Michigan Gov. Jennifer M. Granholm (D) announced on December 18 that an agreement was reached to eliminate a $920 million deficit in the 2004 fiscal year budget.
There were more real cuts made to Michigan’s 2004 budget, by a Democratic governor and Republican legislature, than many observers anticipated. Terms of the agreement included a “six-month pause in the income tax rollback,” with the money to be used to offset the shortfalls in other funds. Also included in the deal was an “additional $12 million in administrative cuts to state government spending,” as well as a four-year phase-in of the health care tax deduction for businesses.
“This agreement preserves the income tax cut scheduled for next year, balances our budget while protecting essential services, and reduces a tax burden on businesses that has penalized them for offering health insurance,” said Senate Majority Leader Ken Sikkema (R-Wyoming). “This is a fair compromise that really is a good deal for the people of Michigan. With this short-term problem now out of the way, we’ll be able to stay focused on long-term solutions for revving up Michigan’s economy and creating jobs.”
“I think the governor had a good first year in spite of very difficult fiscal times,” said State Rep. Dianne Byrum (D-Onondaga), who serves as House Minority Leader. “The governor has dealt with the budget difficulties, which is a very difficult task,” Byrum said.
State Sen. Nancy Cassis (R-Novi) said the governor “worked under pressure to negotiate solutions to keep Michigan moving forward.” But she told reporters some of the governor’s weaknesses lie in projects she didn’t handle correctly, such as road restoration.
“I think sometimes there is a bit of disconnection between herself and some of her department directors; I’m not sure they are always on the same page with the same message,” Cassis said.
Even given this political posturing, the end results of the budget session were mostly encouraging.
State Budget Director Mary A. Lannoye announced on December 30 that Michigan closed its books on the year with a positive “unreserved fund balance of $174 million in the General Fund.” Those funds will be used to help balance the fiscal year 2004 budget.
Sacred Cows Dealt With
According to work done at the Mackinac Center for Public Policy, in many cases, state officials did not just “assume the needs of government were more important than the needs of those who pay for it.” Some large and small sacred cows were either eliminated or put on a diet in 2003. For example:
- General operations spending on higher education was cut by $193 million, which encouraged universities to look at cost-cutting strategies.
- Lawmakers reduced arts subsidies by 47 percent, thus encouraging greater independence and self-reliance for cultural groups.
- The Southwest Michigan Tourist Council no longer receives $60,400 in subsidies to give away free fruit and Christmas tree corsages at the New Buffalo rest area. While the dollar amount is small, this signals a willingness to pay closer attention to what are and are not core functions of government.
- Concessions from state employee unions helped pare back overly generous compensation, saving taxpayers more than $200 million in the near term.
Unlike other states, Michigan closed its fiscal year 2004 budget deficit without a large tax increase. Neighboring Ohio, for instance, hiked its sales tax by 20 percent.
Michigan did delay an income tax cut and could have avoided doing so by further reducing spending. But even this cloud came with a small silver lining: an effective cut in the Single Business Tax.
Recommendations for Future
Mackinac Center researchers recommended the state should cut unnecessary spending further in 2005 and make structural changes that would lower the cost of government services.
Among the recommendations:
- Sell state assets including both fairgrounds ($59.6 million), the Ralph A. MacMullan conference center ($10 million), and other state lands. These “one-time” revenues should be used to lower the state debt, which has leapt in recent years.
- Repeal the Prevailing Wage Act. This single law absorbs $400 million in state funds annually by effectively mandating union-scale wages on state construction projects. Simply exempting public schools from this special-interest favoritism, as Ohio has done, would save schools $150 million each year.
- Switch to a part-time legislature, joining the 41 other states that already have one. The annual savings would be $40 million.
- Competitively bid management of Michigan’s prison system, for approximately $250 million in annual savings.
Although large cuts still can be made without harming core government functions, the Granholm administration and Republican-controlled legislature should be commended for taking a step in the direction of fiscal responsibility.
Michael LaFaive is director of fiscal policy for the Mackinac Center for Public Policy. His email address is [email protected].
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