State Financial Aid Leaves Adult Learners Behind

 

Michigan needs to revamp its financial aid system to ensure that adult learners can build their skills, get a job and become economically secure.

Michigan’s job market is changing. For decades, many individuals became employed in the manufacturing sector immediately after graduating from high school at age 18, built up their skills on the job, and attained a livable wage with which they could support their families and retire with a pension.

Today, rather than teaching needed occupational skills on the job from “square one,” most employers who pay a livable wage expect their new hires to already possess those skills at some level. Sometimes prior experience is sufficient, but for many workers the attainment of required skills must be signified by a recognized credential such as a degree, license or certificate. These credentials are most often attained through completion of a postsecondary program at a community college, technical school or university.

Many workers find themselves needing to acquire new marketable skills with the expectation that doing so will lead to re-employment, higher pay or more job security. Some such workers may have been laid off, others may be trapped in low-wage jobs, and still others may be re-entering the workforce after an extended time as full-time homemakers. Many such individuals do not possess a postsecondary credential and will have a difficult time in the labor market (see Appendix 1).

 

Unfortunately, tuition has increased at community colleges by 31%, though it still compares favorably to other states. Universities increased by 49% since 2005, and Michigan’s public university tuition is the sixth-highest in the nation (Fig. 1). Due to the rising costs, these older workers often need financial aid to help pay for their training. Each year, more than 100,000 (and sometimes more than 150,000) individuals over age 30 in Michigan fill out the Free Application for Federal Student Aid, or FAFSA, which is also used to determine eligibility for state as well as federal aid. (Fig. 2).

 

 

 

 

 

 

The Problem

The decision to get trained in new skills is often made more than 10 years after graduation from high school. While state financial aid helps many students of traditional college age, there are no state financial aid programs to help students attend public community colleges or universities if they have been out of high school for more than 10 years. Two of the three existing grant programs explicitly exclude such individuals from eligibility, and the third is available only to those attending a private, not-for-profit institution:

Tuition Incentive Program: Eligibility rules require applicants to apply prior to high school or GED completion and before the 20th birthday, and the award must be used within 10 years of high school or GED completion—effectively preventing anyone older than age 28-30 from using the award.

Michigan Competitive Scholarship: Workers are ineligible if they are out of high school for more than 10 years, preventing students who graduated “on time” at age 18 from using the award once they pass age 28.

Michigan Tuition Grant: Workers and parents of any age are eligible, but their postsecondary education must be at a private not-for-profit institution. It is not available for use at community colleges, which offer programs specifically designed for students who are working or raising families (Fig. 3).

 

 

 

 

 

 

 

 

 

 

In addition, none of the three current grant programs are available to students enrolled less than half time or who are in short-term occupational programs. Students who are juggling employment, family and school must often go less than half time or enroll in a short-term program due to having to work and care for family members. As discussed in a recent paper by the Working Poor Families Project, while low-income adult students are likely to need employment to support their families and finance their education, working more than a few hours at a job can often result in lower grades and even dropping out. Not having financial aid may discourage adult learners from going to school less than half-time.1

In 2010, the Legislature eliminated a number of grant programs that were available to adult learners: the Adult Part-Time Grant, the Michigan Educational Opportunity Grant, the Michigan Nursing Scholarship and Work-Study. This may have been a factor in the 31% decline in FAFSA applicants age 30 and over for school year 2013-14. (See Appendicies 2 and 3).

It should be pointed out that there are employer-sponsored training programs in some areas of the state that are of low cost or no cost at all to the student. Michigan supports such programs through its Skilled Trades Training Fund and there are other programs available in some areas as well. However, for older working students who are in non-employer-based programs at community colleges and universities, there is no state financial aid available.

Policy Recommendations

Michigan should do the following to make it easier for adult learners to receive financial aid:

1.  Make need-based grants available to older workers by

a) reauthorizing funding for either the Adult Part-Time Grant or the Educational Opportunity Grant, both of which were specifically designed to serve adult learners in a wide variety of circumstances, or

b) modifying the eligibility rules of the Michigan Competitive Scholarship and/or the Tuition Incentive Program to allow older workers to qualify and to allow the money to be used for less than half time enrollment or for short-term occupational programs.

2. Implement a Work-Study program that subsidizes academically relevant work for low-income adult students while paying a livable wage. Studies show that working students are less likely to drop out or suffer academic setbacks if their work is related to their courses of study. Although the traditional Work-Study program was ended in 2010, Michigan could replace it with a carefully targeted program that connects employment to academics. (For more information, see the Working Poor Families Project paper Earn to Learn: How States Can Reimagine and Reinvest in Work-Study to Help Low-Income Adults Pay for College, Enhance Their Academic Studies.)2 

Conclusion

Helping older workers attain new skills leading to in-demand jobs will help grow Michigan’s economy. With the layoffs in manufacturing and other sectors, many workers with families are unemployed, under­employed or earning less than what they used to. This results in less tax revenue for the state and less economic stability for the families. Michigan should provide grants that enable working parents to get skilled jobs. It is good workforce development.

Endnotes

  1. Alstadt, D., Earn to Learn: How States Can Reimagine And Reinvest In Work-Study To Help Low-Income Adults Pay For College, Enhance Their Academic Studies, And Prepare For Post-College Careers, The Working Poor Families Project. Washington, DC: 2014. (http://www.workingpoorfamilies.org/wp-content/uploads/2012/03/WPFP-Spring-2014-Brief.pdf, accessed April 18, 2014)
  2. Ibid.

 

 

 

Education Funding Lags in Michigan

 

State budget balancing act

As Michigan lawmakers head off to Mackinac Island for the annual Detroit Regional Chamber of Commerce policy conference, they are scrambling to resolve several big ticket issues that have slowed down the budget process and could reduce the amount of money available for services critical to our state’s economic development.

First is how best to fund much-needed improvements in Michigan roads, bridges and public transit. The governor wants at least $1.3 billion a year for improvements while some think that isn’t enough. There is little controversy that something needs to be done, but much disagreement on how to pay for it. (more…)

Preschool Boosted, Per-Pupil Funding Increased in Education Budgets Signed by Governor

The final Fiscal Year 2015 budgets for School Aid and the Department of Education contain another $65 million increase for preschool programs for at-risk 4-year-olds, a small boost in the statutory minimum K-12 per-pupil foundation allowance and equity payments for districts and public school academies receiving the lowest state payments. Funding was also included to partially restore some educational and child care programs that were cut during the worst of the state’s decade long recession.

Despite small increases in the per-pupil allotment during the last several years, state payments to public schools and academies have failed to keep up with increased costs. Over the last decade, the minimum foundation allowance increased by 7.3%, while the Detroit Consumer Price Index increased by 19.4%.1

There are 48 Michigan school districts and public school academies operating with deficits, and many others warn that they will face financial distress if current funding trends continue. Minimum per-pupil payments peaked in Fiscal Year 2009 before being cut by a total of $470. With the increase in Fiscal Year 2015, minimum per-pupil payments will still fall below 2009 levels—without accounting for inflation.

Per-Pupil Foundation Allowance

Governor:

  • Includes $150 million for an increase in the foundation allowance of between $83 and $111 per pupil. Under the governor’s budget, the minimum per-pupil allowance would be $7,187, and the maximum guaranteed amount would be $8,132. Much of the cost of increasing the per-pupil payment next year is offset by the governor’s recommendation to shift funding for current equity payments to districts with lower foundation allowances ($36 million) to the foundation allowance, along with expected decreases in the number of students and increases in local taxable values.
  • Recommends continuation funding ($46.4 million) for districts based on their performance on four standards. Districts can currently receive up to $100 per pupil, including $30 per pupil for academic growth in math in grades 3-8, $30 per pupil for growth in reading in grades 3-8, and $40 per pupil for growth in all high school tested subjects. After release of the budget, the administration determined that full funding for eligible districts would require an additional $4.7 million for total funding of $51.1 million in Fiscal Year 2015.
  • Recommends continuation funding of $80 million for grants of up to $52 per pupil for districts that meet seven of eight best practices criteria by June 1, 2015.

