Anatomy of a Tax Hike Campaign

This is fascinating, like a train wreck. You want to look away but you can't. How the fate of a state is in the hands of an "over her head" liberal Governor, her cronies and spineless moderate "Republicans" while Conservatives run interference and try to stop the damage....

Posted: Jul. 19, 2007

Anatomy of a Tax Hike Campaign
http://www.mackinac.org/print.aspx?ID=8532
Mackinac Center for Public Policy

This chronicle is derived from a number of sources. It heavily relies on and (since it was originally created for internal use) in some cases uses text from the daily Michigan Information & Research Service Inc. Capitol Capsule (hereinafter “MIRS”), which it has graciously granted permission to reprint with this citation.
Other sources included the Gongwer News Service Michigan Report, the Detroit News, the Detroit Free Press, the Mackinac Center for Public Policy, the Citizens Research Council of Michigan, the Michigan House and Senate Fiscal Agencies, the MichiganVotes.org web site, Michigan Gov. Jennifer Granholm’s web page, the Washington-based Tax Foundation, the daily sessions of the Michigan House and Senate, and personal conversations. For the most part, the chronicle was created in real time based on a mixture of sources.

1995-2007
From 1995 to 2001, Michigan state revenue from state sources grew approximately 10 percent faster than combined inflation and population growth. From 2001 to 2007, spending and revenue growth were approximately 10 percent below inflation plus population. At the end of this 12 year period, state spending and revenue were almost exactly where they were at the start, adjusting for inflation and population changes.
Beneath these figures is the reality that the prison population has grown nearly 20 percent, and spending on health care programs for the poor (Medicaid), and on health insurance benefits for state and school employees, have greatly increased, crowding out spending in other areas of the budget. On the other side, there is abundant evidence that the cost of government operations including state and school employee compensation is excessive in what is becoming a poor state.
Since 2000 Michigan has lost more than 350,000 jobs. For several years the state’s unemployment rate has been 50 percent above the national average. The state is losing population, and its per capita personal income has been falling since 2001. Its mortgage foreclosure rate is among the highest in the nation, and in most areas property values are falling.

Spring/Summer, 2006
A citizen petition drive is approved by the Republican-controlled legislature, repealing the state’s main business tax as of Jan.1, 2008. The so-called “Single Business Tax brings in $1.9 billion annually, out of a total budget of $42 billion, $26 billion of which is from state sources. Gov. Jennifer Granholm had vetoed earlier legislation to do this, but under the citizen-initiated action process she had no role this time.

November, 2006
Gov. Jennifer Granholm is re-elected to a second term with a substantial margin. Republicans retain their majority in the state Senate, but lose the state House. Sen. Mike Bishop, R-Rochester, is selected as the new Senate Majority Leader, presiding over a 20-18 majority, and Rep. Andrew Dillon, D-Redford Township, is selected to be the new Speaker of the House, where his party has a 58-52 margin.
During her first term Granholm presided over a period of flat or declining state revenue, federal money excepted. Cooperative GOP leaders in the House and Senate during the first two years allowed her to increase a number of peripheral taxes, including cigarette taxes and an indirect property tax hike. A new House Speaker in the second half of her term closed that window. Granholm has been frustrated by budget constraints, and by an inability to reward the public employee unions that are viewed as a cornerstone of her political base.

Dec. 8, 2006
It is revealed that three state departments had violated the Constitution by spending some $70 million more than the legislature appropriated for them in the fiscal year that ended on Sept. 30. In testimony to a joint legislative committee on Dec. 13, Gov. Jennifer Granholm’s budget director Mary Lannoye admits that she new about the overspending as early as August. There is speculation that the information was deliberately concealed until after the election.
Addendum: The final amount was $69 million. The three departments are: Corrections, which overspent its $1.940 billion appropriation by $19.6 million, Human Services, which exceeded the $4.468 billion appropriated for it by $42.9 million, and the State Police (MSP), which spent $6.6 million more than their allotted $569 million.

Dec. 8, 2006
On the same day, it was reported that the directors of the House and Senate fiscal agencies and Citizens Research Council analyst Tom Clay are predicting that already-passed appropriations for the fiscal year that began on Oct. 1 will likely exceed revenues by $250 million to $500 million. (The figures include making up for the $69 million of overspending in the previous year.)

Dec. 17, 2006
An article in the Oakland Press paints a gloomy picture of the liabilities the state has and continues to incur in unfunded state and school employee pension and retiree health benefits. Phil Stoddard, a state workforce official pegs the health care component of the unfunded liability at $20 billion. Under new accounting rules that will phase in the next three years (GASB 45), state and local governments will have to include these liabilities in their financial statements. An accountant and former state and county official quoted in the piece explains, “This is really what happened to companies like Ford and GM. They found out how much they have been giving away as far as health costs and said, ‘Holy cow’.”

Dec. 20, 2006
House Fiscal Agency Director Mitch Bean projects that “spending pressures” for Fiscal Year 2007-2008 will exceed projected revenues by at least $680 million. This comes as the Granholm administration is preparing its budget recommendation for that year, to be released in early February.

Dec. 21, 2006
In a wide ranging discussion with reporters, Granholm refuses to rule out the possibility of a tax increase in the coming year. Casting the issue in terms of economic growth she says, “It would not be a wise course, I think, to cut the things that I think make us competitive as a state.” This interview causes widespread speculation that she is “preparing the ground” for a tax hike, in the words of one news headline. Similar talk from other administration officials follows over the next few weeks.

Jan. 5, 2007
(all dates henceforth are in year 2007)
In a TV appearance, Lieutenant Governor John Cherry said that the administration’s likely response to these budget issues will include “new revenue,” and if it does this “needs to be sold” to the public. He says he is confident that can be done: “If we go there, it’s because we believe it can be sold and we’d make every effort to do that and make the case that it’s necessary.”

