Michigan Legislature Approves Income Tax Hike, New Sales Tax

Michigan Legislature Approves Income Tax Hike, New Sales Tax
December 1, 2007

In the early morning hours of October 1, while Michigan's state government was officially in the process of shutting down for lack of a legal budget, a few Republicans essentially capitulated and gave Democrat Gov. Jennifer Granholm a $1.5 billion hike in taxes.

The deal included an income tax rate hike from 3.9 percent to 4.35 percent and a new 6 cent sales tax on a wide variety of personal and business services.

In exchange for supplying tax hike votes, Republicans acquired some modest school employee health insurance and pension reforms and some even more modest (and yet to be identified) spending cuts.

$1.75 Billion Gap

At issue was a $1.75 billion gap between the amount lawmakers wanted to spend in fiscal year 2008 and the revenues they expected to collect. The state's Senate Majority Leader, Michael Bishop (R-Rochester), originally offered to support a tax hike provided the state cut spending more than it raised taxes. It didn't play out that way. The Senate voted 20-19 in favor of the tax hikes.

In the Democrat-controlled House, the measure passed by a 57-52 vote. Two Republicans--Chris Ward of Brighton and Ed Gaffney of Grosse Pointe Farms--voted for the tax hikes. Three Democrats--Lisa Wojno of Warren, Martin Griffin of Jackson, and Mike Simpson of Liberty Township near Jackson--opposed the measures.

House Minority Leader Craig DeRoche (R-Novi) complained to the Detroit Free Press, "This was a vote for bureaucracy and special interests. This is one of the largest spending sprees in Michigan history. It is a 10 percent increase in the size of the bureaucracy."

Gaffney explained his vote for the budget by telling the newspaper he was "not happy with what I did" but said it needed to be done to "break the logjam and put us on a course to keep government open."

Economic Basket Case

Michigan has been in a one-state recession for years. It has the nation's highest unemployment rate, at 7.4 percent statewide and a Great Depression-like 15.1 percent in Detroit, and was the only state whose economy shrank from 2005 to 2006.

The state is also bleeding people--and their money and talent--to other states. Budget critics had hoped the state's poor economic performance would dissuade legislators from voting for a large tax hike out of fear it would further sink the economy.

Granholm and the legislature have relied in the past on a cigarette tax hike, fee increases, and accounting gimmicks to resolve past budget shortfalls--at least on paper. The accounting changes were hardly permanent fixes and ultimately needed to be addressed.

On September 27, Granholm warned of a possible government shutdown, saying, "Some Republican leaders in the legislature said they could solve our almost $2 billion budget deficit with cuts alone. But even their own members refused to go along. Understandably, they couldn't vote to take thousands of police officers off the streets, to let class sizes explode in our schools, and to see college tuition rise beyond the reach of Michigan families."

Gov't Employee Pay, Benefits

After the votes were counted, Sharon Parks, vice president of policy for the Michigan League for Human Services, said in a statement, "It was a nail-biter, but in the end, lawmakers and the governor deserve credit for averting a disastrous, cuts-only solution to Michigan's historic budget crisis." Parks added, "Tax cuts from the 1990s are at the heart of this problem."

But Gary Wolfram, Munson Professor of Political Economy at Hillsdale College and a former deputy state treasurer, warned, "The budget deal was driven by protecting the salary and benefits for the existing government employees and in the long run will further dampen the flagging Michigan economy."

Only Minor Reforms

The reform bills that were attached to the tax hikes redress some fiscal malpractice in school employee benefits packages, but they do not make the changes necessary for Michigan to recover from its unique economic malaise, according to the Mackinac Center, a Midland, Michigan-based research institute. For instance, a defined contribution pension system for school employees would have been transformational but was not considered by lawmakers, according to Mackinac.

The package of reform legislation would:

 

  • limit the ability of school employees to retire early with a full pension and health insurance;

 

 

  • make it easier for school districts to seek competitive bids on employee health insurance;

 

 

  • limit "double dipping" by retired school employees who return to work as "contractors" collecting both a salary and a pension; and

 

 

  • repeal a prohibition on contracting out mental health services in state prisons.

 

Taxpayer Alliance's Influence

The tax hikes might have come much earlier were it not for the work of a new taxpayer organization, the Michigan Taxpayer Alliance (MTA), run by Leon Drolet, a former state legislator. Drolet launched MTA in February and has spent the past seven months threatening tax-raising legislators with recall campaigns.

Drolet has singled out "RINOs"--"Republicans in Name Only"--for special attention.

Drolet's work changed the dynamic. For a while legislators became more afraid to make themselves a recall target than to buck the powerful special interests seeking higher taxes. The special interests won the battle, but Drolet is now organizing recalls of some of the most vulnerable tax-hikers.


Michael LaFaive (lafaive@mackinac.org) is director of fiscal policy and Jack McHugh (mchugh@mackinac.org) is legislative analyst at the Mackinac Center for Public Policy in Midland, Michigan.