House:

  • Includes $141 million to increase the per-pupil foundation allowance by between $56 and $112, with the minimum foundation allowance at $7,188 and the maximum guaranteed level (basic allowance) at $8,105. The House assumes that the expected changes in baseline costs projected by the governor—from a decline in the number of students, increases in local taxable values, and the transfer of funds from the current equity payment—would cover over $115 million of the total $141 million increase.
  • Includes new budget language reallocating up to $35 million from any funds that are determined by May 1, 2015 to be unspent due to declining enrollments to districts with at least 1.2% fewer students than the prior year, provided that the districts are not in deficit.
  • Increases funding for school district performance grants by 10% to reflect actual need, from the current level of $46.4 million to $51.1 million.
  • Reduces funding for district best practices grants by $1.3 million (1.6%) to a total of $78.7 million, and changes the best practices criteria. The House retains the requirement that districts act as policy holders for healthcare services benefits, competitively bid at least one noninstructional service, participate in schools of choice, and provide financial, achievement testing and other school data to the public through a dashboard. Deleted are criteria encouraging districts to measure student growth twice annually, provide dual enrollment and online learning opportunities, and offer physical education or health education. The House adds requirements related to school employee compensation and collective bargaining, and implementation of the Michigan Comprehensive Guidance and Counseling program.

Senate:

  • Increases the maximum (basic) per-pupil foundation allowance by $150, and the minimum by $300 per pupil. The increases are partially funded through the elimination of best practices grants to districts ($80 million) and performance grants ($46.4 million), as well as the distribution of $100 million in Michigan Public School Employees’ Retirement System (MPSERS) grants through the per-pupil allowance. Under the Senate budget, the minimum grant would be $7,376, and the maximum (basic) $8,199.
  • Includes $31 million for a minimum “hold harmless” increase for districts of $75 per pupil, reflecting the fact that the loss of best practices, performance and MPSERS grants will affect districts differently.
  • Agrees with the governor to roll $36 million in funding authorized in the current year budget for equity payments into the base funding for per-pupil payments.
  • Provides $32.4 million for a new Education Reserve Fund to pay for budget supplementals or other items in future budgets. Legislative action would be required to spend from the fund.

Final Budget:

  • Includes $177 million for increases in the K-12 per-pupil foundation allowance. Districts will receive a minimum of $50 per pupil, and those receiving less per pupil now could receive up to $125 per pupil from a new equity payment, for a total possible increase of $175 per pupil. The minimum payment in 2015 will be $7,251, with the basic allowance set at $8,099. The $50 minimum per-pupil increase fell significantly below the recommendations of the governor, as well as the House and Senate-passed bills.
  • Increases funding for school district performance grants by $4.7 million or 10% to a total of $51.1 million to reflect actual need based on student assessments. Criteria for receiving performance funding are not changed.
  • Reduces the amount of money school districts can receive for meeting best practices criteria from $52 to $50 per pupil, lowering overall funding from $80 million to $75 million. The final budget also adopts most of the changes in best practices recommended by the House, with two exceptions: (1) the final budget retains the current standard that districts provide online learning; and (2) a new standard is added to encourage districts to offer one credit of foreign language in grades K-8. To receive funding, districts must meet seven of the nine revised standards.

Funding and Intervention for School Districts in Fiscal Distress

Governor:

  • Proposes $10 million for a new fund for emergency grants to school districts in financial distress. The fund would be for districts that are either facing dissolution, or have accepted children from districts that have dissolved.
  • Revises the process for identifying and managing school districts facing deficits, including a requirement for immediate notification to the Michigan Department of Education, timelines for reporting and planning, guidelines for district or Intermediate School District financial recovery agreements with the State Treasurer, and authority for the Michigan Department of Education to withhold some or all state funding as an incentive to districts to eliminate deficits or develop acceptable deficit elimination plans.

House:

  • Agrees with the governor and appropriates $10 million for districts in fiscal distress.
  • Retains current law regarding the management of districts facing deficits.

Senate:

  • Rejects the governor’s proposed distressed school district emergency fund.
  • Agrees with the governor on changes in the management of districts facing deficits and requirements for enhanced deficit elimination plans.

Final Budget:

  • Appropriates $4 million for a new Distressed Districts Emergency Grant Fund—down from the governor’s and Senate’s recommendation of $10 million. Funds can be used by districts that are voluntarily dissolving, or those that receive students from a dissolved district.
  • Rejects the governor’s proposed changes in the process for identifying and managing school districts facing deficits. Under current law, which will be continued next year, districts or Intermediate School Districts that have deficits cannot receive payments until the Michigan Department of Education approves a deficit elimination plan that erases the deficit within two years.

At Risk Programs

Governor:

  • Recommends continuation funding of $309 million for the At Risk Program, which is available to school districts for a range of instructional and noninstructional services for at-risk students.
  • Proposes significant changes in the allocation and use of At Risk funds, including:

— Establishing two goals for the use of funds: (1) reading proficiency by the end of third grade; and (2) graduation rates, and career and college readiness. Districts that cannot show success toward those goals after three years must reallocate funds and revise their plans.

—  Allowing funds to be used to implement reforms in schools with 40% or more of pupils identified as at-risk—consistent with the local School Improvement Plan.

— Maintaining the current formula for distributing funds, which is based on the number of pupils qualifying for free or reduced meals, but redefining “at risk” students as those who meet any of the following criteria: (1) are enrolled in priority schools; (2) are enrolled in “focus schools” which are in the bottom 30% of achievement; or (3) did not achieve a proficient score on two or more state or locally administered assessments. In the absence of assessment data, the pupil must meet at least two of the following: (1) eligible for free- or reduced-price meals; (2) absent more than 10 school days during the year, or 10% of enrolled days; (3) homeless; (4) migrant; (5) English language learner; (6) immigrant; or (7) did not complete high school in four years and is still enrolled.

House:

  • Agrees with the governor and provides $309 million—continuation funding—for the At Risk Program.
  • Accepts the governor’s changes in the goals of the At Risk Program, including reading proficiency by the end of third grade, and assuring that high school graduates are career and college ready.
  • Accepts the governor’s new definition of an at-risk student.
  • Retains several current potential uses of At Risk funding, including early childhood programs, reading programs and adult education, and retains language prohibiting the use of funds to supplant other program funding.
  • Concurs with the governor in allowing At Risk funds to be used for school-wide reforms in schools where 40% or more of the students are at-risk.

Senate:

  • Agrees with the governor by providing continuation funding for the At Risk Program.
  • Rejects the governor’s proposed changes to the goals and allocation of At Risk dollars.
  • Rejects the governor’s changes in the definition of an at-risk pupil.
  • Rejects the governor’s proposal to allow districts to use the funds for school-wide reforms in high-risk schools.

Final Budget:

  • Provides continuation funding of $309 million for the At Risk Program, with the allocation of funding based on the current formula, which is 11.5% of each district’s foundation allowance times the number of pupils who qualify for free school meals.
  • Adopts the governor’s proposal that At Risk funds be used to ensure that third grade students are proficient in reading by the end of third grade, and that high school graduates are career and college ready.
  • Concurs with the governor to provide districts with greater flexibility by eliminating some specified uses of At Risk dollars, and by allowing districts to use At Risk funds for school-wide reforms consistent with their School Improvement Plans, if more than 40% of the students are at-risk.
  • Expands the definition of “at-risk pupil” to include both the governor’s proposed language and the definition in current law.
  • Adds new language that districts that do not have at least 50% of at-risk third graders reading at grade level, or have failed to show improvements over three years in the percentage of at-risk pupils who are college- and career-ready, must spend a share of half of their At Risk funds on either tutoring and third grade reading, or activities to improve college and career readiness.

