Snyder gets his changes; consequences unclear

Michigan won’t be reinvented in a day. Or a dog year. But as Gov. Rick Snyder concludes his first (human) year in office, the general course he defined as a candidate is coming into view as legislative markers are set.

Eight years of partisan division and economic decline prompted public interest groups such as The Center for Michigan and Business Leaders of Michigan to call for fundamental change in how Michigan compensates its employees, taxes its businesses and residents, and spends the tax dollars it takes in.

Two weeks from taking the oath as Michigan’s 48th governor last year, Snyder told a Dec. 13 summit organized by CFM and BLM that he was receiving two threads of advice: Be bold and don’t set expectations too high.

“The interesting thing is quite often it’s the same people” offering it, Snyder said.

Actions completed to date and proposed this fall by Snyder are indeed some of the boldest seen in years, to the extent they challenge the conventional wisdom of what can and can’t be done in Lansing. And expectations are high that they'll work. And that more tough votes will be taken in the Legislature.

Last year's summit focused on three core areas:
* Public Sector Efficiency
* Michigan Competitiveness
* New Budget Priorities

Public Sector Efficiency: Snyder wins without much rancor

Because Snyder and Republicans decided to preserve the principle of collective bargaining, Michigan will make significant gains in controlling public employee benefit costs, with little of the rancor that turned the capitols in Madison and Columbus into political war zones in 2011. That cost containment will save hundreds of millions in annual benefit costs and shave billions in unfunded retirement obligations.

Senate Bill 7, sponsored by Sen. Mark Jansen, R-Gaines Township, retains health insurance as a subject of bargaining, but caps what taxpayers will pay for it -- 80 percent of total premium or a set dollar amount, $15,000 for a family policy. Higher mandated employee contributions kick in as current union contracts expire.

Lawmakers are on track to approve legislation that would make graduated retiree health care optional for employees hired after March 1997, eliminate it for new hires and require employees hired before March 1997 to pay 4 percent of their salary, if they choose to remain in the defined benefit pension system.

Public Act 312, the binding arbitration law long cited by municipal managers as overly inflexible has been modified to make a city’s ability to pay the primary factor in labor arbitration.

Paring employee costs is a benchmark cities and school districts must hit in order to qualify for some $450 million in state incentive funding that replaced statutory revenue sharing and a chunk of per-pupil school aid. Legislation that removes barriers to intergovernmental cooperation -- such as barring the decision to share services from collective bargaining table -- was approved by lawmakers Nov. 3.

Ray Holman, a lobbyist for UAW Local 6000, said Snyder and lawmakers like Jansen have succeeded where Republicans in other states have failed by entertaining negotiation instead of picking fights.

“We’re not saying there doesn’t need to be sacrifice. We realize that and we’re willing to sacrifice, but we don’t want our rights taken away,” he said. “We want to do it in a collaborative fashion. When you compare (Snyder) to the other governors, he’s much better.”

Michigan Competitiveness: Big bet placed on tax changes

The state added 22,000 private-sector jobs in the first three quarters of 2011, building on the gains achieved since the employment rate hit bottom two years ago. Michigan's unemployment rate is, however, is half a point higher since Snyder and the new Legislature took office in January.

That’s the good news. The bad news is that according to a new report from IHS Global Insight, the economic consultants who help forecast state revenues, Michigan is one of three states that will wait the longest -- at least 2017 -- to recover just the jobs lost since the financial crisis. Replacing all 783,000 jobs lost between the April 2000 employment peak and the December 2009 trough will take years longer.

Building net employment requires more hiring by Michigan firms and less layoffs. The success of Snyder’s tenure depends on that happening through his primary prescription: significantly lowering the tax burden on the owners of some 95,000 sole proprietorships, limited liability corporations and partnerships that don’t file a federal corporate income tax form.

With the previous tax regime that Snyder asserted was killing jobs, the Tax Foundation said Michigan had the 48th best corporate tax climate and the 17th best tax climate overall. With the changes, it projects Michigan will move up to  22nd and 13th respectively. The foundation said the changes “could” make Michigan more attractive to business.

Bigger firms, manufacturers mainly, say Michigan won’t be competitive until Snyder and lawmakers also move to eliminate the personal property taxes they pay on equipment. The Snyder administration and lawmakers have yet to address the $1.2 billion revenue loss to local governments and schools elimination would mean.

A 6-percent tax rate on C-corporation profits does make Michigan competitive with other states, but the old MBT (and the old Single Business Tax) was accompanied by an economic development strategy in the Engler and Granholm administrations that gave offsetting tax breaks to pretty much any firm that asked for one. Snyder has replaced tax breaks with grant money for firms that invest in Michigan.

The firms benefiting from what will be $1.6 billion in state business tax reduction through the elimination of the MBT are already here. The economic success of the tax plan depends on what those firms’ owners do with the savings, pocket it or hire people.