Jan. 8
The Mackinac Center reports that, “in 2006, 66 percent of United Van Lines’ Michigan-related moves took households out of Michigan, rather than into the state, tying Michigan with North Dakota for the highest rate of outbound moves, and the worst level seen since 1981, when 66.9 percent of Michigan moves involved a departure from the state.”

Jan. 9
Gov. Granholm announces that she is convening an “Emergency Financial Advisory Panel” co-chaired by former Govs. Milliken and Blanchard to recommend a solution to the state’s “current financial crisis” within 20 days. The panel consists exclusively of individuals known to be friendly to tax increases – including the two former governors – with no notable representatives from the private sector.

Jan. 10
Mackinac Center senior economist David Littmann tells the audience of popular Detroit radio host Frank Beckmann the same thing he was reported saying in that day’s Detroit News and Detroit Free Press, which is, “These are the people (on the Granholm panel) who presided over Michigan’s economic decline. The probability they will come up with something creative is as close to zero as you can get.” Littmann explains that tax increases will not lead to prosperity, and identifies spending reforms the state should instead undertake.

Jan. 12
The director of the House Fiscal Agency speculates in press reports that due to balances in state accounts coming in lower than previously expected when the books were closed on FY 2005-2006, and “spending pressures” that exceed previous estimates, spending for the 2007 fiscal year that began on Oct. 1, 2006 will exceed projected revenues not by $250 to $500 million, but by $780 to $880 million. This could mean a $218 reduction in per-pupil distributions to schools. He expects similar spending in excess of revenue for the next fiscal year as well. The director of the Senate Fiscal Agency briefs incoming Senate Democrats, giving them similar numbers.

Jan. 18
After a week of releasing various tidbits of dire information, including a report showing month-to-month state tax collections continuing to fall, the non-partisan legislative fiscal agencies, Department of Treasury and academic economists from the University of Michigan finalize the revenue estimates that the governor and legislature will use to create their annual budgets in the coming months. The bi-annual revenue estimating conference projects that for the current fiscal year revenue will fall $762.4 million short of the amount of spending already appropriated, of which $206.4 million is the result of both over-spending and lower-than-expected revenues in the fiscal year that ended Sept. 30, 2006.
For the fiscal year that will begin Oct. 1, 2007, the conference projects that the revenues will increase by a modest $313 million above the revised current-year estimates, assuming the legislature adopts a revenue-neutral replacement for the Single Business Tax that expires on Dec. 31, 2007. The Senate Fiscal Agency projects that the gap between desired spending and expected revenues in FY 2008 will be $732 million, assuming full replacement of SBT revenue, and $1.9 billion with no replacement.
Granholm budget director Robert Emerson hints that the administration would seek higher taxes: “I don’t think you can fix this with just efficiencies.”
Perhaps more ominous for their “real world” implications, the consensus is that statewide there will be 1.682 million public school pupils in the current year, down 7,900 from the figure estimated last May, and the figure is expected fall by another 15,000 next year to 1.667 million.
Finally, the experts gloomily project that total employment in the state will not see the levels achieved in 2000 until sometime between 2013 and 2020. This would far exceed the length of the Great Depression that began in 1929. Since 2000 Michigan has lost 362,700 jobs, which is fewer than the 533,700 lost in the recession that began in 1979. UM economist George Fulton estimated that the state will lose 27,200 more jobs this year and another 13,200 jobs in 2008.

Jan. 25
Senate Republicans unveil a replacement tax for the SBT that would take in $1.51 billion, approximately $300 to $500 million less than the SBT. Details are sketchy, but this is seen as their opening bid in bargaining with a governor who insists on replacing all the SBT revenue (and is widely expected to propose additional taxes as well.) “Who would pay for these tax cuts?” asks Granholm press secretary Liz Boyd.

Jan. 24
Using tax dollars filtered through various entities, the “Michigan Fiscal Responsibility Project,” an organization comprised of municipalities, universities, hospitals and other entities that rely on government spending hires a Lansing PR firm and launches a publicity campaign promoting a tax increase.

Jan. 25
The Senate Fiscal Agency issues a memo describing the kinds of cuts that would be required to balance the current year’s budget, assuming a that revenues will fall short of already-appropriated expenditures by $818 million, and that no changes of any kind are made in the way the government is operated (such as privatization or employee benefit reductions.) The list of cuts include closing 12 prisons (saving $190 million), lowering health care provider payment rates for Medicaid patients (saving $294 million), reducing higher education funding by $191 million, cutting revenue sharing by $41.6 million and welfare by $120 million.

Jan. 29
The Citizens Research Council releases a study showing that revenues to the state and local governments in Michigan rose from $32.5 billion in 2002 to $35.9 billion in 2005. For the state alone revenues rose from $22.4 billion to $24.3 billion during the period. (Located at http://crcmich.org/PUBLICAT/1990s/1999/rpt327d.pdf)

Jan. 31
The House Minority Leader, Rep. Craig DeRoche, publishes an op-ed in the Detroit News blasting Granholm for failing to limit the growth of government spending, including approving $300 million employee compensation increases. The op-ed signals that the House GOP caucus is less likely to produce any “defectors” for a tax increase vote.

Jan. 25 – Jan. 31
Various leaks from the Granholm “Emergency Financial Advisory Panel” are reported. Among them: The group favors a sales tax on services, but will not recommend anything specific. The group debated an income tax increase, with former Sen. Joe Schwarz urging it, but memories of recall campaigns after a similar move in 1983 tipped the balance against. The group will just “educate” the public on how the state arrived at this “crisis,” and will recommend ‘investing for future’ in programs and policies that will make state more competitive, such as education.

