Facts Matter: Michigan's Budget Deficit
The Budget Deficit:
Current FY 2011 budget deficit estimated at nearly $1.8 billion
Projected to be $3.0 billion in FY2010
Projected to be $2.5 billion in FY2011
It’s Not Just the Economy
There are two kinds of deficits, structural and cyclical. Michigan has both:
A cyclical deficit is one that is driven by the economy and business cycle, and goes away in good economic times.
A structural deficit exists regardless of the economy—during good times and bad times. It occurs because the state’s revenue structure does not bring in enough money to fund services and programs. Because it is structural in nature, it can only be solved by structural changes.
The size of Michigan’s deficit
Fiscal year 2010 marks the 10th consecutive year that state revenues have not been adequate to fund state services and programs.
Last year’s deficit is being addressed with $1.7 billion in federal stimulus dollars and over $400 million in cuts.
Since the first decline in revenues in fiscal year 2001, Michigan has experienced cumulative deficits well in excess of $10 billion, has exhausted over $6 billion in fiscal reserves and has instituted over $4 billion in spending cuts.
The response so far
Over the years, in response to the ongoing structural deficit, the Michigan Legislature cut the budget, raised the income tax temporarily and used other one-time measures. None of these is an acceptable long-term solution. Spending cuts to public safety, health care, human services and education are being felt all across the state. Not only do spending cuts cripple ser-vices, but they are also bad for the economy, as they lead to a further loss of jobs. Given the size of the current deficit and the implications, it is virtually impossible to address the deficit solely through cuts.
While the temporary income tax increase is helping to generate additional revenues for the state; it is only temporary and is declining as large numbers of workers lose jobs. The rate will begin to decline starting in October 2011 and will return to 3.9 percent on October 1, 2015. This will result in a further reduction of state revenues.
Since 2001, Michigan has undertaken a combination of one-time measures, spending reductions and modest revenue enhancements to balance each year’s budget. These have not addressed the structural deficit, which is a serious and growing problem. It is time for state policymakers to look at revenue options that will provide long-term solutions.
Better options for addressing the structural deficit
Extend the 6 percent sales tax to a limited number of services. (Excludes medical, nonprofit and business-to-business services together valued at over $9 billion.)
Projected Revenue: $1.65 billion
Institute a graduated income tax. One scenario would reduce the tax burden of more than 90 percent of Michigan filers with a tax liability. The resulting revenue could be expected to grow more rapidly than is the case with the existing flat income tax.
Projected Revenue: $600 million
Reduce senior tax preferences to a level equal to Kentucky, the second-most generous senior preference state (Michigan is currently No. 1, by over 27 percent).
Projected Revenue: $200 million
Increase the beer tax, which was last adjusted (reduced) in 1966, from 2 cents to 6 cents per 12 ounces. (The proposal would restore two-thirds of the erosion in the purchasing power of beer tax revenues since 1966, due to inflation).
Projected Revenue: Almost $90 million
Decouple from the phase-out of the Federal Estate Tax to permit the state to again receive a portion of the taxes paid by Michigan estates.
Projected Revenue: $250 million
Repeal a series of tax expenditures that have, in previous legislative sessions, been approved for elimination by one house or the other, or recommended for repeal by the governor.
Projected Revenue: $400 million
Reduce the incarceration rate and average cost per prisoner differentials between Michigan and the other Great Lakes states by 50 percent. While not a revenue enhancement, this recommendation would free up resources for use in resolving anticipated shortfalls.
Spending Reduction: $300 million
Note: Revenue and spending projections are annual
A COMEBACK PLAN FOR MICHIGAN
The financial crisis for state government in Michigan calls for real reforms—a end of wasteful tax giveways and a modernized and fair system for funding Michigan’s priorities. A Better Michigan Future’s four-point priority plan calls on the Legislature and Governor to:
Eliminate the flat-rate income tax and Implement a graduated income tax—securing a tax cut for up to 90% of Michigan citizens—by adjusting our tax base and more fairly distributing the tax burden. The Legislature must act immediately to put this option before the voters in 2010.
Reduce wasteful spending by conducting performance audits on government contracts and departments with an eye toward efficiencies—ensuring Michigan taxpayers are getting the most value for their dollar.
Eliminate tax incentives and loopholes for companies failing to create and retain jobs. Require yearly performance reviews for all remaining tax credits and incentives. This will immediately save our state over $600 Million per year. <?p>
Expand the state's sales tax to include luxury and non-essential services, which would generate as much as $1.65 billion in new revenue for the state, with growth potential as the state's economy rebounds. This expansion would not include business-to-business, healthcare, legal, or childcare services.
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