Losing the Tax War

by John Lindstrom
Gongwer News Service
June 18, 2010

Whoever wins the gubernatorial race has to face the fact that he will eventually lose in one major area: he will never win the tax war. The new governor may get a few victories, but eventually defeat is assured because the voters, the businesses, the schools, the interests will never be happy with the state’s tax structure.

We have heard the word from Governor Bernero-Bouchard-Cox-Dillon-George-Hoekstra-Snyder, and it is that Michigan’s tax system is broken. And it is too high. And it taxes the wrong things. And it makes Michigan uncompetitive. And it is broken, again, really broken. And it taxes too much.

And Governor…you know, promises to fix the tax system, promises to cut it, promises to make Michigan the envy of the planet with its tax system. Promises to wage war upon it and win. Admire Governor…yeah well, because in the end he will lose.

This point arises now because Treasurer Bob Kleine this past week expressed faint hope to reporters that the tax proposal of Governor Jennifer Granholm could see action during the lame-duck session. Absent a light from on-high making the way clear for the legislature, however, Mr. Kleine’s faint hope that the state will begin to base its tax system on a more sustainable consumption model will be a long forgotten dream by lame duck.

Ms. Granholm could not win the tax war. For all his many victories, former Governor John Engler did not win the tax war. It cannot be won. We must have taxes, no one likes them, no one wants to pay them, but everyone wants cops, everyone wants schools, roads, parks. So they must have taxes, but they do not like taxes, they do not want taxes, but they want cops, they want…and the battle never ends.

Some tax changes are likely with the new governor and legislature, but unless the state’s elected leaders learn quickly how to spit someone in the eye and grin when they are punched back, little in major tax changes should be expected.

Michigan’s finances are in a mess. No surprise there. The finances of most states are in a mess. The finances of the states are, in fact, in such a mess that, as has been reported, the voters in two states (Oregon and Arizona) have voted higher taxes on themselves, and in a third (Maine) rejected a pretty sweet income tax cut in hopes of cutting the need to, well, keep cutting.

The economy has devastated the state’s budget, and every state’s budget, and in part was able to do so because Michigan, and again every state, was able to use the unprecedented good times of the 1990s to create an illusion that the state could spend more and tax less.

During the current maelstrom Michigan, and again every state, has found itself more in hock to the federal government. The danger that poses is evident in Michigan’s need, and again pretty much every other state’s need, for the federal government to approve additional Medicaid spending, which so far the Congress has refused to approve (which means an additional $500-million problem for Michigan. It also means all those states with supposed part-time legislatures that have already approved their budgets may be back in session to make major cuts to those plans).

Michigan has cut its budget, essentially by eliminating and limiting personnel and not by ending functions. That means a lot of stuff is not getting done, or getting done badly, ’cause the people needed to do the jobs are not there. That means to run government effectively the state has to do one of two things: eliminate the functions altogether or pay for them to be run properly. Which course has the state elected? If you guessed unlisted option 3 — ignore what is happening and hope somehow a recovering economy will get us out of this — you guessed correctly.

The economy is starting to show some life. It’s not good, by any stretch, but its pulse has strengthened. There are more people working, even though the unemployment rate is ungodly high still. More people working means the state will start netting more revenues. And so it has, not enough more revenues to end budget cutting, but enough more revenues to make the cuts only anguishing instead of agonizing.

If the state gets more money, it can hold off a while longer the need to make the really, really hard decisions. Because as hard as the decisions the state has made to date, they aren’t the really, really, really hard decisions about how to restructure government.

Doing that requires establishing priorities, and that means some people, people who vote, are going to be very unhappy their priorities got left out.

It is inevitable some things will be left out, because the state will not raise taxes enough to fund all that it has done before. Under the Headlee Amendment to the constitution, the state could raise taxes right now by some $8 billion before it would be forced to roll taxes back. On its own that would mean nearly double the current general fund budget.