Feb. 1
The Michigan Chamber of Commerce – the state’s largest and most influential business group – calls for a nine-cent per gallon increase in the state’s motor fuel tax. This is just one item on their annual list of legislative priorities, including a business tax cut and government cost-cutting, but it is practically the only item reported by the media. Note: The gas tax is almost completely separate from the other parts of the state budget, and an increase would have no affect on “the deficit crisis.”

Feb. 2
The Granholm “Emergency Financial Advisory Panel” releases its report. As expected it makes no specific recommendations, but does state that “the deficit” cannot be closed with cuts alone, that there should be no business tax cut and that “revenue increases” are required. In addition the report calls for reform of state and school employee pensions and retiree health care benefits, noting that these represent a $35 billion unfunded liability, that schools spend more than $1,200 per pupil for employee health benefits, and recommending that these be no more generous than private sector benefits. The report also calls for a lowering of prison populations, and increased spending on higher education, health coverage for uninsured persons, “cultural” and recreational resources, and “vibrant cities.”

Feb. 6
Gov. Granholm delivers her annual State of the State address. She proposes 20 expansions of government that would cost hundreds of millions of dollars, but only vague and timid cost saving measures. The governor strongly hints that tax increases will be a part the budget she recommends two days hence. She uses the word “investment” 28 times during the speech as a synonym for government spending.

Feb. 8
Gov. Granholm recommends a budget for the next fiscal year that increases state spending by $1 billion. It is accompanied by tax increase proposals that would net an additional $1 billion annually, including 2 percent excise tax on all services except health care and education. This includes business-to-business transactions, which means the tax will be “pyramided” as it passes through a firm’s supply chain, potentially adding much more than 2-percent to costs. For many that would cancel out any savings from a new business tax the governor also proposes that would net $480 million less revenue than the expiring Single Business Tax.
To close a gap in the current fiscal year between previously appropriated spending and expected revenues, the governor proposes some modest program and department cuts. The majority of the gap would be closed with tax increases, an accounting gimmick (shifting funding to universities into the next year) and by shortchanging state employee pension contributions by $93 million (through a revision in actuarial asset valuation formulas.) Another $192 million in pension fund shortchanging is part of the overall budget package (not included in the executive order.)

Feb. 8
Rumbles begin. Former Rep. Leon Drolet launches a taxpayer group with the intention of recalling certain legislators who vote for a tax hike, generating memories of a 1983 tax-hike revolt that led to the recall of two Democratic state senators, tipping that body over to GOP control under the leadership of – Sen. John Engler. Trade associations including the NFIB, the state Bar and Realtors begin to simmer. Even government-friendly reporters and editors believe the governor has overreached by offering not only no substantive spending reforms, but massive increases.

Feb. 9
Prison union officials and legislative Republicans express reservations about a provision in the governor’s budget proposal to change sentencing guidelines to release 5,000 of 50,000 prisoners.
Late February, various datesProperty owners in most communities receive property tax assessment increase notices, despite the fact that real estate values are flat or actually lower. The increases are due to a provision in the Proposal A law that allows assessments to be adjusted upwards with the Detroit area consumers price index, which was pegged at 3.7 percent for the previous year. In addition, assessments are based on sales from two years prior to the previous April, which includes a period of rapidly increasing property values. Press reports feature grumbling or angry homeowners.

Feb. 14
A constitutionally mandated executive order cutting current year spending to match expected revenues is voted down by the Republican-controlled Senate Appropriations Committee. The order was premised on passage of the governor’s 2 percent service tax by June 1. The defeat requires the governor to schedule another executive order within 30 days.

Feb. 20
The Southern Michigan Correctional Facility, one of five state-run prisons in Jackson, will close by July as the Department of Corrections (DOC) moves forward with a restructuring plan designed to save $92 million in Fiscal Year (FY) 2008.

Feb. 23
From MIRS: “Mackinac Center Senior Economist David Littmann released data showing that Michigan’s per capita personal income in 2005, as compared to the average for the rest of the U.S. was lower (95 percent) than it had ever been since at least 1929, and he believes it is even lower now. ‘I think we’ll be seeing it at about 7 percentage points below (the U.S. average),’ Littman told MIRS. Littman said that, in terms of per capita income, Michigan’s actually doing worse than it did in any of the seven recessions it’s gone through since 1934.”
It is reported that MESSA, the MEA teachers union’s insurance arm reported a $130 million profit in 2006, and $268 million in assets. The union does not underwrite insurance, but merely administers Blue Cross plans for around half the state’s school employees.

Feb. 24
The Detroit News reports that the Detroit Public Schools is looking into the previous administration’s purchase of more than $1 million in artwork. The district is operating within a state-mandated plan to eliminate its $200 million deficit and has faced criticism for its spending and contracting practices.

Feb. 27
A House Fiscal Agency report shows that school districts ended 2006 with a total of $1.7 billion in reserves. Nearly two thirds of all districts (63 percent) had fund balances exceeding 10 percent of their annual budget. The MIRS story reports, “22 school districts and charter schools finished ‘06 in debt and 9 percent finished with fund balances of 2 percent of their operating budget or less. Sixteen percent (135) finished with fund balances of 5 percent or less. Nearly two-thirds of school districts (63 percent)
ended FY ‘06 with a balance of at least 10 percent of the operating budget.”

Feb. 27
Reportedly, in school tax and bond elections around the state on this day, three out of four fail.

March 1
The governor’s tax plans are finally introduced as actual legislation.

March 5-9
Gov. Granholm takes her proposal on the road, defending it in a series of carefully orchestrated broadcast “town hall” meetings around the state.

March 5
Comerica Bank, headquartered in Michigan for almost 150 years, shocks many in the political establishment with the announcement that it is moving its headquarters to Dallas. The move follows an earlier announcement by Pfizer that it will close a drug research facility in Ann Arbor, costing the state 2,000 jobs.

