Granholm's Tax Warning

May 28, 2008; Page A16
Wall Street Journal

It's no fun to kick a state when it's down – especially when the local politicians are doing a fine job of it – but the latest news of Michigan's deepening budget woe is a national warning of what happens when you raise taxes in a weak economy.

Officials in Lansing reported this month that the state faces a revenue shortfall between $350 million and $550 million next budget year. This is a major embarrassment for Governor Jennifer Granholm, the second-term Democrat who shut down the state government last year until the Legislature approved Michigan's biggest tax hike in a generation.

Her tax plan raised the state income tax rate to 4.35% from 3.9%, and increased the state's tax on gross business receipts by 22%. Ms. Granholm argued that these new taxes would raise some $1.3 billion in new revenue that could be "invested" in social spending and new businesses and lead to a Michigan renaissance.

Not quite. Six months later one-third of the expected revenues have vanished as the state's economy continues to struggle. Income tax collections are falling behind estimates, as are property tax receipts and those from the state's transaction tax on home sales.

Michigan is now in the 18th month of a state-wide recession, and the unemployment rate of 6.9% remains far above the national rate of 5%. Ms. Granholm blames the nationwide mortgage meltdown and higher energy prices for the job losses and disappearing revenues, but this Great Lakes state is in its own unique hole. Nearby Illinois (5.4% jobless rate) and even Ohio (5.6%) are doing better.

Leon Drolet, the head of the Michigan Taxpayers Alliance, complains that "we are witnessing the Detroit-ification of Michigan." By that he means that the same high tax and spend policies that have hollowed out the Motor City are now infecting many other areas of the state.

The tax hikes have done nothing but accelerate the departures of families and businesses. Michigan ranks fourth of the 50 states in declining home values, and these days about two families leave for every family that moves in. Making matters worse is that property taxes are continuing to rise by the rate of overall inflation, while home values fall.

Michigan natives grumble that the only reason more people aren't blazing a path out of the state is they can't sell their homes. Research by former Comerica economist David Littmann finds that about the only industry still growing in Michigan is government. Ms. Granholm's $44.8 billion budget this year further fattened agency payrolls.

There's another national lesson from the Granholm tax dud. If Democrats believe that anger over the economy and high gas prices have put voters in a receptive mood for higher taxes, they should visit the Wolverine State.

Just a few weeks ago taxpayer advocates collected enough signatures in suburban Detroit for a ballot initiative to recall powerful Speaker of the House Andy Dillon,* who was one of last year's tax-hike ringleaders. Voters seem to think there would be rough justice if for once politicians, rather than workers, lose their jobs from higher taxes.

*An update about the recall:

I received an e-mail from Leon Drolet which states,

Michigan Secretary of State has released their preliminary review of the petition signatures submitted for the purpose of recalling the tax-raising Speaker of the Michigan House, Andy Dillon. The Secretary of State's (SOS) preliminary review contends that the petition drive is 500 signatures short of the 8,724 valid signatures required for Speaker Dillon to face recall, despite having turned in over 15,500 signatures. The SOS believes that several petition circulators who gathered a very significant number of signatures are not registered voters residing in Andy Dillon's district. ...

The SOS will issue their final validity report on June 5th.
By then, we will have done our best to rebut many of the findings in the SOS preliminary report and review all legal options. Things have and will continue to be difficult, but it ain't over yet.