Child and Adolescent Health Centers

Governor:

  • Recommends continuation funding of $3.56 million for child and adolescent health centers.

House:

  • Concurs with the governor.

Senate:

  • Concurs with the governor.

Final Budget:

  • Includes continuation funding of $3.56 million for child and adolescent health centers.

Hearing and Vision Screenings

Governor:

  • Recommends continuation funding for hearing and vision screenings at $5.2 million.

House:

  • Concurs with the governor.

Senate:

  • Concurs with the governor.

Final Budget:

  • Includes continuation funding of $5.2 million for hearing and vision screenings.

Early Childhood Education and Care

Governor:

  • Preschool Programs: The governor increases funding for the Great Start Readiness Program by another $65 million, after a $65 million increase in the current year—the largest dollar and service expansion in the United States. The governor’s proposal creates another 16,000 half-day slots for 4-year-olds, and brings total funding to $239.6 million in Fiscal Year 2015. The governor also:

— Increases the per-slot payment by $100, from $3,625 to $3,725.

— Includes budget language that allows Intermediate School Districts to enroll children from families with incomes of up to 300% of poverty if they can determine that all children at or below 250% of poverty are being served, and there is no waiting list. The highest-need children must be enrolled first. Homeless children, children in foster care, and those in special education inclusive preschool programs are eligible regardless of family income. Currently, Intermediate School Districts must ensure that 90% of the children in the program are from families earning 250% of poverty or less.

  • Early Childhood Block Grant: The governor provides continuation funding of $10.9 million for block grants to Intermediate School Districts for early childhood programs for children from birth through age 8. Funds are to be used in part to convene local Great Start Collaboratives and Parent Coalitions.
  • Child Care: The governor increases funding for child care subsidies for low-income families by $10.6 million (8%)—from $136.3 million to $146.9 million. New funds are to be used to:

— Increase the maximum allowable reimbursable hours for subsidized child care from 80 to 90 hours in a two-week period, recognizing parents need to travel to work and child care settings ($6.9 million). The increase in the number of reimbursable hours was adopted this fiscal year with the appropriation of $3.5 million in a supplemental budget bill.

— Increase reimbursement rates to higher quality child care providers, based on the state’s Great Start to Quality rating system. Providers with three, four and five star ratings would see progressively higher hourly reimbursements rates ($3.7 million). The tiered reimbursement system was also adopted in the current fiscal year with the appropriation of $1.8 million in a supplemental budget bill.

House:

  • Preschool Programs:

— Agrees with the governor and increases the Great Start Readiness Program by an additional $65 million. However, places $25 million of that increase in a GSRP reserve fund, making funding available to districts if sufficient slots are filled before Jan. 31, 2015 (a similar fund was created in the current year).

— Maintains the current requirement that at least 90% of the children enrolled in a GSRP are from families with incomes of 250% of poverty or less; but includes the new language making homeless children, or those in foster care or inclusive special education preschool settings, eligible regardless of family income.

— Rejects the governor’s recommendation to increase the per-slot grant by $100.

— Earmarks $10 million of total GSRP spending for reimbursements of up to $150 per slot for transportation costs.

— Adds budget language requiring Intermediate School Districts to report on their progress in contracting 30% of their GSRP funds to private agencies, and provides penalties for those that fail to demonstrate efforts to do so.

  • Early Childhood Block Grant:

— Concurs with the governor on funding for the Early Childhood Block Grant.

  • Child Care:

— Agrees with the governor by increasing funding for child care subsidies for low-income families by $10.6 million to a total of $146.9 million.

— Agrees with the governor to increase the maximum allowable reimbursable hours for subsidized child care from 80 to 90 hours in a two-week period.

— Agrees with the governor to increase reimbursement rates to higher quality child care providers, based on the state’s Great Start to Quality rating system.

Senate:

  • Preschool Programs:

— Agrees with the governor and increases the Great Start Readiness Program by an additional $65 million.

— Includes the governor’s budget language allowing Intermediate School Districts to enroll children from families with incomes of up to 300% of poverty if they can determine that all children at or below 250% of poverty are being served, and there is no waiting list. Also includes eligibility for homeless children, or children in foster care or preprimary special education regardless of income.

— Increases the per-slot grant by $50 to $3,675.

— Agrees with the House and earmarks $10 million of the total GSRP spending for reimbursements of up to $150 per-slot for transportation costs.

  • Early Childhood Block Grant:

— Concurs with the governor on funding for the Early Childhood Block Grant.

  • Child Care:

— Concurs with the governor and House on total child care subsidy funding of $146.9 million, including a $10.6 million increase to expand hours of care and create a tiered provider reimbursement payment system.

Final Budget:

  • Preschool Programs: For Fiscal Year 2015, an additional $65 million was approved for the Great Start Readiness Program, bringing total funding to $239.6 million. With these funds, an additional 16,000 half-day slots will be available for at-risk 4-year-olds. Because Michigan law allows districts to combine slots to create full-day programs, an estimated 10,000 new children could be enrolled. In addition, the final budget:

— Does not include the governor’s increase in the per-slot grant by $100 to $3,725.

— Allows $10 million (of the total funding) to be used for transportation costs of up to $150 per half-day slot.

— Establishes a $25 million reserve fund for GSRP, with funds made available for services for at-risk 4-year-olds if the slots can be filled and the Legislature approves the expenditure by Dec. 15, 2014.

— Includes the governor’s changes in eligibility, allowing children from families with incomes of up to 300% of poverty to be enrolled if Intermediate School Districts can demonstrate that all children at or below 250% of poverty are being served and there is no waiting list. The highest-need children must be enrolled first; and homeless children, children in foster care, and those in special education inclusive preschool programs are eligible regardless of family income.

— Includes House language requiring the Michigan Department of Education to reduce the number of preschool slots an Intermediate School District receives if it fails to submit evidence that it attempted to contract 30% of its total slots to community-based organizations. Timelines for quality assessments of community organizations through the state’s Great Start to Quality rating system are also established.

— Maintains language requiring Intermediate School Districts to establish a tuition sliding scale for the preschool program for families with incomes above 250% of poverty.

  • Early Childhood Block Grant:

— Includes continuation funding of $10.9 million for the early childhood block grant provided to Intermediate School Districts.

  • Child Care:

— Continues cuts in funding for subsidized child care, but increases funding for quality improvements and hours of care. The final budget includes $6.9 million to increase the maximum allowable reimbursable hours of subsidized child care from 80 hours to 90 hours in a two-week period, as well as $3.7 million to increase reimbursement rates to higher quality child care providers, based on the state’s Great Start to Quality rating system. Both changes were implemented through a supplemental budget bill this year. Michigan once provided child care for up to 100 hours in a two-week period, and many states have no caps if care is needed to work or train for jobs.

— Child care cases and costs are expected to continue to drop, with total funding for the child care subsidy program falling from $136.3 million to $110.3 million—a drop of 19% in just one year.

Bilingual Education

Governor:

  • Provides continuation funding of $1.2 million for bilingual education.
  • Removes current budget language prohibiting reimbursements to school districts that serve children who are not legal residents of the United States.

House:

  • Agrees with the governor to appropriate continuation funding for bilingual education.
  • Retains current budget language prohibiting payments for instruction for children who are not residing in the United States legally.

Senate:

  • Appropriates continuation funding for bilingual education.
  • Agrees with the House subcommittee to retain current budget language prohibiting payments for children who are not residing in the United States legally.

Final Budget:

  • Includes continuation funding of $1.2 million for bilingual education.
  • Includes the governor’s recommendation to remove current budget language prohibiting reimbursements to school districts that serve children who are not legal residents of the United States.