March 5
Democratic leadership in the House announce they will end the generous lifetime health benefits paid to former lawmakers, and cut other expenses.

March 7
The Mackinac Center releases an econometric study showing that the two percent service tax would cause the loss of 19,000 jobs by the end of 2008, and because of its “dynamic” effects on the economy would bring in $221 million less revenue than the $1.47 billion the administration projects.

March 9
The Michigan State Police announce that they are trying to reduce the miles driven by troopers in order to save gas. Earlier, it had been announced that 30 troopers would be laid off. Some view the announcements as a tactic by the executive branch to convince the public that a tax increase is justified.

March 9
The Wall Street Journal blasts the Granholm tax-and-spend plans in its lead editorial, pointing to the Comerica departure as symptomatic of what such policies bring. The piece cites analysis by Mackinac Center economist David Littman of the Mackinac Center showing that the per capita income in the state fell to its lowest level in 75 years in 2005, relative to the national average.

March 12
The Michigan Chamber and the Michigan Association of Realtors begin running a TV ad against the two percent service tax.

March 13
A Standard & Poor’s Ratings Services report warns, “Should the state delay acting on tax and budget reform measures, however, further rating deterioration is likely.” Gov. Granholm says this is endorsement of her tax increase plans. The report also says, “If such a large amount of cuts that late in the year is even possible, they aren’t likely to be very palatable and they may not be sustainable. . . . Cutting taxes or providing economic incentives for businesses is not going to create revenue to address the current shortfall.” Several weeks previously Moody’s Investors Service dropped the state’s rating from Aa2 stable to Aa2 negative “based on the state’s pronounced economic under-performance and chronic budgetary stress in recent years, which has been caused in large part by the continuing decline of the U.S. automobile industry.”

March 18
Media polls are released indicating that the 2-percent service tax enjoys support with less than 30 percent of the public. Support for a possible income tax hike is even lower.

March 19 - 22
Unions including the SEIU, the AFL-CIO and the MEA “turn up the volume” on their urging the legislature to increase taxes rather than reduce government spending, issuing press releases and generating member contacts to lawmakers and media.

March 20
Following a “dance” of conflicting meeting schedules, politicized “no-shows” and dueling press releases, Gov. Granholm and Senate Majority Mike Bishop have a budget meeting.

March 20
Rep. Jacob Hoogendyk introduces HCR 7 to reject proposed increase state employee pay raises recommended by the Civil Service Commission and contained in the Executive Budget for Fiscal Year 2007-2008. This refers to the further installments of a 10 percent pay hike over several years that Gov. Granholm had negotiated during her first term of office. Disapproving upcoming pay hikes would require a two-thirds vote in the House and Senate; the raises will add $123.5 million to Fiscal Year 2008 spending, $76.1 million of which are general fund dollars.

March 22
Gov. Granholm releases a second Constitutionally-mandated Executive Order to match current year to match it with expected revenue. Like the first order, the $344 million affected primarily consists of accounting changes, and reducing deposits into government employee pension and post-retirement health care funds to the legal minimum (which is significantly below the actuarially sound minimum), but also included some actual “hard” cuts. Unlike the first order, the governor does not implicitly assert that this contingent on a tax increases, but instead simply says it’s only a “partial” solution. The Senate Appropriations Committee approves the order.
On the same day, the Senate passes Republican budget cut bills. These also are heavy on pension shorting and accounting gimmicks, but also include $300 million in actual spending cuts (“hard cuts”) from the current year budget, including a $34 per pupil cut in foundation grants to schools, and cuts to scores of other spending line items. (See Senate Bills 220 and 221.)
Finally, the Senate brings up the Governor’s “two penny” service tax proposal, and defeats it on a mostly party-line vote (one Democrat votes “no.”) On the previous day, the Chair of the House Appropriations Committee introduced a bill to increase the state income tax from 3.9 percent to 4.6 percent.

March 27
MIRS: The Department of Treasury informs the governor that the state is facing a $400 million cash-flow problem as early as May, spurring unconfirmed reports that the front office has asked her department heads to formulate a government shutdown contingency plan by May 1. The next day Treasury officials describing some contingency plans, and discussing implications for the state’s bond rating, are accused by Republicans of using “scare tactics.”

March 29
On the last day before a Constitutional deadline, the House Appropriations Committee approves the March 22 Executive order to fill about a third of what is now projected to be a $941 million budget hole for the current fiscal year.
Both houses of the legislature fail to act before a deadline on a measure that would reject $109 in savings that could be realized by rejecting upcoming installments of state employee pay raises granted by Gov. Granholm three years earlier. The following day House Republicans launch an “online petition” calling for the rejection. This is political and has no force of law.
Gov. Granholm issues 10 executive directives that include a moratorium on all state grant payments, news agency subscriptions, service contracts, temporary employees, travel, performance pay awards, employee training or any new hires.
House Speaker Dillon proposes a vague plan to repeal a electric utility competition law – something DTE and other state electric companies have lobbied for intensely – and raise $500 million in new utility taxes as a means of addressing budget problems. The plan is widely panned in the following weeks and little more is heard, although the large utilities continue a heavy lobby campaign to restore their monopolies. Three weeks later Republican legislation is introduced in the Senate to expand competition.

April 3
The Citizens Research Council releases a report showing that in 2006 there were 391 ballot issues asking voters to raise or renew taxes, or for “Headlee overrides.” Only 47 percent of the tax issues passed. In 2002, there were 300 such requests, and 52 percent passed. In 2004, the numbers were 350 and 59 percent

April 5
House Democrats hold a news conference to announce their “plan” to resolve the state’s budget problems. Instead of providing specifics, they discuss a variety of ideas, most of which either have no chance of being adopted, or relate to long term issues. One of these is the now infamous $38 million idea of providing iPods to all schoolchildren. It is later revealed that a number of legislators including the House Speaker accepted a California trip paid for by iPod maker Apple Computer.

