Friday, February 18, 2011

Governor Snyder’s Tax and Budget Proposals Create “Winners and Losers” – Resulting Tax Structure Does Not

Governor Snyder’s budget message yesterday was awaited with great anticipation, and in some cases, trepidation. Everyone familiar with the state of the state’s economy and the state and local governments’ fiscal condition knew the choices would not be easy, and that any proposal would gore many oxen. The Governor’s message yesterday did not disappoint in that regard, as many “real people” (as the Governor likes to refer to them/us) will bear the “shared sacrifice” he promised - to the extent his proposals are adopted by the legislature.

The Governor’s task was to simultaneously achieve three goals: (1) create a better climate to encourage job growth to cure our basic economic problem of high unemployment, (2) achieve a balanced budget as required by the state’s constitution and (3) put in place a revised tax and budget structure that would solve the long term “structural” budget problem, in contrast to the year-by-year band-aid budgeting approach of years past.

The first goal required a revised tax structure, leading to his proposal to dump the Michigan Business Tax and its hated 22% surcharge and recommend a replacement 6% corporate income tax which he deems “simple, fair and efficient. Numerous “tax expenditures” (tax credits, exemptions, preferences in business and income taxes) would be reduced or eliminated. Any tax reform naturally results in some people or entities paying lower taxes while others may pay more taxes.

The result is a projected net reduction in tax collections of about a quarter billion dollars – meeting the “no net tax increase” criteria for even those candidates who signed a “Taxpayer Protection Pledge”. Another result is a tax structure that does not favor one industry or business over another, and together with the proposed revisions to the Michigan Economic Development Corporations, does not pick winners and losers in the marketplace.

On the budget side, Governor Snyder has proposed a combination of wage and benefit reductions for public employees and program reductions. Here too, real people are affected.

Public clamor against some of the elements of the Governor’s proposal was expected and instantaneous. The elimination of the exemption of retiree’s pension income from the personal income tax is drawing fire. The Governor’s reasoning he shared was as follows. Why should the following income earned by neighbors living side by side be taxed differently?

• A business owner/job creator organized as a sole proprietor, partnership, or limited liability company whose income for federal income tax purposes is not taxed at the business level but flows through to the individual’s tax return, while under the current state tax structure is taxed at both the business level through the MBT AND at the individual level on the individual income tax return.

• An elderly couple with no pension income who must continue to work to earn enough money to survive.

• A retired couple who draw pension income.

The Governor has concluded that income is income and people should not be taxed differently based on the differences in the source of that income. (Exceptions he retained are Social Security payments and the pay of active duty military servicemen and women.)

Regardless of the reasoning, real people will be affected by his proposals. Local governments would be affected by the proposed reductions in statutory revenue sharing. School districts will be affected by the reductions in the student foundation grants that the districts rely on.

All of these proposals will be rigorously scrutinized in the months ahead by the various legislative tax policy and appropriations committees and the legislature as a whole. I expect a respectful consideration of the Governor’s proposals, but no rubber stamp by the legislature. Each element of the proposal will be considered in light of the big picture – how the pieces all fit together to achieve the three goals that the legislature shares with the Governor.

Whether we agree 100% with the Governor or not, we must all applaud the Governor for his comprehensive, courageous proposals which address our long-term problems head-on, and which do not simply “kick the can down the road” to the future. Based on his business background and campaign promises, we expected no less, and he has delivered. Now it is our turn as legislators to do what we promised in our campaigns.