Wednesday, November 24, 2010

Nothing Left to Cut: Some Facts Behind the Coming Michigan Budget Crisis

Like the Senate Fiscal Agency report on the real numbers behind Michigan's low-to-middle tax rates, the truth behind the state budget and how much we have cut in the past 10 years has so far not drawn a lot of attention in what is left of the mainstream media. Gary Olson, outgoing director of the SFA, spoke at the recent economic outlook conference at the U of M, and brought some fiscal reality with him that the "cut government spending" crowd neglected to mention in their campaign commercials this year.

Let's start with the hard one: Tax expenditures. Peter Luke has been hammering on these as well, and if anyone knows how we curb tax incentives and still be competitive with other states as far as attracting economic development, it's time to get those ideas out there.

Olson pointed to a variety of statistics, notably that tax expenditures - exemptions, credits and other tax breaks - totaled $26.2 billion in the 2009-10 fiscal year, compared to $14.1 billion in 1999-2000. The current figure is more than double revenues received from state sources.

Simply having low tax rates won't cut it, as any serious economic development official can tell you. We need incentives. Can they be trimmed back? Good question - one that can only be answered by what other states are offering. Given that many are facing the same budget problems that we are, it will be interesting to see how a bunch of Republican governors compete with each other in the coming years. Stay tuned.

The next figure to look at is the stunning drop in revenue to the state. If Dick Headlee were alive he would probably be shocked at this one.

He also pointed to the state being $8.8 billion under the revenue limit set by the Headlee Amendment after it exceeded the limit by $159.7 million in 1999-2000.

"The size of the state budget in relation to the size of the Michigan economy has significantly declined in the last decade," he said, adding that he tells legislators, "If your goal over the last decade has been to shrink the size of state government, consider it a remarkable success because it has occurred."

And still the teabaggers insist on more, even though state spending has dropped considerably below the rate of inflation...

Olson said spending from state sources of revenue went up during the decade by $578 million, or 2.3 percent, while the Detroit Consumer Price Index went up 22.7 percent.

He questioned those who say the state needs to eliminate entire programs to eliminate the $1.58 billion gap between available revenues for the 2011-12 fiscal year and existing spending.

"I've heard it all before," he said. "We've done a lot of downsizing over the last decade. I seriously doubt there's a huge amount of money to be saved from eliminating state programs."

And what does he prescribe? Keep in mind this is a guy with two decades of experience in analyzing the state budget...

The state also needs to broaden the base of the sales tax to service and could do so in a way that is revenue-neutral by reducing the rate of the sales tax, Olson said. But the 2007 debacle when the Legislature and Governor Jennifer Granholm threw together a services tax in the middle of the night may have crushed that issue for the long-term. The governor and Legislature swiftly repealed the tax, and Granholm's attempt to revive a services tax this year went nowhere.

"That needs to be done," he said. "I thought in 2007 after they botched that job it probably put that on the shelf for about 10 years."

Not so sure "revenue neutral" will do the trick in the face of many cities and school districts teetering on bankruptcy at this point, but once again we see the idea of lowering the tax rate and broadening the base brought up - something that both Governor Granholm and the Business Leaders have pushed for, but unfortunately an idea that the Legislature refused to consider. (And if you want to know how the service tax debacle went down in 2007, be sure and read this diary that explains how tax rates were held hostage by Republican leadership, who intended to make Democrats pay the biggest political price they could for their votes.)

Rick Snyder seems to think that by simply eliminating the MBT and replacing it with a flat rate corporate tax we can also eliminate the need for "tax expenditures" - but his plan seems to rely too much on magical thinking, and also would cut another $1.5 billion out of a budget that is already $1.6 billion or so short. Even if it all worked out like he thinks, it certainly would take years for it to kick in, and we need this money by next September 30th.

What to do? The DNews gives us another clue today - perhaps we can sell off state services to the lowest bidder. The Department of Human Services is one area facing a huge crisis with the retirement of thousands of state employees - 12% of its workforce - and they are scrambling to fill positions that take a year of training to learn. Snyder once again in non-committal about replacing retiring state employees...

Snyder said he will take a wait-and-see approach but is sensitive to demands generated by Michigan's battered economy.

"There are a lot of caseloads out there," he said at a recent news conference in Lansing. "People have needs, and we need to be sensitive about that."

Options under consideration include working "with third parties in the interim, or as a longer-term solution," Snyder said.

... or in other words, "privatization". Get ready, here it comes. It's debatable that privatizing services will actually save money, but chances are certain campaign contributors would love to promise us that it will.

And hey, we got this great bridge we can probably sell...