Sorting through Michigan’s public investment priorities

By Rick Haglund

Mention “government investments” and many Republicans shield their wallets. To them, investing is a euphemism for wasteful spending of taxpayers’ hard-earned money.

But Gov.-elect Rick Snyder appears not to be your typical low-tax, small-government Republican.

Sure, he has proposed a $1.5 billion business tax cut without explaining how the severely cash-strapped state can afford it. And he has said he would shrink the size of a state government that’s already struggling to provide services.

But Snyder also has tendered a laundry list of investments he plans to pursue, including revitalizing Detroit, strengthening rural communities, supporting arts programs, protecting the environment and providing incentives to keep college graduates in Michigan.

“We need new models for economic development, education, health care, central cities revitalization, environmental stewardship and more,” Snyder said on his gubernatorial website. “Our citizens, particularly the young, need the education and training appropriate for today’s global, knowledge-based economy.”

The word “investment” appears on Snyder’s gubernatorial website numerous times in explaining how he plans to “reinvent” Michigan.

Many Michigan residents say they also want state government to undertake investments that will make Michigan a more attractive place to live and work.

In The Center for Michigan’s Defining Moment Campaign, 10,000 state citizens in the past three years identified an investment agenda that roughly aligned with Snyder’s priorities.

It included better environmental stewardship, improved roads and other public infrastructure, a stable spending plan for education from pre-school to the university level, and support for arts and culture.

Snyder would seemingly be in a strong position to push his agenda through the Legislature, as Republicans will control every branch of state government in January.

But many of them were elected on their promises to cut taxes and spending, making it questionable whether they will look favorably on Snyder’s investment plans.

Revitalizing Cities

That may be especially true concerning one of Snyder’s top priorities—restoring Detroit and other struggling cities.

Regional leaders “need to understand that the well-being of the entire state depends on the success of all of Michigan’s central cities,” Snyder said on his gubernatorial website.

Michigan, he said numerous times on the campaign trail, can’t be a great state unless “Detroit is on the path to being a great city. And the right way to do that is to be a partner.”

Studies by the Brookings Institution and others show the critical importance of healthy big cities and metropolitan areas to a state’s economy.

Big Cities Fuel Economy

Research by Michigan Future Inc. has found that the wealthiest states in the country are mostly those with large metropolitan areas anchored by vibrant big cities.

Metropolitan Seattle provides 69 percent of Washington state’s gross domestic product, according to the Brookings study. The impact is even larger in metropolitan Chicago, which represents 78 percent of Illinois’ GDP.

Those are states with relatively high per capita income.

In Michigan, the Detroit, Grand Rapids and Lansing areas combined produce 66 percent of the state’s GDP, according to Brookings. Michigan’s GDP plunged 5.2 percent last year, the second largest drop of any state, ahead of only Nevada at 6.4 percent.

“We have to be clear that just a smaller government and lower taxes don’t get us higher income and economic growth,” said John Austin, a nonresident senior fellow of the Brookings Institution.

But Michigan lawmakers, who have long been at best ambivalent about Detroit, are likely to be even more skeptical about becoming a “partner” with the city.

Although Mayor Dave Bing has been praised for cleaning up the mess his predecessor, the imprisoned Kwame Kilpatrick, left him, some say lawmakers likely will shun Detroit, which faces a budget deficit in its schools of about $325 million, and is embroiled in an ongoing FBI investigation of massive political corruption.

“This will be most anti-Detroit legislature in a very long time,” said Lou Glazer, president of Michigan Future in Ann Arbor.

Investing in Prosperity

Michigan Future advocates for a high-prosperity economy based on investment in higher education, attraction of young talent, and vibrant cities and metropolitan areas.

But Glazer and others said Michigan can’t make those investments unless it generates more revenue. That means higher taxes, something Republicans in the Legislature have said they will oppose. “A lot of people in the Republican Party are not going to be in favor of an investment budget,” he said.

The short-run prospects for significant investment in such things as cities, roads and early childhood education appear grim.

Snyder faces an estimated $1.6 billion shortfall in the next fiscal year budget, starting Oct. 1. Plus, he has proposed a $1.5 billion business tax cut by ending the Michigan Business Tax and replacing it with a 6 percent corporate income tax.

One prominent Republican predicted that virtually no additional money will be spent on investments in the first year of Snyder’s administration and that austerity budgets are likely to be part of Michigan’s future for years to come.

“It’s going to be brutal, Oakland County Executive L. Brooks Patterson said Saturday on WWJ-TV’s “Michigan Matters” public affairs show. “Everything that isn’t mandated by law is gone. It won’t be business as usual.”

Snyder’s prospects for making investments in the state’s quality of life are zero if he carries through on his promise to trim $1.5 billion in business taxes, said Jeff Padden, president of Public Policy Associates in Lansing.

“If he does that, his administration is dead in the water,” Padden said. “There won’t be enough money to fund anything.”

The state’s general fund budget has shrunk from $9.6 billion in 2000 to about $7 billion this year. Michigan has depended on $4.7 billion in temporary federal funds to plug budget holes over the past three years, money that is not likely to be extended into the next budget cycle.