Rep. Wayne Schmidt, a Traverse City Republican, says there is emerging anecdotal evidence that the tax change will give employers the confidence and certainty to add workers.

“It won’t be huge gains, but talking with some of the smaller businesses that I deal with, when you’re hiring one or two, it makes the world of difference,” said Schmidt, chairman of the House Commerce Committee. “Right now there’s a sense of confidence. People are feeling they have a clear direction in where they want to go. They know that government is working to get out of the way.”

Rep. Jim Townsend, Democrat from Royal Oak, countered: “I haven’t heard anyone outside of Lansing say these tax cuts are effective. What I hear is a lack of demand in the economy and a lack of confidence in the overall global situation. That is a much bigger factor than anything we’re doing with the tax code.”

If Schmidt is correct, then you can make the case that the individual financial sacrifice being made to pay for it - $1.4 billion worth by applying the income tax to some retirement income and paring back tax credits for just about everyone else - would be worth it from a policy standpoint.

That doesn’t negate Townsend’s point that the talent that’s headed out of state after earning their degrees remains drawn to high-tax, high-service locales on the coasts. Or his view that that repairing a decade’s worth of budget destruction is necessary for Michigan’s competitiveness as well.

In June, Snyder announced the formation of three citizen-stakeholder panels to review three key areas of state regulation -- environmental protection, liquor control and occupational licensing. The panels are expected to wrap up their work by the end of the year. The fate of their recommendations in the Legislation - particularly one that would challenge the beer and wine wholesalers business model - is unclear.

New Budget Priorities: Fast road to balance

Though the fiscal 2012 budget was approved in modern record time, it also maintains 10 years of budget priorities that doubled college tuition, eroded the state’s ability to rebuild its infrastructure and took billions in cash from local governments to help the state keep its own budget in technical balance.

Michigan will spend $677 million less on higher education than it did in fiscal 2002. It will spend $274 million more on the Michigan Department of Corrections. The state spent about $300 million less on its prisons than its universities in 2002. In 2012, it will spend nearly $700 million more. (These are raw numbers, not adjusted for inflation.)

In the past, lawmakers would simply cut $50 million out of the corrections budget as the Oct. 1 fiscal deadline approached and tell department officials where to find the savings. In the 2012 budget, lawmakers have been more specific in spelling out system-wide change. For example, the budget assumes $62 million through more cost-effective inmate housing, contracting out food service, bidding out prisoner store operations and eliminating 81 lieutenant positions.

The problem is that given the sheer size of the department, the 2012 adjustment for employee economics, energy, maintenance and food is $58 million. Neither Snyder nor lawmakers appear inclined to adjust sentencing law so well-behaved inmates can serve less than 100 percent of their minimum terms.

Only when the department cuts hundreds of millions, instead of tens of millions, will state aid to public universities once again surpass the cost of incarceration.

Michigan already ranked in the bottom of states in terms of state aid to universities when Snyder and lawmakers slashed the higher ed budget by 15 percent. At best, the fiscal 2013 budget will maintain assistance where it is now.

Rather than game the budget to take statutory revenue sharing from municipalities, Snyder and lawmakers simply eliminated it. Assuming cities comply with the terms of the $200 million cost-cutting incentive fund that replaced it, municipalities are still looking at a $100 million reduction in state aid.

Snyder’s suggestion to modernize gas tax collections and effectively double registration fees merely stalls further deterioration in road condition and mass transit. Republicans quickly rejected the idea anyway. After being rebuffed on the New International Trade Crossing project, Snyder doesn't appear eager to change their minds.

The good news is that fiscal year 2011 generated an estimated $500 million more in tax receipts for both the general and School Aid funds than last May's revenue estimating conference forecast. Democrats want to restore cuts to K-12 and universities. Snyder and Republican lawmakers say hold on. It's a disagreement that will help define political year 2012.

In conclusion, the budget would be in worse shape had Snyder and lawmakers chosen to finance tax cuts solely through spending reduction. But if tax expenditures are fair game to pay for those tax cuts, they can be tapped to pay for investment in the areas also critical to Michigan’s economic well-being: education, transportation and quality of life.

Michigan’s broad exclusion of services from the sales tax represented $4.3 billion of lost revenue in 2000, for example. A decade later, given the changing patterns of consumption, that number was $10.3 billion.

In the end, can a business tax overhaul designed to promote entrepreneurial risk-taking work if Michigan isn’t a state where entrepreneurs want to live? Can Detroit be the essential component to Michigan’s reinvention if it doesn’t have a police force, but has one of the nation’s highest murder rates? And 70,000 abandoned buildings?

Pretty much all you need to know about how much ground Michigan has to make up can be found in the measurement of per-capita gross domestic product. In 1999, Michigan ranked 22nd. A decade later, we were 41st.

Think back to 1999 and you know that being in the top half of states feels a lot better than languishing in the bottom fifth. Snyder's optimism that Michigan will once again be in better shape than most hasn't wavered. He just has to make sure that the policies required to help make that happen don't either.