October 1, 2007

Michigan Goes Smoot-Hawley In The Early Morning

The economic woes of Michigan appear ready to worsen, thanks to a budget agreement reached this morning as the state government began shutting down. Michigan residents will see their taxes increase by over a billion dollars, further burdening the decreasing purchasing power of its residents, as the legislature only sliced less than a third of that from their spending plans (via The Corner):

The Legislature agreed to raise Michigan's income tax rate from 3.9 percent to 4.35 percent and expand the 6 percent sales tax to some services. Granholm signed both measures. Structural changes to state government — including the management of teacher and other public employee benefits — also are part of the package.

The tax increases should erase most of a projected $1.75 billion deficit in Michigan's next budget. The final budget for the new fiscal year will include $440 million in spending cuts, Granholm said. ...

Raising the state's income tax to 4.35 percent will raise an additional $765 million for the state. The income tax bill is written so the rate will gradually drop back to 3.9 percent between 2011 and 2015.

Extending the sales tax to some services starting Dec. 1 will bring in an estimated $614 million for the 10 months remaining in the fiscal year at that point, or about $750 million annually, state Treasurer Robert Kleine said.

This budget belongs to Michigan's Democrats. The Republicans only control the upper chamber in the state legislature, and that could only muster a tie vote 19-19 on the package. Jennifer Granholm's lieutenant governor had to cast the tiebreaker to force the bill's passage. Democrats control the lower chamber, which passed the budget 57-52.

For those who have studied the Depression, this "hair of the dog" strategy will sound familiar. The stock-market collapsed produced a large, world-wide recession, but it took Congress and the Hoover administration to really kick-start the depression. They passed the Smoot-Hawley Tarriff Act, which started a protectionist trade war around the world. It threw millions more out of work here and almost destroyed the global markets.

Adding taxes to Michigan amounts to a domestic Smoot-Hawley approach. Michigan already had the 14th-highest tax burden in the US. State and local taxes took 11.2% of their income before these tax increases. They now appear ready to leapfrog Arkansas, California, Minnesota, and New Jersey to enter the Top Ten of tax-burden states.

Note, too, that the Michigan government solved the problem by a 3:1 ratio of sacrifice. They increased taxes by over $1.4 billion, thanks to increases in both income and sales taxes that go into effect immediately. They only managed to shave $440 million off of their own budget. Given that the state budget planned for $42.6 billion in spending for FY2007, this represents a whopping 1% decrease in state spending. It hardly seems as though Michigan lawmakers even cracked the books of their budget to look for other opportunities for savings.

The increased burden of taxation will not help Michigan recover its economy. It will pressure businesses to move elsewhere at a time when Michigan needs investment and commitment to improve its financial stability. Instead of reversing the decline, the increased burden will escalate it, and next year's revenue shortfalls will create the exact same problem for Michigan.

It's a disaster in slow motion. Instead of taking a critical look at the reasons why Michigan's economy has plunged, the state legislature has punted and stuck its citizens with the bill. That's hardly a profile in courage.


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» Granholm:With the state back on solid financial footing, we can turn our focus to the critical task of jump-starting our economy and creating new jobs.” from Right Voices
As John Miller said, “Hail to the Losers”. Michigan decided that the way out of the state’s horrible economic mess is to raise taxes by more than $1 billion. Granholm is delusional if she thinks that this will jump start our economy... [Read More]

» The Michigan Squeeze from The Moderate Voice
Ed Morrissey’s rips the words right out of my brain concerning Michigan’s new budget/what in the…/disaster: The economic woes of Michigan appear ready to worsen, thanks to a budget agreement reached this morning as the state governmen... [Read More]

» Michigan’s economic troubles to continue from Sister Toldjah
… because apparently they think raising taxes to the tune of $1 billion is something that will rescue the state from its current financial crisis: LANSING, Mich. - The state Legislature agreed early Monday to raise the income tax and expand the s... [Read More]

Comments (29)

Posted by NavyspyII | October 1, 2007 6:35 AM

Once again, we can thank our Canadian governor, and our Socialist (Dem) Legislature for enhancing our lives.