Adult Education

Governor:

  • Provides continuation funding of $22 million for adult education. Michigan has decreased state funding for adult education drastically in the past 20 years, from $185 million in 1996 to $22 million this year.
  • Proposes significant changes in the allocation method for adult education funds, including:

— Funds would be allocated to Intermediate School Districts serving as fiscal agents in each of the 10 “Prosperity Regions” identified by the Michigan Department of Education.

— In Fiscal Year 2015, 67% of the funds would be provided to Intermediate School Districts based on the proportion of total funding formerly received by the adult education providers in that region. The remaining funds (33%) would be divided based on new criteria that relate to the percentage of high school graduates and English language proficiency. By Fiscal Year 2017, all funds would be allocated based on the new formula.

House:

  • Agrees with the governor to provide continuation funding of $22 million for adult education.
  • Agrees with the governor to revise the adult education allocation method and formula.
  • Adds language prohibiting Intermediate School Districts from using the funds for administrative costs associated with serving as the fiscal agent.

Senate:

  • Agrees with the governor to provide continuation funding of $22 million for adult education.
  • Rejects the governor’s new allocation method and formula.

Final Budget:

  • Provides continuation funding of $22 million for adult education, down from $185 million in 1996.
  • Includes a new method for allocating adult education funds based on 10 “Prosperity Regions,” with Intermediate School Districts serving as fiscal agents. Funding through Prosperity Regions would be phased in, with all funds allocated through the new formula by Fiscal Year 2017. The new formula is based on criteria relating to the percentage of high school graduates and English language proficiency.
  • Allows Intermediate School Districts to retain up to 5% for administrative costs, which could reduce money going directly to programs by up to 5% in each Prosperity Region.
  • Requires the Michigan Department of Education to ensure that in Fiscal Year 2015, adult education services will be provided to at least as many persons as are served in the current fiscal year.
  • Provides up to $2,850 for each full-time adult education student, with providers receiving payments based 75% on enrollment and 25% on successful completion (currently 90% enrollment and 10% completion).

Dual Enrollment Incentives

Governor:

  • Includes $1.75 million for new incentives for school districts that support dual enrollment. Districts can receive up to $30 for each pupil enrolling in a course at an eligible postsecondary institution ($10 per credit hour), with an additional $30 provided if the pupil successfully completes the course and is awarded both high school and postsecondary credit.

House:

  • Concurs with the governor.

Senate:

  • Concurs with the governor, and makes concurrent enrollment programs eligible for funding.

Final Budget:

  • Includes $1.75 million recommended by the governor for new incentives for school districts offering dual enrollment.
  • Expands the incentives to concurrent enrollment programs.

Year-Around School Pilot Projects

Governor:

  • Includes $2 million for year-around school pilot projects in school districts that are eligible for the community eligibility option for free and reduced price lunches.

House:

  • Concurs with the governor to provide $2 million for year-around school pilot projects, but provides for a maximum award per district of $750,000.
  • Adds criteria for the selection of pilot districts.

Senate:

  • Concurs with the governor on funding, but limits any individual grant to $250,000.

Final Budget:

 Despite support by the governor, House and Senate in their 2015 budgets, the final budget does not include $2 million for year-around school pilot projects in school districts that are eligible for the community eligibility option for free and reduced price lunches.

Endnote:

  1. Jeffries, E., K-12 School Minimum Foundation Allowance, State Budget Overview, Senate Fiscal Agency (May 27, 2014).

Bad for MI: higher ed less affordable

Those of us moving our college students home for the summer this week probably are not surprised by a new national report showing that Michigan has made deep cuts in funding for colleges and universities, leading to steep increases in tuition.

Compared with other states, I’m afraid Michigan doesn’t look so good. Policymakers in Michigan cut per-student state spending more than 37 other states from 2008 to 2014—a 28% cut in state support. Michigan’s average tuition increase of over $2,000 (a 21% increase) during that time is higher than 34 other states. (more…)

80-mile walk

On this cool, windy spring morning I joined other advocates to show support for the youth who walked the 80 miles from Detroit to the Capitol steps in Lansing to express their concerns with Michigan’s zero tolerance policies and the impact on their lives.

Michael Reynolds, an organizer of the 80- mile event, said zero tolerance policies are "kicking good kids out of school.''

For the uninitiated, “zero tolerance” in this context refers to those education policies that mandate automatic suspension or expulsion for offenses deemed a threat to the safety of other students or school staff. The big problem in Michigan is that the list of such offenses now includes relatively minor infractions such as not having a school ID badge or wearing clothing that doesn’t adhere to the uniform code, according to the students who spoke this morning.

“I hope that legislators understand that youth around Michigan want to modify zero tolerance, and we’re willing to walk 80 miles to show it,” said Michael Reynolds, co-president of Youth First and an organizer of the march.

In 1995, Michigan enacted a series of laws in response to the federal Gun Free Schools Act of 1994 that required expulsion for at least one year any student who brought a weapon onto school property. Unfortunately Michigan legislators enacted some of the most stringent policies in the country by expanding the list of “expulsion” offenses to include assault whether or not a weapon was involved, verbal “assaults,” vandalism, disobedience and an expansive definition of “weapon” that included toys and plastic knives. (more…)

Rolling back progress

The Senate Finance Committee Wednesday approved a bill to reduce the state’s personal income tax rate from 4.25% to 3.9% by 2017, a move that would reduce state revenues by up to $874 million when fully implemented in Fiscal Year 2018.

While the purely political appeal of a tax cut during an election season is obvious, the League testified, based on a recently released report, that the risks to Michigan’s economy far outweigh any benefits. Low- and moderate-income workers will see little in return while the wealthiest taxpayers would benefit the most. (more…)

Tax cuts won’t grow the economy

A new report by the League demonstrates that across-the-board cuts in the state’s personal income tax would not boost Michigan’s economy, but could affect long-term prosperity by locking in cuts in funding for public schools, community colleges, universities, health care and public safety—the very services that fuel economic growth.

Despite the claims of several legislative leaders advocating for a tax cut, there is no evidence that income tax cuts generate good jobs or economic growth. In fact, a study of 65 years of data by the Congressional Research Service found that top income tax rates have had no discernible impact on economic growth, and states that cut taxes the most during the 1990s and 2000s saw their economies fall behind in job creation, as well as production and income growth. (more…)

A gift for the future

From the First Tuesday newsletter
Sign up for e-news

 The holidays are upon us, and I’d like to offer Michigan the gift that keeps on giving – 10 ways to invest in our future.

The generations that came before us knew what it took to build a Mighty Mac, freeways and strong universities. Yet today, when you hear about economic development, you often hear about tax cuts, not investments. We can’t cut our way to prosperity. We simply must pay it forward for future generations and give them the investments they need for a strong economy.

A recent report by Senior Policy Analyst Pat Sorenson offers 10 ways to invest in our economy. It’s the League’s gift for the future:

1.
Invest
In early childhood.
2. Make sure all kids get
a great education – and a diploma!
3. Make college affordable 4. Encourage good health
with access to physical and mental health treatment 5. Offer help
with basic needs to those who cannot work or who cannot find
a job. 6. Invest in community services to attract businesses and young
professionals. 7. Generate revenue by strengthening the personal income tax,
based on the ability to pay. 8. Make sure businesses pay their fair share 9. Bring sales tax
into the modern age by taxing services and Internet sales. 10. End ineffective tax breaks
and put funds
into what works.

Happy holidays, and make sure to sign up for our Dec. 9 policy forum!