What that would mean is the state could in one step make up all the cuts it has made to higher education so students would see tuitions cut in half. The state would spend enough to make most roads smooth as butter. And it could pay Tim Allen to personally call everyone in America and recite a “Pure Michigan” ad to them.

But would the voters tolerate an $8-billion tax increase? Ah, no. So things will have to be eliminated from the budget if we want government run better.

Even with that, there are things the state has to spend more money on to make itself more competitive. Tops among them are higher education and transportation. Future Governor whatshisname knows that, has alluded to that. Yet none of the candidates has at this point said directly what will have to happen — which is more damn money must be spent — because their campaigns will not say directly the state has to spend more money anywhere.

So what does this mean for taxes in the next several years?

There will be, we should assume, at least one big change to Michigan taxes. The surcharge now assessed to the Michigan Business Tax will in some way be ended. Whether it is eliminated immediately or more rapidly phased out will depend on a number of dynamics: who is elected governor, which party controls which houses in the legislature, what the overall budget looks like and how badly the state needs the revenue.

But politically, all the candidates concur in eliminating the surcharge and they all want the big boost that will come with the announcement the state has sharply slashed business taxes. So, it has to be concluded the surcharge will be gone, it is just a matter of when and how.

Once the surcharge is gone, it could very well be that is the only major change made to Michigan taxes in the next several years.

Look at Mr. Kleine’s faint hope that the lame-duck legislature would act on Ms. Granholm’s sales tax proposal. Is there a single political model that could be constructed indicating that happens? If a Republican is elected governor (and in late June that appears to be a better than 50-percent chance), who would think the legislature would enact such a major change before that governor takes office? The Republican-controlled Senate will immediately stop it, so that possibility doesn’t exist.

Then there is the simmering outrage a new legislature would face in January 2011 if a major tax change was enacted during lame duck. The voters would scream betrayal and the legislature would almost instantly have to repeal the change.

Now, we are into the new legislature and governor, and that means sorting out budget priorities, sorting out what gets cut and does not, and how the state’s revenues are deployed. Since few successful politicians will arrive at the Capitol saying the state has to raise taxes, balancing the budget with the current tax structure will be painful enough. And with several gubernatorial candidates calling for major cuts to taxes, honest budget balancing could be a long political funeral for a number of legislators.

Assume that, unless the state is willing to make remarkably dramatic cuts to the budget, which in turn means refusing federal funds because it will have to eliminate the state matches for a whole lot of programs, taxes are not reduced by the billions of dollars. A few hundred million in cuts is a reasonable expectation, and most politicians will be willing to call that a victory.

So then, does that mean the state makes major changes to its tax structure so that it generates the amount of money it will but in a more fair manner? Oh maybe, but…remember that stiff martini? Pour yourself another one.

Much as people hate the taxes they pay, they fear as much or more the taxes they may get.

Remember the Single Business Tax? Everyone hated it, demanded it be ended, screamed it was an impediment to business. Never mind that in more than 30 years the rates never went up (only the beer tax can claim to beat that) and that it was one tax that absolutely most businesses never paid. Everyone hated it, and cheered when it was eliminated. Which means the Michigan Business Tax is now beloved by all, right? No one wants to change the MBT, right? It’s just a portrait of a beautiful tax, right?

Right. So no major changes in taxes in the next four years? Probably not, except…

Should America and Michigan see an economic miracle, and that would be a recovery 1990s style, then, yes, major changes to taxes will occur. Pray, if that happens, the state also makes big changes to its spending priorities, because the state will dig its own grave for the next inevitable downturn.

Governor…that guy, knows this, one hopes. Governor…you there, is willing to accept the inevitable defeat, because it is inevitable. Must always fight on, Governor, and must always lose because taxes always win.

John Lindstrom is publisher of Gongwer News Service. For nearly 50 years in Michigan, Gongwer News Service has provided independent, comprehensive, accurate and timely coverage of issues in and around Michigan’s government and political systems. For subscription information, including a free trial, visit Gongwer online.