A huge portion of our tax base has left the State, and rather than pare back spending to meet the new realities of income, you ignorami decide that a better improvement is a tax increase?

What color is the sky in your collective world?

Bonior, Stabenow, Levin, Conyers. Notice a trend? Oh, and 50% of them are/were on the Norman Hsu payroll also. Coincidence? I think not.

Posted by Mikey NTH | October 1, 2007 7:05 AM

3/4 of the state budget comes from restricted funds accounts. The state legislature cannot touch those. Cutting deeply the remaining 1/4 general budget impacts some departments and agencies while others whose funding comes from the restricted accounts are immune from cuts.

Posted by rbj | October 1, 2007 7:14 AM

Jobs & businesses are leaving Michigan. You do not attract new ones by raising taxes.


Posted by chsw | October 1, 2007 8:13 AM

Mr. Dingell is coming to the rescue with a 50 cent tax on gas and new taxes on cars based on "carbon footprint" and size. That should help.


Posted by docjim505 | October 1, 2007 8:14 AM

While it's easy (and fun!) to blame politicians for this sort of thing, the real blame lies with John Q. Public. Many - perhaps most - Americans have gotten the idea over the past few decades that government should "do something" about every major and minor woe not only in their own lives, but in everybody else's. People being hurt in car accidents? Make 'em wear seatbelts (and pay police officers to write tickets instead of catching real crooks). Students not doing well in school? Hire more administrators and beef up the Dept. of Education. College costs rising? Give more and more grant money so every dumbass who manages to graduate from high school can go waste time (and money) in college. O' course, all these things cost money, but politicians can always find something else to tax. By spreading the taxes around and / or taxing unpopular items or people (rich people, cigarettes), politicians keep the willfully ignorant public from realizing just how much of our money they are wasting.

I have every confidence that Michigan will continue to slide into further economic woe, and that the response of the politicians - and the people who send them to Lansing - will be more taxes, more programs, more taxes, more programs. As long as there is one person in Michigan who makes a good living, that person can be taxed to pay for every feel-good program the people want.

Posted by J | October 1, 2007 8:20 AM

Democrats refuse, absolutely refuse to cut spending (ok, some Republicans, too),
- Dems choose to ignore the positive cash flow of tax cuts (Clinton #2 wants to raise taxes to pay for all her programs yet Bush's cuts are bringing more revenue to the US Treasury in total dollars and % than seen in a long time)

Dems think only "raise taxes?"

Democrats want control over our lives. Stupid? Yes. Control driven, yes.

Posted by kalel666 | October 1, 2007 8:43 AM

Oy vey. I moved to MI last year from MA. I figured I'd be getting out from under the small minded, economically retarded style of government I'd lived with for 37 years. Then I get to west MI, take a year to find a job, wake up to this today. Last one out of MI, please turn out the lights.

Posted by Pam | October 1, 2007 8:43 AM

Will the last person in Michigan please turn off the lights?

Posted by Bikerken | October 1, 2007 9:59 AM

Michigan is a perfect model of George Soros success.

Posted by NoDonkey | October 1, 2007 10:03 AM

But I thought the Democrats repealed the law of supply and demand?

The Washington Post had an op-ed yesterday by a Maryland Democrat, which maintained that state tax increases will pretty much have zero effect on the state economy.

Junk science on global warming? Full speed ahead.

Macroeconomic principals? Meaningless.

Democrats should soon repeal the law of gravity so we can have those flying cars used in the Jetsons.

Posted by PJO, a twin with twins | October 1, 2007 10:13 AM

This is my last year in this stupid state, I getting out so I won't be the one shutting off the lights. My wife and I are thinking OH, MO, TN or DE. If any one know of impending disasters coming in those states, please let me know. Any other suggestions?