– Gilda Z. Jacobs

The Path to Prosperity: Ten Steps Michigan Must Take to Strengthen Its Economy

Full report in PDF | 10 Steps fact sheet
 

Michigan Cannot Cut Its Way to Prosperity

Over the last decade, Michigan policymakers have addressed the state’s economic and fiscal problems largely through a combination of budget cuts, tax shifts and reliance on one-time revenues–under the mistaken assumption that the state could cut its way to prosperity, and create jobs and economic growth through reduced business taxes. In fact, the path to economic prosperity requires a broader investment strategy, starting with the following 10 steps:

  1. Increase investments in early childhood education and care—beginning prenatally through school entry.
  2. Ensure that all children have access to a high-quality public education and receive a high school diploma.
  3. Make higher education an option for more residents.
  4. Provide access to the health and mental health services needed for healthy children, families and workers.
  5. Provide basic economic security for those who cannot work or find jobs.
  6. Invest in the community services needed to attract and retain business investments and young professionals.
  7. Strengthen the personal income tax to ensure it generates sufficient revenue and is based on the ability to pay.
  8. Make sure businesses are paying their share of taxes for the public services they rely on.
  9. Modernize the sales tax by expanding it to selected services and internet sales.
  10. Annually scrutinize all forms of spending, including tax expenditures or breaks, and reinvest funds into services and infrastructure that have been shown to create economic growth.

A Shared Interest in Economic Growth and Prosperity

Economic prosperity for all Michiganians is a goal that is shared by lawmakers on both sides of the aisle and their constituents. We want Michigan’s economy to grow, giving all residents the opportunity to find jobs that will support themselves and their families. We want our young people to stay in Michigan, rather than leave the state to find economic opportunity.

While the goal is shared, the best path to that prosperity has been disputed. Michigan, like the rest of the country, is trying to recover from the most severe recession in seven decades—one that sharply reduced state revenues and resulted in cuts to public services. State lawmakers responded to that crisis with a range of one-time budgeting strategies, budget cuts, and reliance on federal stimulus funds.

Economic development strategies during this fiscal crisis focused on “competitiveness,” narrowly defined as reductions in state and local taxes—despite the reality that research fails to support claims that lower state and local taxes are always better for state economies. In fact, higher taxes are often associated with better economic performance when they finance the engines of the economy, including high-quality education and better infrastructure.1

The Path to Prosperity

Michigan’s fiscal problems began before the national Great Recession, and its recovery from that recession has been slow. While the drop in auto jobs drove Michigan’s high jobless rate during the last decade, tax and budget policy decisions left state government with few options to soften the economic blows.

To address its growing fiscal problems, over the last decade Michigan relied heavily on reserved funds, one-time budget fixes and temporary federal funding. Between June of 2001 and December of 2002, the state relied on nearly $3.2 billion in one-time revenues to balance its budget, including a withdrawal of $1.3 billion from its “rainy day” fund. By 2011, the state was still relying on $1.4 billion in temporary revenues, including federal funds, tax amnesty programs, and debt service restructuring, along with budget cuts and reductions in the number of public employees.2

Michigan lawmakers also enacted tax policies that had the net effect of reducing state revenues available for vital public services. Michigan has two major state funds: the General Fund and the School Aid Fund. Over the last 15 years, significant changes were made in the state’s personal income tax—the primary source of revenue for the General Fund, and a major source of revenue for the School Aid Fund—as well as business taxes. These tax changes, along with Michigan’s declining economy and the national Great Recession, resulted in a drop in state General Funds of more than one-third (adjusted for inflation) since Fiscal Year 2000.3

Included in the tax changes were the following:

  • In 1994, Michigan’s personal income tax rate was decreased from 4.5% to 4.4%.
  • Beginning in tax year 2000, the personal income tax rate was reduced by one-tenth of a percentage point per year, with the final reduction to 3.9% occurring in 2004.
  • In 2007, in response to budget deficits, the personal income tax rate was increased to 4.35%, with a scheduled phase-out of 0.1% annually until October 2015, when the rate would have reached 3.9%.
  • In 2011, as part of a major state tax shift that reduced business taxes by 83%, while increasing personal income taxes by eliminating a range of tax credits and deductions, the personal income tax rate was maintained at 4.35%, with a rate reduction to 4.25% in January of this year. The net effect of the 2011 legislation was a state tax cut of $550 million annually, along with a shift in tax responsibility from businesses to lower- and middle-income families and retirees.4

Experiences in Michigan and other states—supported by the research—show that tax cuts cannot create economic growth or generate sufficient jobs to ensure economic opportunity for all. Studies conducted by economists over the last 40 years largely concluded that interstate differences in tax levels have little, if any, effect on relative rates of state economic growth.5 In fact, the five states that cut taxes the most in the 1990s had slower job growth than other states over the next economic cycle, with average annual growth in employment between 2000 and 2007 of only .3% compared with 1% for other states.6 Overwhelmingly, thriving, high-wage states are those with well-educated workforces, pointing to the need to invest in education and the types of services and quality of life that would attract well-educated workers.7

Michigan cannot afford to lock in the damage to public services that occurred over the last decade, accepting growing school deficits and city bankruptcies, reduced public safety, and crumbling roads and bridges as the “new normal.” To grow Michigan’s economy and ensure opportunity for all residents, state lawmakers must:

  • Invest in the services and infrastructure needed to create jobs and fuel economic growth, including effective public schools, community colleges and universities; healthcare services needed to ensure healthy children and workers; roads, bridges and public transportation needed to attract businesses; police and firefighters; and the libraries, parks and other community services needed to attract and retain a well-trained workforce.
  • Modernize and strengthen the state’s revenue system to generate sufficient funding for economic development priorities. While the pay-off of these investments is clear, Michigan has tied its hands by both failing to update its tax system to reflect current economic realities and consumer spending, and by dramatically reducing taxes on businesses.

The Ten Steps to Economic Prosperity

Prioritize Spending

1. Expand investments in early childhood development and care, including supports for families with children ages 0 to 3.

The research is clear: The single best predictor of economic prosperity is a state’s success in educating and preparing its workforce, and the path that holds the greatest promise for education achievement is the investment in young children. Leading economists, including Nobel Laureate James Heckman, have shown the high return on investment in high-quality early learning and care programs–in excess of 14% for the Michigan-based Perry Preschool Program.8

As part of the fiscal year 2014 state budget, Gov. Snyder and lawmakers increased funding for the Michigan Great Start Readiness Program by $65 million. Michigan’s expanded investment in preschool programs for at-risk 4-year-olds is a major step forward, but there is still much to be done to ensure that children are ready for school, including more attention to the first three years of life when the very architecture of children’s brains is being built in ways that affect lifelong learning. Greater investments in prenatal care, high-quality child care, and proven home visiting programs are critical.

Fast Facts:

  • The High Scope Research Foundation has documented that children who participate in the GSRP are more ready for school, perform better on MEAP tests four years later, are less likely to be held back a grade, and more often graduate from high school on time. Forty years later, GSRP graduates are more likely to hold jobs, earn more, rely less on public assistance, and are not as likely to be involved in criminal activity.
  • Each month, an average of 41,411 low-income or high needs Michigan children are in child care settings subsidized by the state, yet the state’s investment in child care has dropped precipitously over the last decade. As a result, Michigan ranks fifth lowest in the nation in its child care eligibility income limit, and ninth lowest in its average monthly reimbursement for center care for preschoolers.9
  • Michigan’s investments in children ages 0 to 3 are woefully inadequate. In addition to an underfunded child care system, over the last decade, Michigan has reduced funding for child abuse and neglect prevention programs for children ages 0 to 3, limited access to income and food assistance benefits, and provided minimal state funds for evidence-based home visiting programs.

