, expense is a little baffling.
- There’s a 9% reductions in revenue sharing with municipal governments. In total dollars, that $96 million is a mere 10% of the dollar value of the education reduction.
- The budget assumes $180 million in state worker concessions, but meanwhile allocates $200 million for future pension obligations. This is a good example of the kind of shifting common in this proposal.
On the tax and revenue side:
- The Center for Michigan again reports that in the second year of Snyder’s two year budget, tax revenues will actually increase 2010-11 levels by nearly $300 million, illustrating that absolute reductions in spending are not really happening. We’re into that mode of addressing projected shortfalls as opposed to true absolute reductions.
- Business tax revenues, on a net basis, are being reduced by $1.2 billion (a tidy 50%) but are more than offset by a…
- …whopping $1.8 billion personal income tax increase, punctuated by a new pension tax and elimination of lower income tax credits.
What’s key to recognize, particularly in relation to education spending, is that if you are a Michigan resident your taxes are not going down – and more than likely are going up.
To be fair, Snyder’s strategy is to spur economic growth, and job growth specifically, to bridge the state’s structural deficit by making Michigan one of the most business tax friendly states around. Ultimately as new jobs materialize, the taxes which he’s raised or kept the same – income, sales, use, gas, liquor/beer, etc. – will yield higher returns as more people have an income (and thus pay income taxes) and spend their wages (thereby increasing consumption tax revenues).
Back to the future in the Hundred Acre Wood
If the above sounds familiar, it should. This has been a frequent topic of mine in regards to pointing out the segmentation of the state’s General Fund from the School Aid Fund, the honey pot of this allegory.
The last Michigan governor to propose this kind of sweeping tax reform, John Engler, did so by delivering true tax relief that Michigan residents regretfully forget, namely through massive Property Tax reductions and increased reliance on consumption and income taxes. All the howling that K-12 school districts have been doing over the last 6 years was the result of capped consumption tax revenues scaling down with the state’s loss of wealth.
Attention, taxpayers of Michigan, your tax contribution to K-12 budets were going down all that time. Did you enjoy it? Read this April, 2010 post while you crack the champagne and reminisce.
To illustrate the point locally, in real dollars Grosse Pointe Public School’s General Fund spending is 18% lower than just five years ago. Despite all the harping about teacher salaries, pensions, privatization and what-have-you Proposal A is about the most taxpayer friendly legislation imaginable. Now in Snyder’s proposal, our local General Fund revenues will decrease by another $4 million.
State legislators, like Pooh with a rumbly in his tumbly, discovered that the School Aid Fund revenues were recovering quicker than the broken General Fund. They started to dip into the honey pot last year to bail out community colleges. Snyder is now raiding the rapidly recovering School Aid Fund (which indexes more accurately to the state’s true economic condition) to release half of the $1.8 million of pressure felt by the General Fund. The irony of a recovering School Aid Fund, and Proposal A, enabling this kind of relief is quite rich.
Snyder, like Pooh, has gone and stuck his whole head in the School Aid Fund honey pot at the very moment K-12 schools saw some light at the end of the tunnel. Instead the combined effect of a $470 per pupil cut plus a massive increase in mandated retirement costs will send scores (perhaps hundred) of districts into the red. K-12 districts in Michigan have months of blustery days ahead.
Meanwhile, Community Colleges and University, despite their ability to increase revenue through higher tuition and increased enrollment, saw their budget houses get blown away just like Owl’s. They now share a house with the K-12 budget, despite K-12 schools (like Piglet) having spent years there all alone in an austere tree-house. But do we think that colleges won’t take this as an opportunity to raise tuition anyways? Oh, d-d-dear, dear. Christopher Robin himself isn’t that naive.
Snyder clearly has a better strategy than Pooh’s blind drift through the Hundred Acre Wood with his head stuck in the honey pot. Like Pooh, he most certainly should not be heralded as a hero on account of his tax proposals for the average citizen. Granholm, politically, could never have even brought this plan forward. But the characteristics of Snyder’s plan are similar to Proposal A’s mechanics. And despite the painful slide down as Michigan residents’ taxable income fell, it accurately mirrored our true economic condition. There’s a good deal of logic there.
Nevertheless, the current legislature will be tested by Snyder’s plan because they may find themselves blown away and looking for new homes themselves. We’ll see if Michigan residents are really ready for this change. They may have voted for it the last couple of Novembers, but did they know what it meant? Time will tell.
Snyder should get credit for showing real political courage – holding at bay ideologues on both the right (who must swallow personal tax increases) and left (who swallow cuts to their core constituency). I’m not sure which are the Heffalumps and which are the Woozles, but neither can declare victory. Businesses are the undeniable winners for now. The trues test of Snyder’s plan is whether what’s good for business is good for Michigan.
The hero’s welcome for Rick should be postponed until his plan, and those businesses benefactors, actually creates jobs. And even then the end result is stable to increasing income and consumption tax revenues. Should the party actually take place, it won’t be of the tea variety. Snyder’s plan is most certainly not that.
In this respect, I’m personally glad to see a little honey being served with our tea.