April 6
The Attorney General announces a plan to install a gym in the department’s building. No cost figures or fund source are specified. Later, the cost is pegged at $60,000 with no state money involved, but the proposal in disapproved by DMB.
The state police troopers union offers $400,000 to the state to postpone the proposed layoff of 29 troopers.

April 8
The Detroit Free Press article reported that the state spends $359,000 to provide personal cars to judges on the Supreme and Appeals courts. On April 16 House Democrats announce that they will move to take away the cars.

April 9
It’s reported that a recent Tax Foundation study shows that Michigan’s total state and local tax burden as a percentage of personal income is 11.2 percent, ranking third (among five states) in the Midwest for highest tax burden, and moving from 26th place nationwide in 2004 to 14th worst in 2007. Ohio and Wisconsin had burdens of 12.4 and 12.3 percent, respectively. Illinois and Indiana had burdens of 10.8 and 10.7 percent, respectively. State Treasurer Robert Kleine disputes the figures, which are based on projections of trends.

April 11
House Democrat Fred Miller, proposes a 6 percent service tax on selected services described as “amenities.”

April 12
House Fiscal Agency Director Mitch Bean says the current $686 million budget deficit for Fiscal Year 2007 (after the Executive Order) likely will grow another $100-$300 million after state official budget officials meet again in May to discuss state revenues.

April 17
The House passes its version of a partial fix for the current-year spending and revenue gap, which includes a $7.50 per ton tax on solid wasted dumped in landfills (the current tax is 21 cents), expected to take in approximately $150 million annually. The House passes a number of smaller tax hikes (“loophole” closings) and rejects most of the Senate’s budget cuts, but accepts all of its accounting gimmicks, and adds some of its own. Although the House does not accept the Senate’s $34 per pupil school cut, it fails to completely close the gap in the School Aid Fund, which means that the cut will be imposed anyway by way of a statutorily-mandated “pro-rated” Executive Order cut. Given ongoing declines in revenues, this is expected to be as much as $122 per student (which would still mean a net increase of $85 from FY 2006.) The House repeals a previously appropriated 3 percent hike in university funding for the current fiscal year.

April 18
Approximately 350 citizens waving tea bags backed up by a giant fiberglass pig assemble in front of the state Capitol steps to protest proposed tax hikes. The protest was first organized before the Governor’s 2 percent service tax proposal was defeated, and at that time organizers had hopes of turning out thousands of service providers targeted by that tax.

April 20
The House announces employee benefit cuts as part of an announced effort to cut 5 percent from its own budget. The legislature has a $116 million budget. The House and Senate combined have roughly about 700 employees.
Michigan ranked 44th in the country and scored “D-minus” on a “Entrepreneurship Score Card” compiled by the Small Business Association of Michigan that uses 122 factors to measure public policy impacts on “entrepreneurial dynamism.”

April 23
Supreme Court Chief Justice Clifford Taylor says the state has too many judges for its needs, including Court of Appeals judges. In recent years the court has recommended that the legislature establish new judgeships in some areas and eliminate them in others, but for the most part only the politically popular first part of the formula has been adopted (adding more judges.)
It is reported that in response to the current fiscal situation, Gov. Granholm has asked the Civil Service Commission (CSC) to change the state rules to allow for a 20-day temporary layoff of state workers who do not have union representation. There are 15,371 of these so-called Nonexclusively Represented Employees.

April 23
The state Department of Management and Budget orders judges and department heads to turn in their state cars. It will instead reimburse officials for the use of their personal cars on public business. In recent years the size of the state vehicle fleet has been greatly reduced.
April 24The Senate approved the House-passed funding shifts and accounting changes to the School Aid Fund, which effectively trimmed the hole in this year’s state budget to about $399 million.
A Michigan State Police official tells a legislative committee that its current budget may not be sufficient to sustain full operations through the end of the fiscal year, and that one response might be to curtail road patrols in the fall. No drivers appear before the committee to complain.

April 25
House Democrats announce a new plan to replace the expiring Single Business Tax. This would be a revenue-neutral package that gets half its revenue from a 7 percent profits tax and half from a 0.488 percent annual tax on a firm’s net worth. It contains an average cut in the personal property (business tools and equipment) tax of 73 percent for industrial firms and 46 percent for other businesses, plus tax credits based on the size of a firms payroll in Michigan compared to other states, and for locating its headquarters here. The plan includes a provision that if in the first two years it takes in more than the SBT by more than 10 percent, a pro-rated credit will be issued to all business taxpayers for the excess.

April 26
The Fitch financial rating service downgrades Michigan’s bond rating from AA- with a stable outlook to AA- with a negative outlook, noting that the move reflects “the state’s financial stress,” a sharp drop in sales tax revenue and continued economic weakness. Just three months previously the service had lowered Michigan from AA to AA-. Fitch notes that Michigan’s cash flow problem has been made worse this year because the short-term note sales Michigan has used in year’s past, is showing signs of stress at an earlier point this year.

April 27
MIRS reports that earlier in the year Senate Republicans paid for a large, and in-depth, polling survey. This showed that on the general issue of tax hikes, solid percentages of likely voters would oppose such increases. High percentages of Republican voters were strongly opposed to tax hikes, high percentages of Independent voters were opposed as well, and (supposedly) a surprisingly high percentage of Democratic voters said they were opposed to tax hikes.

April 29
Tax proponents arguing that spending more on higher education will save the state economy receive a blow from a Detroit Free Press poll released on this date, showing that 53 percent of 640 undergrads polled at UM, MSU and WMU, plan to leave the state when they graduate. Of those who plan to leave, 47 percent cite “go to where good jobs are” as the reason. Chicago, West coast, Northeast or Southern state are destinations cited by 15 percent, 16 percent, 14 percent and 11 percent of those who say they will leave, respectively.