2. Ensure that all children have access to a high-quality public education and receive a high school diploma.

Strong and effective public schools are the foundation for economic development in Michigan, ensuring a well-educated workforce and economic opportunity for all residents. In fact, a recent report by the Economic Policy Institute concluded that providing access to a high-quality education will likely do more to strengthen the overall state economy than anything else a state government can do.10

Despite broad public support for schools, state support has dropped, and debate rages about how to best improve educational outcomes. Between Fiscal Years 2003 and 2013, the minimum per pupil foundation allowance for K-12 public schools increased by only 4%, in the face of a 21% increase in inflation.11 The result has been deep budget cuts in Michigan schools, with 55 school districts across the state grappling with budget deficits, and school closures.12

One of the most concerning failures is persistently high dropout rates, particularly for African American, Hispanic, low-income and homeless youths. The prospects for Michigan residents without high school diplomas are bleak, and their failure to graduate has both personal and societal costs. A Michigan study of the personal and social consequences of dropping out of school found that dropouts face increasing labor market difficulties, including steep declines in the employment rates, real wages and annual earnings. In addition, dropouts are less likely to marry, form independent households, and be able to support their children.13 The implications for state government and taxpayers are significant. High school dropouts are more likely to live in poverty, turn to public assistance and become incarcerated. Further, because of their bleak job prospects and wages, they cannot bolster the economy through their contributions to the state’s personal, sales and incomes tax revenues.14

Fast Facts:

  • Statewide, for the class of 2012, of a total cohort of 129,689 students, 98,881 (76.2%) graduated on time, 12,884 (10.7%) dropped out, and 15,203 (11.7%) were not able to complete on schedule, but were still engaged in their high school education.
  • If the students who dropped out of the Class of 2011 in Michigan had graduated, the state’s economy would likely benefit from over $5 billion in additional income over the course of their lifetimes.15
  • In Michigan, the chances of dropping out of high school vary by race, ethnicity and economic status, with the highest dropout rates found among African American (19%), Hispanic (18%), and homeless students (18%).16

3. Make higher education an option for more residents.

In Michigan’s new knowledge-based economy, a college degree is key to economic prosperity. Unfortunately, average wages are lower in Michigan than the national average, along with the proportion of adults with a 4-year degree.17

There are many barriers to higher education in Michigan, including rapidly rising costs and cuts in needs-based scholarships. State support for public university operations has been reduced by $350 million (22%) since Fiscal year 2002, and is still $155 million (11%) below Fiscal Year 2011 levels.18 State support for community college operations has remained roughly flat since Fiscal Year 2001, while total college enrollments have increased by approximately 50%.19

Further, over the past decade, tuition rates at Michigan’s public universities doubled, yet Michigan policymakers cut need-based grants by 20%, while other states increased their need-based scholarships by 84%.20 Only 14% of Michigan students are offered needs-based scholarships, ranking Michigan 40th nationwide.

Failure to make higher education more accessible will stymie the state’s efforts to expand the economy and build the talent needed to draw business investments. Nationwide, young adults with less education face high unemployment and underemployment rates, particularly for certain racial and ethnic minority populations. According to the Economic Policy Institute, unemployment rates for young high school graduates jumped from 17.5% in 2007 to 32.7% in 2010, dwarfing the increases in prior recessions. Since that time (April 2011-March 2012) unemployment rates for high school graduates have declined only slightly to an average of 31.1%.21

Unemployment rates for African American and Hispanic high school graduates ages 17-20 have also skyrocketed, rising nearly 50% for African American graduates, and more than doubling for Hispanic students.22

Fast Facts:

  • In Michigan’s three largest metropolitan areas, the employment rate for adults ages 25-64 with a four-year degree or more exceeds 80%, compared with 38%-48% for persons without a high school diploma.23
  • Young high school graduates who do find jobs are earning less. Between 2000 and 2011, the real (inflation-adjusted) wages of young graduates nationwide declined by 11.1%.24
  • Because of cuts in funding for higher education, two-thirds of college students nationwide now graduate with an average student loan debt of nearly $27,000—up 41% since 1989. This debt results in a lifetime wealth loss of nearly $208,000 from lower retirement savings and home equity.25

4. Provide access to the health and mental health services needed for healthy children, families and workers.

Access to healthcare is an important and often overlooked contributor to the economic vitality of a community and state. A healthy workforce is a critical foundation for economic productivity, and helps to improve the state’s competitive advantage.

The Medicaid program is designed to meet the needs of low-income people who often have poorer health statuses and greater healthcare needs that could make it difficult for them to sustain employment. In approving the Medicaid expansion called for in the Affordable Care Act, the Michigan Legislature has taken a major step forward in improving the health of Michigan’s workforce.

A healthier workforce benefits both low-wage workers and their employers, and access to medical, mental health and preventive services is the key to improving workforce health and productivity. In addition, with employer-sponsored coverage continuing to decline, the expansion of Medicaid to those with incomes up to 133% of poverty can fill a growing void.26

Fast Facts:

  • Expanding Medicaid to 133% of the federal poverty line ($15,282 per year for a single person, $25,975 for a family of 3) will provide physical and mental health care coverage to an estimated 320,000 low-income Michiganians, and reduce the number of uninsured adults by 46%.27
  • Approximately 1.9 million Michigan residents (19%) now rely on Medicaid for health and mental health services.
  • Michigan has reduced spending for mental health services for low-income persons not eligible for Medicaid. It is estimated that half of the people seeking mental health treatment in Michigan are not eligible for Medicaid, and because Michigan does not provide mental health parity, many cannot afford services in the private sector. Between Fiscal Years 2008 and 2013, state funding for non-Medicaid mental health services decreased by 9%, resulting in waiting lists, a need to focus only on crisis services, and the elimination of programs such as school-based prevention.28

5. Provide basic economic security for those who cannot work or find jobs.

During economic downturns, many families find themselves facing layoffs or reduced work hours, a fact that is particularly true for families with the lowest educational and skill levels, or those with chronic health issues. State and federal programs that provide for such basic needs as food, clothing and shelter during times of high unemployment are a critical base for ensuring economic stability.

Without a basic safety net, families can lose their grounding in the economy altogether, experiencing homelessness, hunger, energy crises, or lack of access to transportation or other supports needed to seek work and hold jobs. Sadly, the impact of this complete destitution on children—including the likelihood of succeeding in school—can affect the next generation of families and workers.

In 1996, national welfare reforms resulted in the Temporary Assistance for Needy Families block grant to states, along with stronger work requirements for persons receiving basic income assistance, and time limits on assistance. Federal and state safety net policies are now more focused on the laudable goals of encouraging work and helping low-income working families, but are less effective at providing the basic supports children and families need when parents cannot work or find jobs.

Fast Facts:

  • During the national recession and into the recovery (December 2007 to December 2011), Family Independence Program caseloads fell by 17% in Michigan, while the number of unemployed rose by 20%.29
  • In March 2013, the number of Michigan households receiving FIP fell to its lowest level in 45 years—since February 1968—when it was 45,930.30
  • Falling caseloads, and declines in total TANF spending for FIP cannot be explained solely by improvements in the economy. According to the House Fiscal Agency, gross TANF spending for FIP has declined by $210.1 million or 54%, with the most significant policy change causing this decline being the adoption of more stringent state and federal lifetime limits for FIP which began Oct. 1, 2012.31
  • The maximum FIP benefit is $492 per month, representing less than one-third of the federal poverty line. Between 1996 and 2012, FIP benefits, adjusted for inflation, fell nearly 27%.32
  • After years of steady growth, the number of families receiving federally funded food assistance has begun to drop,in part because of a state policy decision to impose an asset test. Between Fiscal Years 2011 and 2013 (through March of 2013), caseloads fell from 967,566 to 912,755—a decline of 6%.33
  • Between December 2009 and 2011, TANF income assistance caseloads in five states, including Michigan fell by a total of approximately 84,000 families—more than the net national caseload decline over that period. 34

6. Invest in the community services needed to attract and retain business investments and young professionals.

In order to attract the highly educated workforce needed in the 21st century economy, businesses must consider the quality of local services and amenities, including public schools, libraries, parks, the arts and recreational opportunities. In addition, corporations rely on strong public services in order to conduct their business, including police and fire protection, and public transportation.

