Deja vu: Biz tax cuts head agenda in Lansing
“At the end of the day, we’ll be a stronger, more vibrant state,” Gov. Rick Snyder asserted a year ago in his first State of the State speech that offered the first outlines of his 2011 legislative agenda.
But he didn’t say what day that would be. As he prepares to deliver his second "SOS" address on Wednesday before a Legislature firmly in the hands of his own Republican Party, some of the unfinished tasks he says are designed to keep that pledge will be tougher to complete.
Legislative messages greeted positively by lawmakers in the first half of last year reflected Republican priorities of tax reduction, fiscal austerity and debt reduction. Snyder priorities shelved, ignored or rejected under the Capitol dome called for not only higher taxes, but more government in the areas of health, education and transportation.
And that was when the Snyder administration was in fresh, full flush. It’s doubtful whether Republicans out to preserve a House majority this year will be any more receptive to, say, raising car registration fees in 2012 than they were in 2011. That seems particularly the case when they’ll be required to answer to the voters for the big decisions they made in 2011.
Budget -- the beginning and the ending
One of those 2011 decisions involved the fiscal 2012 budget transfer of $396 million in School Aid Fund dollars to higher education coffers,which are traditionally supported by the state through the general fund.
Balance estimates for the end of the current fiscal year give the School Aid Fund a surplus of $119 million. But if Michigan continues in 2013 some $455 million in one-time FY2012 expenditures that reduce retirement costs or reward efficiency, the School Aid Fund is expected to be in deficit by some $152 million at the end of FY2013.
The general fund, according to the Senate Fiscal Agency, is in better shape. It will have a balance of nearly $630 million on Sept. 30. And that’s after a $256 million deposit into the state’s rainy day fund.
During last year's budget negotiations, Snyder originally wanted to use $900 million in School Aid Fund dollars for higher education. This fall, expect Democrats to try and persuade voters who still complain about the mythic diversion of lottery funds from public schools that Republicans have broken the promise of Proposal A, the tax-and-funding package for schools. They'll also argue that electing Democrats is the only way to preserve adequate funding for local public schools.
The governor has prefaced the budget work ahead with an assurance that education funding wouldn’t be cut again in the fiscal 2013, which begins Oct. 1. This could mean it’s not necessarily going to be increased, either. Snyder and the big Republican majorities in the House and Senate could choose to keep the minimum $6,846 foundation grant for public schools and hold firm on the controversial use of SAF dollars for higher ed.
“Anything that they do in terms of additional revenue is going to be based on things attached -- best practices, retirement changes. They’re not looking at a carte blanche increase in the foundation allowance,” said Peter Spadafore of the Michigan Association of School Boards. He added the budgets for K-12, universities and community colleges had now been -- unfortunately -- "fused” within the School Aid Fund.
Where are taxes headed?
Some of the projected surplus for Michigan is the result of higher revenue. GF and SAF tax receipts in this fiscal year are expected to up an estimated $400 million from the May 2011 calculus on which the current budget is based. That still represents, though, just 2 percent of the $20 billion in both funds.
A tax cut -- or rather blocked tax increase -- already is baked into the budget, thanks to the Michigan Supreme Court’s decision to strike down last year’s phase-out of the personal income tax deduction for upper income households. It violates the constitutional ban on graduated income taxes, didn’t you know? The ruling will cost the budget about $60 million.
Both the Michigan League for Human Services and AARP Michigan, meanwhile, want to revisit other 2011 personal income tax changes on their constituencies; changes that helped finance the elimination of the Michigan Business Tax.
But the proposed tax cut that weaves together many of the strands of Snyder’s agenda is the elimination of the $1.3 billion in personal property taxes paid by businesses on commercial, industrial and utility equipment.
More than a third of that revenue, $457 million, supported the operating budgets of cities, counties and townships in 2010. School operations received $426 million from the tax. The tax also financed about $142 million in local school debt, which presumably would be picked up by the payers of real property taxes, including homeowners, if the personal property tax goes away.
Eliminating the tax immediately would almost equal the net cost of last year’s overhaul that replaced the Michigan Business Tax with a new income tax on “C” corporations that file a federal return.
The 2011 elimination of the MBT has echoes in the upcoming debate over the personal property tax. For Michigan’s largest manufacturers, the MBT provided a 35 percent credit for industrial personal property taxes; a credit that wasn’t replicated in the new corporate income tax. Business groups contend that since Ohio, Illinois and Wisconsin don’t levy property taxes on factory equipment, Michigan is now at a greater competitive disadvantage than it was before.