Posted by Mark Soper | October 1, 2007 10:33 AM

Soon to be ex-Michiganders (I've been one for 30 years), consider Indiana. "My Man Mitch" McConnell is the governor, and he's been coming up with out of the box solutions for financing highways and solving other problems.

The Hoosier State isn't perfect: we still don't have I-69 south of Indianapolis (although groundbreaking starts next year) and the only Interstate-quality highways are those with the familiar red-white-blue shield. However, taxes are low and the governor and at least the R contigent of the state legislature understand budgeting.

I left Michigan for love (my wife and I met in college and will celebrate 31 years this December), not money. However, it sickens me to see the state take this shortsighted and counterproductive move to fix their problems.

One bright note - if it doesn't work out, maybe Jeff Daniels' commercials extolling Michigan as a place that can help make you competitive will come off the air. They were beyond belief even before these tax hikes.

Posted by John Stephens | October 1, 2007 10:37 AM

Long before the last person leaves Michigan, the lights will have been shut off for them. Either the utilities will have had their fuel supplies cut off for non-payment, or looters will have torn down the power lines. The whole state is heading down the same sewer that swallowed downtown Detroit, and for the same reason.

Posted by NoDonkey | October 1, 2007 10:45 AM

"The whole state is heading down the same sewer that swallowed downtown Detroit, and for the same reason."

According to the left, there's no problem so serious that it cannot be solved by having a protest march or a sit-in, so maybe that's the next step.

Posted by Bikerken | October 1, 2007 10:49 AM

First of all, I agree with every point Docjim posted. He's right on. I was born in Dearborn MI in 1958. I grew up on the river in Detriot. All of my friends fathers were UAW and Teamsters. They made about ten times as much money as my widowed mother who was a cashier. I watched the unions destroy a city of almost four million people, Detroit, now it has a smaller population than New Orleans after Katrina. Proof that the stupidity of man can be far worse that anything mother nature can do. I left when I was old enough to join the Navy and retired after 20 years here in San Diego.

I'm not saying it's true, but I'm beginning to hear rumors of Michiganders sneaking across the border into Mexico looking for work!

Posted by PJO, a twin with twins | October 1, 2007 11:10 AM

Bikerken, that joke has been circulating for a couple of years.
Mark, I like IN but my wife is not thrilled about the state.
As I keep telling people around here for years, the whole shakeout with the automotive is still got five more years before things will stabilise. What will remain here in Michigan will just be a shell.
I find appropo, that it is raining here today.

Posted by Peyton | October 1, 2007 11:34 AM

There's no causation implied, but there may be an interesting intersection, in future years. Michigan has the largest U.S. population of Muslims, and it's growing. I have no clue what percentage of them are on welfare or other assistance, or how well integrated with society they are. As Michigan state policies force productive workers to relocate and businesses of all sizes to move out of state, how will the state's demographics change, as it tends toward an end-state with no population but welfare recipients and politicians to pander to them?

Posted by TimEnder | October 1, 2007 11:54 AM

I've lived in rural michigan all my life and plan to die here. It's my state.

Thank god this is over for now. If someone would have told me months ago that all I would have to do is cough up roughly 200 more dollars per year in taxes in order to keep layoffs down and infrastructure attended to, I would have gladly accepted it.

And for those of you moving out, don't let the door hitcha where the good lord splitcha. More fresh water for me, thanks.

Posted by docjim505 | October 1, 2007 12:01 PM

TimEnder: If someone would have told me months ago that all I would have to do is cough up roughly 200 more dollars per year in taxes in order to keep layoffs down and infrastructure attended to, I would have gladly accepted it.

Um... How do higher taxes keep layoffs down? Except among government employees, that is?

Posted by jpe | October 1, 2007 12:03 PM

I would think tax policy is a drop in the macroeconomic bucket compared to the problems w/ the auto industry.

Posted by jim | October 1, 2007 12:15 PM

Michigan eliminated a tax on business (the single business tax) which was generating over $1 billion annually as of the end of 2007. This budget agreement was in large part the way to replace that lost revenue.

