Strong on Tax and Fiscal Policy
by Joseph G. Lehman
March 19, 2011
What a governor does means more than what a governor says or what kind of people he brings to his team. Gov. Rick Snyder has stated intentions and filled appointments, but he must be judged by his executive actions and signatures on bills. At this early stage in his term, Gov. Snyder’s actions are painting a picture of a chief executive who could be quite strong on tax and fiscal policy.
His most consequential act so far has been the introduction of his state budget. Gov. Snyder did three important things when he sent his plan to the legislature only seven weeks after taking office. He led with his strength as a CPA-minded business executive, he announced his most urgent priority, and he gave momentum to truly beneficial changes.
His budget reduces spending by $1.2 billion, cuts taxes by a net $254 million in 2012 and simplifies the tax structure. In all three areas, it’s a significant departure from current, failing policies, and the immediate net fiscal effect is to close the projected $1.8 billion deficit.
The spending reductions allow the state to live within its means without extracting more from the ailing private sector. Not only would a tax increase have been politically unpopular, but my colleagues estimate that Gov. Jennifer Granholm’s proposed sales tax hike, for example, would have eliminated 30,000 more jobs. Gov. Snyder’s proposed $1.1 billion business tax cut should help spur the re-creation of some of the more than 850,000 jobs we lost in the last decade.
The part of the budget with the most potential long-term impact, however, is the tax simplification. Gov. Snyder’s plan largely reverses more than a decade of failed attempts to create jobs through a constellation of special tax deals, credits, gimmicks and subsidies targeted at the ever-changing industries du jour.
Loved by the politicians who make friends by giving away goodies — and the companies that love to get goodies — programs like the Michigan Economic Growth Authority and the film subsidies have not worked. Ironically, Republican Gov. John Engler started us down this road with MEGA’s creation. Gov. Granholm then doubled down on his unsuccessful initiative, creating boutique incentive programs for film, battery, solar, windmill and other industries.
While officials churned out news releases touting Michigan’s aggressive inducement campaigns and award-winning commercials, we bled more jobs than any other state. The more we bribed certain companies to come, the more our other employers found Michigan too expensive a place to keep people on the payroll.
Scaling back the incentive programs and removing a host of special exemptions from the Michigan business tax will channel companies’ ingenuity and wealth into creating jobs, not lobbying for loopholes or currying favor with politicians. It sends a signal to businesses everywhere that Michigan is a place where everybody knows the rules, and everyone plays by the same rules, which has not been our approach since at least 1995.
The few remaining business subsides remaining in Snyder’s plan would go through the appropriations process, not the tax code. This is a huge improvement because it subjects each subsidy to public scrutiny before (not after) the deals are done, and requires lawmakers to take stands on individual deals.
The governor kicked a hornet’s nest when he proposed eliminating Michigan’s generous income tax exemptions on pension income, but the idea is entirely and admirably consistent with his approach on the MBT: keep the rate low and treat everyone pretty much the same.
Politically, it is a tough sell. Those whose taxes go up because of it won’t care if his plan is a net tax cut. If he ends up having to compromise on this point, he has plenty of room to cut spending elsewhere in the budget.
For instance, my colleague James Hohman has calculated that if public-sector workers’ benefits were merely benchmarked to private-sector averages, the state, public schools and municipalities would save $5.7 billion each year. That’s enough to close the deficit, eliminate the MBT entirely, fix the roads and still have hundreds of millions of dollars left over. And it can be done without cutting a single government job, wage or program.
One of the first bills signed by the governor spends $25 million on the Pure Michigan tourism promotion campaign. The tourism industry won’t fund the program, even though its officials claim the ads are a big moneymaker. If the going gets tough on the budget, Gov. Snyder may wish he had that $25 million to fix potholes, pay pensions or train police.
However, Gov. Snyder made an outstanding decision when the Department of Human Services reversed a policy of his predecessor that enriched unions at the expense of low-income children and their caregivers. The Mackinac Center has represented three workers in a lawsuit against the state seeking an end to this collection of millions of dollars in so-called public-sector union dues from private day care owners and workers. His decisive move frees up to 40,000 workers from a union if they don’t want to associate with it, and stops letting the union use the state as its bagman.
Another decision, to combine certain regulatory and permitting functions in a single department, missed a big opportunity. Environmental permitting should have been brought into this new department to streamline the process and make it more responsive to the needs of job creators. Unless the Department of Environmental Quality becomes at least as concerned with protecting the economic ecosystem as it is with protecting the rest of nature, the agency will act as a check on our growth that could offset many of Gov. Snyder’s positive changes.
One cannot address the structural challenges of Michigan’s governments without confronting government unions. Gov. Snyder is taking a different approach, at least in public, than some of his fellow Republican governors. The emergency financial manager legislation he signed is a step in the right direction of balancing unions’ abilities to push schools and municipalities — and their taxpayers — into bankruptcy.
He should not stop with the EFM legislation. Several states do not confer collective bargaining privileges on government unions at all, and Michigan could become one of them with an act of the legislature. Short of that, the governor could push for legislation that would create open government employment, where no union could get a public employee fired just because he or she doesn’t want to support a union. Another option would be to simply stop performing the courtesy of collecting dues for unions. Unions that have to collect their own dues from members have stronger incentives to serve them well.
Gov. Snyder has had a promising debut, especially on fiscal and tax matters. It’s clear he’s the sort of person who is honest with himself about what balance sheets and cash flow statements say. He views things through a fiscal lens, which is a good place for a governor to start. To encourage job growth and permit fiscal breathing room in the future, he must be equally strong on regulatory and union matters.