Whether property tax liability has hindered a Michigan economic recovery built on manufacturing is unclear. But unless Snyder and lawmakers address the issue, said Mike Johnston of the Michigan Manufacturers Association, the state could lose investment in the long run if auto suppliers, for instance, conclude they can operate as easily in Ohio as in Michigan, but at lower cost.
“The economy is recovering largely based on manufacturing growth, so let’s get a piece of that pie,” Johnston said.
Snyder has said it could take years for the PPT to be eliminated entirely. Those familiar with the administration’s thinking say the first round of tax relief could be targeted toward industrial machinery.
But personal property taxes generate tens of millions of dollars for cash-strapped cities such as Detroit, Flint and Saginaw -- cities under pressure from Snyder’s tougher emergency manager law. Eliminating a key source of local revenue would make the job that much more difficult.
Municipal officials want revenue replacement that’s guaranteed in the Michigan Constitution -- and they have reason to seek such guarantees. For a decade now, lawmakers have annually departed from statutory (non-constitutional) revenue sharing formulas that have cost cities some $4 billion.
Phasing out the PPT over a number of years by relying on budget savings from expiring alternative energy tax credits would delay the cost of tax relief. Another approach would exempt new business equipment from the tax while continuing to tax the stuff already in place as it continues to depreciate.
But that strategy relies on a future Legislature -- shorn of institutional memory thanks to term limits -- to make up the difference to cities and schools. In no surprise, local officials aren’t confident the deal would be kept.
“Why would we expect that future legislatures will keep their promises?” says Summer Minnick of the Michigan Municipal League. “They won’t.”
Who pays for what the public wants?
Snyder's State of the State address is expected to place a fair amount of emphasis on the promises that have been kept in the past year, notably the rewrite of a business tax code he said during the campaign was at the core of Michigan’s decade of economic woe.
But several key policy prescriptions Snyder made last year are still stuck in the starting gate. The biggest involves infrastructure.
Lawmakers undoubtedly will cobble together the $100 million or so required to ensure the state fully matches federal highway aid. In his October 2011 message to the Legislature on infrastructure, Snyder said lawmakers had to do more, however. He backed the findings of Reps. Rick Olson, R-Saline, and Roy Schmidt, D-Grand Rapids, that met the same cold reception his message did. Despite the Legislature's avoidance, the state still needs $1.4 billion in new annual revenue just to keep the existing system from falling apart.
“The longer we wait to address the problem, the bigger the bill we are handing to our future citizens, manufacturers and commercial businesses. Continued procrastination threatens Michigan’s economic future,” Snyder said. “Those of us in elected office must face up to our responsibilities to that future by developing responsible, fiscally prudent policies that assure a bright future for Michigan companies and drivers.”
Snyder suggested that one way to raise that kind of money required doubling vehicle registration fees to about $120 a year. Assuming the price of gas eventually will go up and stay there, another revenue generator would replace the 19-cent tax on a gallon of gas with a percentage levy that would collect more money as the wholesale price of fuel inevitably grows.
That's where Snyder left it in 2011 and where the Legislature finds itself in 2012.
“The governor has made some suggestions and now it’s up to the Legislature to come up with some solutions that are palatable and can at least be voted on,” said Mike Nystrom of the Michigan Infrastructure and Transportation Association.
One hurdle, of course, is the election, which is why the odds are that any vote to increase transportation revenue won’t come until after the November vote.
Another infrastructure issue is how Snyder resolves the legislative impasse over the New International Trade Crossing between Detroit and Windsor, Ontario. Will lawmakers resent Snyder for crafting a legal strategy to commence the project without legislative authorization? Or will a significant number be relieved that they won’t be pressured to vote either way on it?
In elevating the importance of the bridge in last year's address to a statewide audience, Snyder took on the risk of rejection by lawmakers in his own party. If he should tell them to their face on Wednesday that he can proceed without their authorization, a project that could have weakened him politically just might strengthen him, instead.
"The challenge for Gov. Snyder is to present an aggressive and robust agenda in his second State of the State," said Ken Sikkema, a former Republican Senate Majority Leader. "If he doesn't do that, individual legislators will fill the vacuum with their own ideas and individual legislative interests. What is advanced might not necessarily be to the governor's liking. This is a difficult challenge for the governor and Republicans generally in 2012. In some respects, they might become a victim of their own success. They were so successful with their agenda in 2011 that they will find it hard to repeat it, and issues that are more divisive in Republican ranks might become the story."
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