One of the significant ways that state government has supported counties, cities, villages and townships has been through state revenue sharing payments, which have been cut dramatically in the last decade. While the budget for the upcoming fiscal year includes a 4.8% increase in revenue sharing payments to local governments, it does not begin to offset the losses suffered. Over the last 12 years, local revenue sharing has been cut by more than $6 billion, with funds used to plug holes in the state budget and pay for state tax reductions. The result has been cuts in desperately needed services, including local police and fire protection, road and bridge maintenance, and supports for seniors.35

Fast Facts:

  • If Michigan’s statutory local revenue sharing allocation had been fully implemented, payments to local governments in Fiscal Year 2011 would have been approximately $914 million, instead of the $416 million that was actually provided.36
  • Fewer than one-third of the local governments that received statutory payments in the early 2000s receive them today, and funding to cities, villages and townships, which peaked at $684 million in Fiscal Year 2001, dropped to $225 million in Fiscal Year 2013—a 67% cut.37
  • State cuts in revenue sharing have cost Detroit nearly $200 million, helping to push the city into bankruptcy.38

Modernize the Revenue System

7. Strengthen the personal income tax to ensure it generates sufficient revenue and is based on the ability to pay.

The state income tax is a fundamental pillar of the state’s revenue system, generating approximately $7.9 billion in Fiscal Year 2013. Revenue from the income tax represents 63% of the state’s General Fund of $9.3 billion, and 18% of the School Aid Fund.39

Michigan is one of only seven states with flat rate taxes for personal income.40 With the credits and deductions allowed under Michigan law for lower-income earners, Michigan’s personal income tax is moderately progressive overall, but certainly not as progressive as states that have adopted graduated income taxes that impose a higher tax rate on the highest-income earners.

Further, with the 2011 tax shift, credits and deductions intended to reduce the income tax burden on low-income families were lost, the most significant being the Michigan Earned Income Tax Credit and the Homestead Property Tax Credit.

The reduction in the state EITC—from 20% of the federal EITC to 6%–has reduced the progressivity of Michigan’s personal income tax. With that tax policy change, Michigan’s lowest-income families are now paying a higher effective tax rate (for all state and local taxes) than any other income group.41

8. Make sure businesses are paying their share of taxes for the public services they rely on.

A number of states, like Michigan, have cut business taxes deeply, selling the cuts as a quick path to economic and job growth. In Fiscal Year 2007, taxes on Michigan businesses generated $1.9 billion or 22% of the state’s General Fund. In Fiscal Year 2013, business taxes are expected to generate approximately $352 million, or less than 4% of state General Fund revenue.42

Unfortunately, business tax cuts are unlikely to produce what they claim, and can actually thwart growth by reducing state revenues to the point that the state cannot invest in schools, roads, and public services that are fundamental to the economy in the long run.

Corporate income tax cuts are unlikely to have a positive impact on a state’s rate of economic growth or the pace at which it generates private sector jobs. Business tax cuts generally produce no net short-term economic stimulus because Michigan, like most states, is required to balance its budget each year, so it must offset revenue losses from corporate tax cuts by cutting services or increasing household taxes.43

To balance the state budget in an economic downturn while reducing business taxes, Michigan both cut services deeply and increased taxes on low- and moderate-income individual taxpayers. The budget cuts could adversely affect long-term growth in the state by weakening the public services businesses need and rely on–including high-quality educational systems, good police and fire protection, and access to well-maintained roads and transportation. Budget cuts and tax increases also affect Michigan’s economy by taking money out of the hands of consumers.

Fast Facts:

  • Tax changes passed by the Michigan Legislature in 2011 made Michigan’s overall tax system significantly more regressive by cutting business taxes by 83%, while increasing taxes for individual taxpayers by 23%.
  • As a result of the 2011 tax shift, approximately two?thirds of all businesses no longer have to file a state business tax return, and most businesses are enjoying a net tax reduction.

9. Modernize the sales tax by expanding it to selected services and internet sales.

Michigan’s sales and use taxes generated approximately $8.3 billion in Fiscal Year 2013. Michigan’s 6% sales tax rate ranks it (along with four other states) 11th lowest among the 45 states with a sales tax.44 In the current fiscal year, most Michigan sales tax revenue is dedicated to the School Aid Fund (73%), the General Fund (16%) and local government revenue sharing (10%).45

Even with a 1974 Constitutional amendment to eliminate sales and use taxes on food and prescription drugs, Michigan’s sales tax is regressive because low-income residents pay substantially more in sales tax as a share of their income than do higher-income taxpayers. In fact, sales taxes make up 60% of low-income families’ total tax bill, and the bottom 20% of earners in the state pay 6.7% of their family incomes on sales and excise taxes, compared with less than 1% for the top 1% of earners.46

Since Michigan’s sales and use taxes were adopted in the 1930s, consumer spending habits have changed dramatically, shifting from the purchase of goods, which are taxed in Michigan, to services, which largely are not. In addition, the growth of Internet sales has resulted in lost revenues, and placed “main street” businesses at a competitive disadvantage.

Fast Facts:

  • Michigan manufacturing employment fell by 37% between 1990 and 2011, compared with 32% nationally. Knowledge-based services (healthcare, social assistance, information, finance and insurance, professional services and management of companies) grew by 30% during that same time.47
  • In 2007, Michigan taxed only 26 services, fewer than 38 states and the District of Columbia.48 The estimated loss of sales tax revenue due to the exemption of most services was $10 billion in Fiscal Year 2010.49
  • The total amount of revenue loss from catalog, e-commerce and remote sales is expected to grow to $451 million in the current fiscal year.50

10. Annually scrutinize all forms of spending, including tax expenditures or breaks, and reinvest funds into services and infrastructure that have been shown to create economic growth.

Tax expenditures are often described as “silent spending,” and include tax deductions, deferrals, exclusions and credits given to individuals or businesses. Tax expenditures are considered a form of spending because they allocate funds for specific public purposes, but are not debated and approved during the annual budget process. They have a significant impact on state revenues because they reduce or eliminate revenues that would have otherwise been collected and available for needed public services. Currently there is no formal process in place to evaluate the effectiveness of tax expenditures in Michigan. Unlike direct appropriations that are part of the annual budget process, most tax expenditures are put in place and never reviewed.

A 1991 state task force reviewing the impact of tax expenditures recommended the following to ensure that tax expenditures are effective and achieving their intended purpose:

  • Include a tax expenditure report as part of every Executive Budget.
  • Conduct a fiscal impact analysis of all tax expenditure bills,and include a sunset on tax expenditures to ensure that they are evaluated.
  • Create a formal process for the review of all tax expenditures,including a joint subcommittee of the taxation and appropriations committees.
  • Establish criteria for evaluating tax expenditures.

More than two decades later, only the first recommendation has been adopted, and tax expenditures are now included in annual Executive Budgets. Still missing is a formal process for evaluating whether or not tax expenditures are serving an important public purpose or are simply unnecessary and costly giveaways.

Fast Facts:

  • The Treasury Department forecasts that tax expenditures from state business and individual income taxes, sales and use taxes, and transportation taxes alone will be $21.6 billion in 2014, $1 billion more than the $20.6 billion the state is expected to collect in revenues from those taxes. Over 70% of those tax breaks will be for goods and services that are currently exempt from state sales and use taxes.51
  • The 2011 tax shift legislation repealed many of the credits allowed in the former Michigan Business Tax, as well as the EITC and other personal income tax credits, so tax expenditures are expected to fall by 8.6% between fiscal years 2012 and 2013.52

Sources:

1.   Michael Mazerov, Academic Research Lacks Consensus on the Impact of State Tax Cuts on Economic Growth: A Reply to the Tax Foundation, Center on Budget and Policy Priorities (June 17, 2013).