April 30
Moody’s Investors service lowers the Michigan bond rating from Aa2 to Aa3, putting Michigan’s rating near the bottom among the nation’s 50 states. The downgrade impacts about $1.6 billion in the state’s general obligation debt and impacts roughly $17.7 billion more in other related debt.
Moody’s reported that the downgrade was spurred by the state’s economic reliance on domestic auto manufacturing, state government burning through its fund balances and government basically using accounting gimmicks instead of structural changes to address its many budget shortfalls. The fact that the Legislature eliminated the Single Business Tax also was listed as a factor. The report specifically attacked Michigan’s response to balancing the Fiscal Year 2007 budget. Analysts said that adjusting pension and retirement benefits, pushing off higher education payments and debt restructuring “are consistent with below-average credit quality.”

April 30
The Detroit News describes a memo circulated by Oakland County Deputy Executive Robert Daddow describing alarming developments in the state’s long term financial picture. Their editorial explains that, “for several years, the state has not made full payments to its pension funds. According to the notes to the state’s financial statement, unfunded liabilities for the state employee pension system have grown to $2.5 billion at the end of the 2005 budget year from $1.3 billion at the end of the 2003 fiscal year. For education employees, the unfunded liabilities have grown to nearly $10 billion from $6 billion. . . . (O)ver the last four years (local school districts) have under-funded their pension systems by more than $800 million, he notes. . . . (I)f the state and schools wanted to put aside money for future health care liabilities, according to Daddow, they might have to spend three times as much each year.”

May 2-3
The House and Senate pass competing plans to replace the expiring Single Business Tax. The House plan is “revenue neutral,” raising the same $1.9 billion as the SBT. The Senate plan would mean a $400 million business tax hike.

May 3
House Democrats discharge from committee House Bill 4500, to increase the state income tax from 3.9 percent to 4.6 percent. According to rumors, in a closed-door meeting, virtually every member of the caucus indicated that they preferred this to the Gov. Granholm’s moribund “two penny” service tax. Earlier in the week, State Treasurer Robert Kleine says that a proposal to place on the ballot a measure giving voters a choice between an income tax increase or a sales tax increase “has some appeal,” and compares favorably with the 1994 Proposal A initiative, which gave voters a choice between a tax shift that lowered property taxes for homeowners or an income tax hike.

May 3
Two stories appear that add to the “cognitive dissonance” of citizens being told that government in the state is experiencing a fiscal “crisis.” Over the preceding five months, a steady stream of similar news reports have appeared on almost a weekly basis:
The Detroit Free Press reports, “nearly 80 municipal officials representing public employee pension funds - more than twice the number of any other state - are planning to attend a weeklong conference on pension issues – in Honolulu. The event is hosted by National Conference on Public Employee Retirement Systems, a nonprofit, public-pension advocacy group.”
The Detroit News reports, “Wayne County commissioners get double the pay, have three times the staff and spend three times the tax money compared with the commissioners in Oakland and Macomb. Wayne County commissioners get double the pay, have three times the staff and spend three times the tax money compared with the commissioners in Oakland and Macomb. The 15-member governing board of Wayne County costs taxpayers $11.2 million a year; Oakland’s board costs $2.9 million.”
Rep. Fulton Sheen introduces a new tax proposal, the so-called “Fair Tax,” which would replace the SBT, Income Tax, and Personal Property Tax with a new 9.5 percent sales tax on all goods and services.

May 8
The board of the Michigan Strategic Fund votes to immediately disburse the last $42.8 billion remaining in the “21st Century Jobs Fund,” a business subsidy scheme adopted a year previously which borrowed $400 million through long term bonds. Republicans who had planned to use the money to balance the current-year budget are angered by the move, and especially by the news that state Treasurer Robert Kleine appeared at the meeting to urge the action. It is later learned that the Governor was not aware of Kleine’s actions.
Gov. Granholm announces a June 1 deadline to resolve the budget dispute, or she will begin “shutting down” the government on that date.

May 9
MIRS reports that the Granholm administration believes there are nine GOP senators willing to support “some kind of” tax increase. The list includes Sen. Gerry Van Woerkom (R-Norton Shores), Sen. Wayne Kuipers (R-Holland), Sen. Alan Cropsey (R-Dewitt), Sen. Mark Jansen (R-Cutlerville), Senate Appropriations Chairman Ron Jelinek (R-Three Oaks), Sen. Tom George (R-Kalamazoo), Sen. Patty Birkholz (R-Saugatuck), Sen. Bill Hardiman (R-Kentwood) And Maybe Sen. Roger Kahn (R-Saginaw).
Four senators are considered to be “definite ‘No’ Votes”: Sen. John Pappageorge (R-Troy), Sen. Michelle McManus (R-Lake Leelanau), Sen. Alan Sanborn (R-Richmond) And Sen. Randy Richardville (R-Monroe).

May 10
The Detroit News begins a three part expose’, “Michigan’s education time bomb: Costly, loophole-ridden retirement system threatens public schools.” The stories detail loopholes in the school employee pension system that allow members to acquire lifetime health insurance benefits with very little service, “double dip” by collecting pension benefits while still working, and more. They explain the billions of dollars in unfunded liabilities the system represents, and how in little over a decade it will consume more than 30 percent of school payrolls. (See also Oakland Press article in Dec. 17, 2006 item above.)

May 14
After ongoing budget negotiations involving multi-party “work groups,” and between Gov.. Granholm, House Speaker Andrew Dillon, and Senate Majority Leader Mike Bishop, the latter issues a press release announcing a “deal” on closing the current year budget deficit that involves no tax increase and a $36 per-pupil school aid cut (considered modest compared to the $122 cut expected if no deal is struck.) Half an hour later the Governor and Speaker release a joint statement saying, “No deal.”

