Among many uncertainties about Michigan’s financial future stands one sure thing: The state tax code is going to change.
With a Republican clean sweep of the House and Senate combined with Gov. Snyder’s win, the political rancor and rhetoric may abate and work can begin to address the General Fund’s $1.8 billion structural deficit. The Republicans now own the solution.
Snyder is showing his hand on both the revenue side as he floats his ideas and on the expense side as he took dead aim on public worker compensation packages.
No surprise to anyone, the much maligned Michigan Business Tax (MBT) is a dead man walkin’, which will inflate the structural deficit until it is somehow replaced. Other tax reforms will be a big part of the package.
Film credits are on the outs along with the earned income tax credits that have delivered tax relief for low income residents. The MBT appears to be morphing into a retraction in business income tax credits that would hit larger corporations harder than small businesses.
Snyder’s been unambiguous. This is gonna hurt.
Relating this to school funding, I’ve written just recently about how the shaky state General Fund threatens the School Aid Fund. And for all the abuse it’s taken, Proposal A, the tax policy that has kept the School Aid Fund more stable than the General Fund, actually serves as a better template for Snyder. I treated this subject extensively in this post.
As an ameteur wonk, my view of Michigan’s tax structure relative to spending is that from a national benchmark view, Michigan tax rates are, by and large, middle of the pack. This report from the Tax Foundation supports that hypothesis. The major exceptions appear to be the business tax climate (thus the inertia behind the MBT reform) and Property Tax rates. Interestingly enough, Property Tax reform was the major driver behind Proposal A’s adoption. Here’s a handy overview of Proposal A.
So in Michigan’s case, the sub-prime mortgage explosion hit us very hard (given our dependence on property taxes) as well as the declines in personal income that, when combined with middle of the pack tax rates, contracted tax revenues. Note that had schools been more dependent on property taxes, such as was the case before Proposal A, this crisis would have been MUCH worse. In fact the School Aid Fund is proving far more resilient than the General Fund.
The big picture problem is that spending patterns, inclusive of public employee contracts, were predicated on the long-standing personal income levels that had once seen Michigan as a fairly wealthy state. (We’ve dropped from as high as 9th in income per capita to 37th). The predominant mindset assumed property values would always increase. So much for that. Main point is that this condition isn’t temporary. This is the New Normal.
Snyder now will bring forth proposals, either in legislation or his budgets, to reflect a cognizance of the New Normal. So keep an eye on all this because it will affect you.