Opinion | Our state budget is a casualty of COVID-19. These principles could help.
The COVID-19 pandemic has come to represent a devastating risk to our health and our economic well-being. Our attempts to contain it have certainly helped flatten the curve, but with an economic impact that will reverberate for months. Among its many economic casualties will be the Michigan state budget, which reflects and supports all the basic services that state government provides, from education to public safety to health care and so much more.
The speed and magnitude of the decline in economic activity has resulted in unpresented reductions in state revenue. Initial estimates from the State Budget Office indicate that the decline in revenue impacting both the state’s General Fund and the School Aid Fund will be several billion dollars for both this year and the next. Three other factors make addressing this decline in revenue even more severe: (1) the state is making additional expenditures to address the COVID-19 pandemic; (2) the state’s fiscal year ends in only a little more than four months; and (3) decisions will have to be made quickly, because—unlike the federal government—states are constitutionally required to balance their budgets every year.
The two of us are not strangers to dealing with difficult budgets, having to make recommendations in both bad and good times as budget directors for former Governors Jennifer Granholm and Rick Snyder. Although the exact size of the problem is yet to be determined, we know at this point that it will be significant and solving it will be incredibly difficult. Following are some principles we believe can help establish a framework for decisions:
First, federal assistance will be critical in the weeks ahead. Debate in Washington has already begun on whether another round of federal stimulus dollars should be enacted to assist state and local governments address budget shortfalls. Given the severity and suddenness of the precipitous drop in state revenue this late in the state’s fiscal year, however, we believe federal assistance is not only warranted, but necessary.
Secondly, Michigan’s Budget Stabilization Fund (BSF)—the “rainy day fund”—should be utilized to help address the looming deficit in this year and potentially next year as well. Although it would be imprudent to use the entire balance of $1.1 billion immediately, it would also be foolish to not use some of it for the current fiscal year. It’s raining now, and we cannot think of a more compelling time and reason to utilize the funds.
Third, budget cuts will certainly be necessary. Rather than arbitrary or “across the board” cuts, however, services should first be prioritized. The health, safety and security of the public should be at the top. We know that the pandemic has hit lower income and communities of color more severely, so we should also review our social safety net, understand its failings, and strengthen it where necessary. A thorough review should be made of federal waivers to maximize money coming into Michigan to support this safety net.
This prioritization process should include a thorough assessment of what state services can be done more efficiently or could be eliminated altogether. This would be an ideal time to conduct such an assessment, since so much of government has been conducted remotely in the past few weeks and has undoubtedly taught us much about what is an essential service and how best to provide it. Companies and individuals faced with life changing events re-engineer their operations, and government should not be treated any differently. This assessment should also include the right level of government to provide needed services.
Although a full assessment of this nature might take some time and not provide much in the short term, we need to take advantage of the current situation to properly evaluate services and the right level of government to provide those services.
Given that budgets have two sides, income and expenditures, should we consider tax increases to help with the pending deficits?
We believe it is premature to consider general tax increases to address the immediate deficit. Individuals have lost jobs and incomes, businesses have been temporarily closed, and some will never reopen. Now is not the time to burden individuals or businesses with the additional financial obligation any tax increase would impose. In addition, we still don’t know the extent of any federal assistance, nor the length of economic dislocation and how long the revenue loss will last. Once more is known and all other alternatives have been fully utilized, including borrowing options, there might be a time to discuss tax increases to help eliminate the deficit.
Given our caution about general tax increases in the short term because of the uncertain economic environment, we do believe that tax policy should be reviewed. Just as it is a good time to assess state services, we should seize this opportunity to review our tax structure for fairness, effectiveness and efficiency.
What we are suggesting will test our elected leaders – both in the policies they propose and the manner in which they propose them. The current situation is unprecedented, so there is no previous model for them to follow. Recognizing that their decisions will affect an entire state for years to come, they will not only need to compromise, but also communicate to constituents why certain decisions have been made.
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