May 15
A further round of budget negotiations collapse, reportedly because Sen. Majority Leader Mike Bishop refuses to “sign a pledge” to go along with $1.8 billion in unspecified tax increases.

May 16
Responding to the collapse of budget negotiations, and to preliminary figures indicating that an upcoming revenue estimating conference will peg the current year deficit at around $700 million even after the budget-cutting Executive Order adopted in March, on a party line vote the Senate passes a Republican bill with most of the same cuts as its March 22 budget plan, plus some new ones, and which also removes $294.5 million that it has been learned was allocated by the “21st Century Jobs Fund,” but not yet actually spent. The plan also “raids” other so-called “restricted” revenues, including $35 million from a state “convention facilities fund,” $70 million from a state underground fuel tank cleanup fund (also the target of a 2004 raid), $20 million from a “Michigan Conservation Corps Endowment Fund,” $70 million from the “Merit Award Trust Fund” that uses tobacco lawsuit money to pay for non-need based college scholarships, and others.

May 16
Gov. Granholm tells the state Medical Society that if taxes are not raised “people will die” because of the budget cuts to Medicaid and other social services that she says this will necessitate. Republicans are angered by the remark, and neutral observers generally find it to be somewhat over the top.

May 17
The second of two regularly scheduled biannual Revenue Estimating Conferences takes place, with the non-partisan House and Senate Fiscal Agencies, the Department of Treasury and academic economists from the University of Michigan agreeing that revenue for Fiscal Year 2006-2007 will be $195.3 million lower than their January estimate, and $338.2 million lower for FY 2007-2008. Under state law the deficit projected for the School Aid Fund will require a $116 per pupil cut, prorated across all districts, unless cuts are made elsewhere or taxes raised. All told, the gap between desired spending and expected revenues in the current fiscal year is projected to be approximately $802 million. A conference report on Senate Bill 220 that would close $327 million of that gap has not been put up for a vote, but reportedly there is consensus among the parties on this much.

May 22
The Office of State Employer sends layoff notices to state employees unions, starting the clock on a 30-day notice required by law before union layoffs can go into effect. The move is taken in case no budget agreement is reached before that date.

May 23
Plans by House Democrats to possibly vote on an income tax increase do not come about, in part due to recall threats by anti-tax groups. The possibility arose three days earlier when an unusual Sunday meeting was convened by House Speaker Dillon to gauge support for the measure, and to ask four Republicans (Wenke, Ball, Nofs, and Gaffney) who attended what their “price” for a “yes” vote would be in terms of government reforms. On Wednesday, two such bills are passed (capping school superintendent’s pay and capping a school pension “double dipping” scheme featured in a recent Detroit News expose), and both are tie-barred to an income tax hike, but there is not vote on the tax hike itself.
MIRS News reports that Democrats are “freaked out” by actions orchestrated by former Rep. Leon Drolet to back up a threat from the “Michigan Taxpayers Alliance” group he leads to recall legislators who vote for tax hikes. In preceding week Drolet’s group made thousands of “robocalls” to citizens in the districts of Republicans thought to be sympathetic to tax hikes, and distributed door-to-door recall-threat leaflets in pro-tax Republican Rep. Dick Ball’s district. On this day Drolet distributes similar professionally produced recall leaflets to Democratic legislators’ offices, and parks a giant fiberglass pig sporting “Recall Ball” messages in front of the Capitol.

May 24
The Citizens Research Council releases a report showing that the state has drained nearly $2.9 billion from various funds since 2000, and is expected to incur $66 million in interest expense this year on short-term borrowing to cover cash flow shortfalls. In contrast, in 2000 the state earned $137 million in interest on positive balances in various funds, including the long-since depleted “rainy day fund.”

May 24
House Appropriations Chair George Cushingberry, D-Detroit, the sponsor of a bill to increase the state income tax rate from 3.9 percent to 4.6 percent, introduces a bill to levy a $1.35 monthly tax on every phone line in the state, both cellular and landline. This would impose a new $200 million burden on phone users. The money would be distributed to a variety of programs and local governments under a formula specified in the bill; $43 million would go to the state general fund.

May 25
The House, Senate and Governor agree on a plan to paper over the $802 million FY 2006-2007 deficit with $410 million borrowed against future revenue from the 1998 tobacco company lawsuit settlement, plus another $80 to $90 million from a fund that borrows money to provide college loans, and $167 million raided from so-called “restricted” funds. This in addition to previous agreements to use accounting gimmicks to shortchange an annual contribution to cover employee pension liabilities. The agreement only includes modest spending cuts in arts grants, universities, the legislature, and some other items. It would push $112 million in disbursements into the FY 2007-2008 budget year, raising the gap between desired spending and expected revenue in that year’s budget to more than $1.8 billion.

May 25
In a television interview, Treasurer Robert Kleine reveals that under the SBT replacement plan favored by House Democrats, the Big Three automakers would not only pay no business tax, they would likely get refund checks from the state for property tax on tools and equipment they pay to schools and local governments.

May 30
The House passes legislation containing the provisions of the deal made on May 25. In the days since the agreement the press and public have begun to comprehend the unprecedented decision to use long-term borrowing to pay for current consumption, and the deal has been condemned by editorial boards on both sides of the ideological spectrum, which urge either straightforward tax increases or budget cuts.
Detroit Free Press, May 29, 2007 Little joy over budget deal
Lansing State Journal, May 28, 2007 Budget deal seen as one-time fix for state's cash woes

May 30
The annual Detroit Regional Chamber of Commerce Annual Leadership Conference on Mackinac Island begins with a subdued atmosphere, given the ongoing budget situation. The posh conference is made up of legislators, the governor, business leaders and other prominent public officials.