Fixing Michigan’s Roads

One area Michigan is in desperate need of more investment is in its roads and highways, Padden said.

The Michigan Chamber of Commerce, which generally is opposed to tax increases, supports increasing the gas tax as an economic imperative. “Michigan’s economy will not fully recover without a first-class network of roads, bridges and transit systems — period,” said chamber President Rich Studley.

Earlier this year, the chamber commissioned a study by the Anderson Economic Group that found the state could generate 15,000 new jobs by boosting its annual transportation budget from about $2.1 billion to $4.4 billion. The study said that could be accomplished by doubling vehicle registration fees and raising the gas tax from 19 cents to 38 cents a gallon. The state last raised the gas tax in 1997.

Padden said the state, which is not growing significantly in population, should focus its transportation budget solely on repairing its existing system.

“The smartest investment you can make in transportation is improving the quality of the current system,” he said. “The new administration should say not a single dollar will be spent in expanding our transportation capacity.”

Snyder is opposed to raising the gas tax. He has said existing funds can be spent more efficiently through his “value-for-money” budgeting plan.

That’s the name Snyder has given for a process in which citizens are asked how they want their tax dollars spent and a budget is built around those priorities. Spending is regularly monitored for effectiveness, and programs that don’t meet certain criteria are scaled back or eliminated.

Snyder has pointed to the state of Washington as a successful model of “value-for-money” budgeting saying that the state used it to cut a $2.4 billion deficit last year without raising taxes.

But Washington is facing a projected $5.7 billion deficit over the next two years because of declining tax revenues. Washington is one of seven states without a personal income tax.

Voters rejected a proposal in November to tax the top 1 percent of earners in the state to pay for education and health programs. The tax plan was supported by Microsoft co-founder Bill Gates, but was hotly opposed by many in Washington’s tech sector, including Microsoft CEO Steve Ballmer.

In Search of Savings

One area in which Michigan could find money for additional investments is in trimming the cost of public sector workers and retirees, a move Snyder supports.

Research by Michigan Future found that total cost of wages and benefits for all state employees, including schools and universities, is 5 percent higher than what Minnesota pays. If Michigan matched Minnesota’s public sector labor costs, the state could save $1.8 billion a year, Glazer said.

Continuing that gap is “kind of hard to defend,” he said.

Padden said the state also could save hundreds of millions of dollars by cutting the size of the Corrections Department.

He said the state has done a good job of shrinking the size of the prison population, which for years has been the largest among the Great Lakes states.

But corrections spending has jumped 31 percent over the past decade, from $1.51 billion to $1.99 billion. That’s mainly due to growing employment and health care costs in the department.

“When you think of where investment dollars come from, you have to talk about corrections,” Padden said. “The future has to be a much, much smaller corrections department in Michigan.”

Snyder has talked a lot about supporting investments in such areas as cities, early childhood education and environmental protection without suggesting that he would increase general fund spending in those areas.

In an interview before being named Snyder’s strategy director, Public Sector Consultants President Bill Rustem said the new governor could invest millions of dollars in an urban agenda from non-general fund sources such as the Natural Resources Trust Fund and Michigan State Housing Development Authority.

And on his gubernatorial website, Snyder repeatedly mentions establishing public-private partnerships to fund various investment priorities, without specifics.

Reviewing Tax Expenditures

He also has said the state needs to trim tax expenditures—revenue the state gives up in tax exemptions, credits and deductions. That could provide his administration with billions more to pay for basic government services and reinvest in the state’s higher education system.

Michigan ranks 42nd per capita in higher education at a time when more and more good-paying jobs require at least some college education beyond high school.

The state hands out more than $6 billion a year in tax expenditures than it takes in from tax revenues, according to the House and Senate Fiscal Agencies.

Snyder has said he plans to cut back on the amount of tax credits offered by the Michigan Economic Growth Authority, the state’s premiere business tax incentive program.

The state gives up nearly $2 billion a year in business tax expenditures, according to the Senate Fiscal Agency.

“Hundreds of millions of dollars have gone out to larger companies in the form of incentives and tax credits that wouldn’t be necessary if the tax and regulatory climate were more competitive,” Snyder said on his website.

Tax Policies Fuel Debate

But removing many of those credits, deductions and exemptions won’t be easy or popular. Local economic developers say they would see little new business investment in their communities if MEGA and other incentive tools were no longer available.

“I’ll go out of business and so will everyone else doing local economic development,” said Birgit Klohs, president of the Right Place Inc. in Grand Rapids and a member of the Michigan Economic Development Corp. executive board.

And the conservatives who control the Legislature would likely view such things as eliminating exemptions on pension income as tax hikes.

Michigan exempts private pension income of up to $45,120 for individuals and up to $90,240 for joint filers, costing the state $725 million a year, according to the House Fiscal Agency.

Some say dealing with his own Republican colleagues in the Legislature will be Snyder’s biggest challenge in pushing through his investment priorities.

“I think he’s going to face a situation in which Republicans will repeatedly put bills on his desk that will constrain his ability to make the kind of investments he wants to make,” Padden said. “He faces a really tricky political landscape.”