High Taxes, Public Employee Unions Crushing Michigan’s Economy

Published December 9, 2009

Michigan Governor Jennifer Granholm (D) is facing a state increasingly on the edge of a budgetary and employment abyss.

The state last year had to deal with a budget shortfall of $550 million, and this year has to grapple with a deficit in excess of $2.8 billion. Its U-3 unemployment rate, which traditionally underestimates unemployment by 7 percentage points, is close to 16 percent. This follows a $1.3 billion tax hike imposed in 2007 after Granholm shut down state government until lawmakers approved the increase.

Now homes sales in Michigan have collapsed, income tax collections are dropping rapidly, and property tax revenues are falling too.

‘We’re Facing a Cliff’
At a conference in Washington, DC, Michigan State Finance Director Mitchell Bean declared, “We’re facing a cliff in 2011 when stimulus dollars run out. There is not an end in sight, even in recovery.”

Jason Clemens, director of research at the Pacific Research Institute in San Francisco, said Michigan’s problems are the result of policies implemented by Granholm and the Democrats in the State House.

“The policies they have implemented have essentially made the state uncompetitive on a whole range of tax and regulatory issues,” Clemens said.  “If I am an investor, why do I go to Michigan instead of Indiana or the southern United States?”

Constantly Changing Taxes, Regs
Jerry Zandstra, President of America Saga Productions, one of the state’s most successful television production companies, agrees. He is particularly angry at Michigan’s state legislators for constantly changing the state’s tax and regulatory structure.

“They set up this legislation, they attract a lot investment from people, they pass these tax credit measures with near unanimous consent in both the State House and Senate, and then they bait and switch,” Zandstra said.

“For instance, they created a film incentive package, and everyone thought they knew the rules there, and then suddenly the rules changed.  [The legislators] do not understand how that affects investment. They do not even understand how even talking about changing the rules immediately freezes investment, immediately stops all brick and mortar. They do not even understand how voting for, say, film tax credits and then changing your vote a year later to increase film taxes, how that damages Michigan’s ability to get investment,” he added.

Zandstra also notes most of the rule-changing and tax increases in the state come about because both the governor and state legislators are afraid to deal with expensive public employee pensions and health benefits.

‘No Rationality’
“Michigan’s political class is really amateurism run amok,” he said. “No rationality. And in the meantime jobs are being lost, [the state has] the worst unemployment in the land, and no one wants to confront the third rail of Michigan politics: The public employee unions and their pensions. We have to reform public employee and teacher health insurance and pensions if the state is to stop having these tax increases and constant rule changes.

“This is the perennial issue for the state.  Hopefully, out of this present disaster, we learn this,” Zandstra added.

Clemens notes, “Michigan has a fairly large government relative to the size of their economy, and by definition that will mean heavy taxes. Does Michigan get back for that large government world-class public services?  I don’t know anybody who says that about Michigan.”

Possible Outside Discipline
Clemens believes the only way to reform the state’s government is for the markets to refuse to lend money to the state.
“Once the bond markets stop lending to the state, it will impose a very harsh discipline,” he said. “That or a visionary politician like Gov. Engler [Michigan governor from 1991 to 2003] returns and implements pro-economic-growth reforms. The state is hitting a wall with yearly average negative private sector job loss, the worst migration records in the country, and an anti-business and anti-economic-development image.

“The bond markets are already indicating that there are some fairly serious risks with Michigan. At some point, change is no longer a choice,” he added

Thomas Cheplick ([email protected]) writes from Cambridge, Massachusetts.