June 4
The Departments of Community Health, Corrections, Human Services, and the Strategic Fund agency, divulge that they are on track to overspending the amount appropriated for them in the current fiscal year ending Sept. 30 by $168.5 million, $42.4 million, $39.5 million and $8 million, respectively, for a grand total of $258 million. The disclosures comply with a new law was passed earlier in the year requiring them by June 1. This was adopted following allegations that news of similar overspending in the previous year was withheld for political reasons.
Gov. Granholm announces that, following a budget deal that would pay for current spending with up to $500 million in borrowing, the government employee layoffs warned of on May 22 will not take place.

June 7
The U.S. Bureau of Economic Analysis releases its final tabulation of real Gross Domestic Product of every state in the union in 2006. They all grew - except Michigan. In this broadest measure of the economic performance of a state or nation, Michigan’s economy actually contracted by 0.5 percent in inflation-adjusted terms.
Separately, in the 12 month period ending March 31, Michigan was dead-last in an index of changes in house prices maintained by the Office of Federal Housing Enterprise Oversight. Prices here fell by 0.66 percent. The U.S. average was a 0.45 increase. Michigan was one of only two states that experienced four straight quarters of decline (Massachusetts the other).

June 11
Senate Majority Leader Mike Bishop tells the Detroit Free Press that he thinks there should be concessions from the state’s 52,000 employees. Specifically, that they should give up the 4 percent raise scheduled for Oct. 1, which would save $109 million. In late March the Senate failed to vote on a resolution that if approved by two-thirds of both houses would have repealed the pay hike. The vote almost certainly would have failed, given the administration’s opposition to rescinding the raise.

June 12
Comerica Bank chief economist Dana Johnson releases a quarterly report detailing how Michigan is becoming a poor state. The state saw its gross domestic product stagnate between 2000 and 2006 (annual compound growth rate of 0.0 percent), while the nation as a whole saw an annual growth rate of 2.8 percent. From 2004 to 2006, real GDP in the state contracted at a 0.3 percent compound annual rate. In per capita GDP Michigan fell from 23rd place in 2003 to 35th in 2006. Johnson concludes, “A lot needs to go right for the state economy to bottom out.” He does not comment on the proposal to increase the state’s income tax. Johnson’s employer Comerica Bank recently decided to transfer its headquarters from Michigan – its home for almost 150 years – to Texas.

June 18
A poll by the Lansing EPIC/MRA firm shows that 3 percent of Michigan residents questioned said they would “definitely” leave the state in the next five years. Most cited the economy, with weather also a factor. Of men under the age of 40, 32 percent said they would or were “likely” to leave, and 5 percent said they would leave. Twelve percent of young men with college educations said they were likely to leave. The question requested by the Gongwer News Service asked 600 likely voters if over the next five years they thought they would definitely stay in Michigan, likely stay in the state, likely to move out or definitely move out. Pollster Ed Sarpolis said the findings suggest that the state should plan on losing 300,000 to 600,000 people in the next five years from it’s current 10 million.

June 19
MIRS reports that Gov. Granholm and Democratic leaders have agreed on a tax increase revenue target of $1.5 billion. Rumors that the House would stage a “test vote” on some tax increase bill do not come to pass.

June 20
The Mackinac Center releases a report by Economist Richard Vedder showing that despite their loud complaints about flat or lower state appropriations, between 2000 and 2004 total inflation-adjusted revenues per full time student increased at every state university except Ferris State and Wayne State. The University of Michigan saw real income rise nearly 20 percent.

June 25
Senate Republicans produce a list of $1.05 billion in cuts and reforms, and suggest that this could forestall tax hikes if combined with “selling” future lottery revenue for a $750 million up-front lump-sum payment from a private entity (basically a form of deficit financing, or paying for current spending by requiring lower spending or higher taxes in the future). Among the cuts and reforms are privatization measures, state employee wage concessions, school employee benefit reforms, welfare cuts, suspension of the state’s “prevailing wage” law, postponing an earned income tax credit for low income workers scheduled for 2008, and more.

June 27
Following a contentious exchange of public letters and press statements between Gov. Granholm and Senate Majority Leader Mike Bishop over tax increases, government reforms and who is responsible for failure to progress on a 2008 budget, the Senate passes modest but controversial legislation to reform notoriously lax school employee pension qualifications. All Democrats plus Republican Sen. Roger Kahn vote against the measure, which is strongly opposed by the MEA teachers union. The body is unable to summon sufficient GOP votes to move a another bill opposed by the MEA that would reform school employee health insurance systems, potentially causing a significant loss of business fir the union’s lucrative insurance arm, MESSA.

June 28
The legislature passes a new Michigan Business Tax to replace the Single Business Tax, repealed as of Jan. 1, 2008 under citizen-imitated legislation. The new tax will extract at least as much revenue from business as the SBT, and is arguably no less complicated, consisting of a corporate income tax, a corporate gross receipts tax, and an alternative tax for small business, plus many offsetting tax credits that benefit some types of business much more than others. Among these are substantial personal property tax reductions for industrial firms, and smaller ones for other firms. In general, the new system reduces taxes on industrial firms, small businesses that don’t exceed specified profit and officer compensation caps, and multistate firms based inside Michigan; and raises them on other types of business. The Big Three automakers will get large tax reductions, and reportedly were heavily involved in drafting the new tax. Notably, the Michigan Chamber of Commerce comes out against the tax.

July 18
After falling to 6.9 percent in May, Michigan’s unemployment rate rose to 7.2 percent in June. The national rate is 4.5 percent. Total state employment was 4.68 million, down 52,000 jobs from one year earlier, or 1.1 percent. Total employment nationwide rose 1.2 percent in the same