My guess is that taxes on businesses in Michigan will actually go down in 2008.

Posted by sestamibi | October 1, 2007 12:51 PM

To Mark Soper:

Wrong Mitch--Daniels, not McConnell. You sure you're a Hoosier?

Posted by Rich Vail | October 1, 2007 4:39 PM

I moved to MI in 2002 for love...got married... my wife was born and raised im Dearborn Heights) we moved to MD==AFTER we lost the house, cars, pretty much everything. after 3 years, we had to BORROW money from our synagogue to move as we were destitute.

We moved to Balt, MD, found jobs w/in 48 hours of moving here...this is home now... Dems go on raise taxes...find out what Grey Davis discoverd in CA...raising taxes DOES NOT SAVE JOBS...it drives them away...wholesale. The truly sad thing is, the statistics for unemployment there are wrong...they stop counting you after you drop off the unemployment rolls (6 month cap). The real rate is far higher than the approx 7.5% official rate...go figure.

I am a member of the United Brotherhood of Carpenters & Joiners...but I only joined up there to get a decent paying job. The union did nothing for me except take my dues and build a larger building. I was unemployed for 16 months, my wife for 12...

I am very bitter about MI, it cost me almost everything including my self-respect. I had to beg money to leave that G-dforsakenhellhole!

Posted by DCM | October 1, 2007 4:52 PM

You people just don’t get it! Recently, the number of people working for the government in Michigan surpassed the number of people working in manufacturing. In Michigan, we are all are going to work in government. All of us will get fully paid medical insurance, four weeks of vacation after 2 years and we’ll all retire after 20 years of service with full pensions and, if we’re teachers, we’ll get summers off and an assistance to babysit our classrooms while we work on our study plans. It will be great!!

Posted by JP | October 1, 2007 6:32 PM

The bad news: My feakin' taxes are going up...again (I'm counting the hikes in local taxes). Unfortunately our Canadian Cousin (Gov. Granholm)has gotten a free ride from the press here since she was elected in 2002. My biggest complaint with her is that she is a do nothing governor. I really had to laugh at her reelection commercials touting the new jobs she brought into the state...never mentioning that 10 times that amount left! As for our legislature... ugh!
The good news: This sets up an opportunely for another John Engler.

Posted by Gregory | October 1, 2007 7:10 PM

"The income tax bill is written so the rate will gradually drop back to 3.9 percent between 2011 and 2015."

Yeah, right, sure...and Porky Pig is a Captain at Jet Blue. The UAW gets a new contract, and the state gov't takes the money away. Say goodby to that minimun wage increase too. A guy will happilly pay $200 MORE in taxes and here in my state I didn't even pay $200 in TOTAL. Suckers.

Posted by Lattedatter | October 1, 2007 7:58 PM

Born in MI and left in 1991. Daughter and I went back for a visit last year and could not believe what a run down, suffering state it is. We wouldn't have recognized Battle Creek except for a sign. Reminded me of Gary, IN. Even Kellogg has pulled out. The Upper Peninsula is even worse. There are NO JOBS because there are no BUSINESSES. Although the UP is still beautiful...just stay out of the towns. It is depressing.

Posted by Drew | October 2, 2007 12:08 AM

I wonder how long it will be before the new owners at Chrysler relocate HQ to a low-tax state, and one that is Right-to-Work too?

Posted by Mary | October 4, 2007 12:28 PM

Jim, the SBT was repealed, but in July a new Michigan Business Tax was imposed. See http://www.plantemoran.com/Services/Tax/TaxConsulting/Resources/SALT+Alert/Michigan/Michigan+Business+Tax+Enacted.htm
Granholm, the Democrats, and 2 Republicans couldn't have found a better way to drive businesses out of the state if they'd tried.

I was born and raised in Michigan, but I'll likely be leaving within the next year. I'm not even in financial distress; I have a pretty good job. But I'm also finishing a masters degree in the next two months and I'm a renter--so I have options. And I've had it with Michigan.

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