Shortsighted tax policy decisions by Michigan lawmakers have created a budget shortfall of $325 million in the current fiscal year, despite growth in the state’s economy.
Because Michigan must balance its budget every year, cuts will be made in the state’s General Fund, the major source of funds for health and human services, higher education and public safety – before the end of September. The 2016 budget, scheduled to be released by the governor on Feb. 11, has an additional revenue shortfall of $532 million.
This was the consensus of state economic and fiscal experts who met with lawmakers last week to determine how much the state has to spend for the remainder of this year and the upcoming year. They all agreed that although the economy is growing, revenues are not following suit.
At first blush, it is difficult to understand how state revenues can be dropping so quickly in a time of economic growth. One of the justifications for the 80% cut in business taxes approved by the Legislature in 2011 was that lower taxes would attract new businesses, create jobs, and ultimately increase state coffers by spurring economic growth.
So what happened? Why the budget gap?
- Business tax cuts don’t grow the economy. With the 2011 changes, taxes on businesses were cut by $1.6 billion, placing Michigan 49th in the U.S. for business tax contributions to the state. Michigan businesses are now the source of only 2% of total state revenue, despite the fact that employers rely on many essential state services, including police and fire protection, the roads and bridges needed to transport their products, and a good educational system that can create the workforce they need. A major cause of the state’s current budget problem was the deep cut in business taxes in the face of known outstanding business tax credits that are expected to be a drain on the budget for many years to come. Net business refunds could exceed $680 million in 2015, and rise to more than $800 million in 2016.
- Tepid economic growth. Michigan suffered a 10-year recession from 2000 to 2010, and while the state economy has strengthened in the last several years along with the rest of the nation, we have not yet regained lost ground. The state has recouped less than two-thirds of the jobs lost during the recession, and too many of those jobs are low-wage. And, while Michigan’s unemployment rate has dropped significantly, much of that decline can be attributed to nearly 90,000 discouraged and other workers leaving the labor force.
The state budget director has made it clear that there will be “real cuts.” We should be clear when we talk to our lawmakers that those cuts are the result of tax policies that have benefited Michigan businesses, but have not led to economic recovery for all of the state’s citizens. Government restructuring and efficiencies, while commendable if they can increase opportunities for families who are struggling to make ends meet, are not going to fill the gap.
– Pat Sorenson