2.   Mitchell E. Bean, A Problem 10 Years in the Making, House Fiscal Agency (April 6, 2011).

3.   Kyle I. Jen, State Budget Update, House Fiscal Agency presentation prepared for Rep. Genetski (June 21, 2013).

4.   Outline of the Michigan Tax System, Citizens Research Council of Michigan (March 2012).

5.    Michael Leachman, Michael Mazerov, Vincent Palacios, and Chris Mai, State Personal Income Tax Cuts: A Poor Strategy for Economic Growth, Center on Budget and Policy Priorities (March 21, 2013).

6.    Ibid.

7.   Noah Berger and Peter Fisher, A Well-Educated Workforce is Key to State Prosperity, Economic Analysis and Research Network (August 22, 2013).

8.   James J. Heckman, Ph.D., The Case for Investing in Disadvantaged Young Children, Big Ideas for Children: Investing in our Nation’s Future, First Focus (September 15, 2008).

9.   Child Development and Care, Presentation to the House Appropriations Subcommittees on School Aid and Education Committee, Michigan Department of Education (August 6, 2013).

10. Noah Berger and Peter Fisher, A Well-Educated Workforce is Key to State Prosperity, Economic Policy Institute (August 20, 2013).

11.  K-12 Schools Minimum Foundation Allowance, Senate Fiscal Agency (updated September 18, 2012).

12.  Michigan Public Schools with Deficits for Fiscal Year Ending June 30, 2012 and Projections for Fiscal Year 2013, Michigan Department of Education (May 30, 2013). Also Kathleen Gray, Record 55 School Districts in Michigan Facing Deficits, Detroit Free Press (August 13, 2013).

13.  Andrew Sum, et al. An Assessment of the Labor Market, Income, Social, Health, Civic, Incarceration, and Fiscal Consequences of Dropping Out of High School: Findings for Michigan Adults in the 21st Century, Center for Labor Market Studies, Northeastern University (January 2008).

14.  Ibid.

15.  The High Cost of High School Dropouts: What the Nation Pays for Inadequate High Schools, Issue Brief, Alliance for Excellent Education (November 2011).

16.  Patricia Sorenson, The FY 2014 Budget: Gains for Some Children & Families but Deep Disparities Persist, Michigan League for Public Policy (July 2013), utilizing data from the Michigan Department of Education.

17.  Lou Glazer and Don Grimes, Michigan’s Transition to a Knowledge-Based Economy: Fifth Annual Progress Report, Michigan Future, Inc. (October 2012).

18. Kyle I. Jen, State Budget Update, House Fiscal Agency presentation prepared for Rep. Genetski (June 21, 2013). Reflects only operational funding, omitting funds contributed by the state to prefund retiree health benefits through payments to MPSERS.

19. Ibid.

20. Peter Ruark, Keeping It Affordable in Michigan: Disinvestment in Financial Aid Grants Hurts Students and Their Families, Michigan League for Public Policy (November 2012).

21. Heidi Shierholz, Natalie Sabadish, and Hilary Wething, The Class of 2012: Labor Market for Young Graduates Remains Grim, Economic Policy Institute (May 3, 2012). Data are for high school graduates ages 17-20 who are not enrolled in further schooling.

22. Ibid.

23. Lou Glazer, Michigan Employment by Education Attainment II, Michigan Future, Inc. (June 17, 2013).

24. Heidi Shierholz, Natalie Sabadish, and Hilary Wething, The Class of 2012: Labor Market for Young Graduates Remains Grim, Economic Policy Institute (May 3, 2012).

25. Robert Hiltonsmith, At What Cost? How Student Debt Reduces Lifetime Wealth, Demos (August 2013).

26. Jan Hudson, Affordable Care Act Medicaid Expansion: A Win for the State and Its Low-income Residents, Michigan League for Public Policy (September 2012).

27. Ibid.

28. Jan Hudson, Shoring Up Mental Health Services, Michigan League for Public Policy (January 28, 2013), and Margaret Alston, Susan Frey and Steve Stauff, Mental Health Spending, Community Health Background Briefing, House Fiscal Agency (December 2012).

29. LaDonna Pavetti, Ife Finch, and Liz Schott, TANF Emerging from the Downturn a Weaker Safety net, Center on Budget and Policy Priorities (March 1, 2013).

30. Michigan Department of Human Services Information Packet, DHS Budget and Grant Management Division (June 2013). Excludes Extended Benefit FIP (EFIP).

31. Kevin Koorstra, Temporary Assistance for Needy Families (TANF), Fiscal Focus, House Fiscal Agency (November 2012).

32. Ife Finch and Liz Schott, The Value of TANF Cash Benefits Continued to Erode in 2012, Center on Budget and Policy Priorities (March 28, 2013).

33. Michigan Department of Human Services Information Packet, DHS Budget and Grant Management Division (June 2013).

34. LaDonna Pavetti, Ife Finch, and Liz Schott, TANF Emerging from the Downturn a Weaker Safety net, Center on Budget and Policy Priorities (March 1, 2013).

35. Letter to the Michigan Legislature from David Lossing, President, Michigan Municipal League (May 21, 2013).

36. Revenue Sharing Keeps Our Economic Engines Running, Michigan Municipal League (February 2011).

37. Using State Shared Revenues to Incentivize Local Government Behavior, State Budget Notes, Citizens Research Council of Michigan (July 2012).

38. Robert Kleine, How the State of Michigan Helped Bankrupt Detroit, Detroit Free Press (August 4, 2013).

39. State of Michigan Revenue Source and Distribution, House Fiscal Agency (March 2012).

40. “The ITEP Guide to Fair State and Local Taxes,” Institute on Taxation and Economic Policy, 2011.

41. Data provided to the Michigan League for Public Policy by the Institute on Taxation and Economic Policy. ITEP data reflects permanent law in Michigan enacted through January 2, 2013 at 2010 income levels. Includes total state and local taxes as a share of personal income, post-federal deduction offset.

42. State of Michigan Revenue Source and Distribution, House Fiscal Agency (June 2006 and March 2012).

43. Michael Mazerov, Cutting State Corporate Income Taxes is Unlikely to Create Many Jobs, Center on Budget and Policy Priorities (September 14, 2010).

44. “Michigan’s Sales and Use Taxes, 2010,” Michigan Department of Treasury, August 2011.

45. “State of Michigan Revenue Source and Distribution,” House Fiscal Agency, July 2012.

46. Fact Sheet: The Michigan EITC and Taxes Paid by Working Families, Michigan League for Human Services, February 2011, data from the Institute on Taxation and Economic Policy; and data provided to the Michigan League for Public Policy by the Institute on Taxation and Economic Policy. ITEP data reflects permanent law in Michigan enacted through January 2, 2013 at 2010 income levels.

47. Lou Glazer, From Factories to Knowledge-based II, Michigan Future, Inc. (July 29, 2013).

48. Eric Scorsone and David Zin, The Michigan Economy and State Revenue: A 10-Year History (1999-2009), Senate Fiscal Agency (April 2010). Data based on data from a Federation of Tax Administrators survey.

49. Michigan’s Sales and Use Taxes, 2010, Michigan Department of Treasury (August 2011).

50. Ibid.

51. Rick Haglund, State Government ‘Spends’ $30 Billion More This Year than You Think, Bridge Magazine, Center for Michigan (June 25, 2013).

52. Michigan Department of Treasury Executive Budget Appendix on Tax Credits, Deductions and Exemptions, fiscal years 2005 through 2012-2013, and State Spending from State Resources Appropriation History, Senate Fiscal Agency, Updated August 31, 2012.

 

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