Sunday, June 12, 2011

DRIC/NITC Bridge Debate Rages with Misinformation.

I support a second span between Windsor and Detroit and a freeway to freeway connection. The question is how to do it.

I am not yet convinced that it cannot be done by completing the second span for which the Ambassador Bridge already has the approaches built. I have seen the route through Windsor by which the freeway to freeway connection can be built, and which is much the same as the proposed route for DRIC. If this can be accomplished for about $2 billion less, I would be supportive of this approach. It may require the negotiated purchase of the Ambassador Bridge by a new bridge authority to get past the Canadian objection to a bridge being owned by a private entity, but I think this is worth exploring. If it cannot be done, then I will not allow Maroun to hold up the second bridge any longer.

The problem with this whole debate is that you cannot get the whole truth from any one source. Each side misrepresents facts.

· The proponents of DRIC/NITC claim “10,000 jobs will be created”, which is a gross exaggeration, and contrary to the Governor’s intention to count only the direct jobs created by any economic development project, and not the “indirect” jobs created by any assumed multiplier effect.

· Further, proponents claim that the $550 million to be loaned by the Canadian government will leverage $2 billion of federal gas tax dollars to be returned to Michigan. This is misleading on two counts. First, it assumes that the state would not otherwise provide the match money, which is just not likely to happen. Second, the $550 million would be what is called “toll credits” or soft match, which is exactly what the investment in the second span of the Ambassador Bridge would qualify as.

· Meanwhile, the Detroit International Bridge Company (Ambassador Bridge, owned by Matty Maroun) has installed the gas stations in the Gateway Project where it can maximize its profits from the duty free stations, rather than where it had agreed to build them, causing MDOT to refuse to open the approach built off I-75 because the revised location would cause backups onto the freeway.

· Opponents say that approving NITC would put the state on the hook for millions of dollars. The proponents say the bill explicitly prohibits that, but it is uncertain whether that will be true from a practical sense, as Michigan may be reluctant to allow a joint bridge authority to fail, for fear that the bankruptcy might negatively affect the State’s bond rating.

· Opponents say that the provisions of the bill providing for “availability payments” show that the project is not viable. Availability payments are additional money borrowed in years when the bridge tolls are not sufficient to cover the debt service, which are expected to be needed in the early years of the completed project. Private companies would consider the need for the availability payments in their evaluation of the economic viability of the project and their decision to submit a bid to finance, construct and manage the project. If their evaluation shows the project to be uneconomical such that they do not wish to take the risk of loss on the deal, presumably they would not submit a bid. If all potential bidders did the same, the project would not get built.

Suffice it to say that there remain many questions concerning the proposal to build DRIC/NITC. The bills submitted will first be considered in the Senate, then fully vetted in the Transportation Committee in the House of Representatives. Only after carefully evaluating all of the facts will I make a final decision about the bills.

Progress on Improving Roads

Samaria Road. After many meetings and telephone calls, I believe we are close to a solution for Samaria Road. The Road Commission engineers and several contractors have come up with an innovative combination of techniques that has the potential of not only making the road safe for next spring, but also keep the road in smooth drivable condition for the next 5 years - and - at a reasonable cost ($800,000 in 2011 and an additional $600,000 of maintenance over the next 5 years). The rub is that no local entity or combination of entities has even that reasonable cost. 

The attempt to get the Michigan Department of Transportation to take back the road is faltering because if MDOT takes over the road and improves it, MDOT must apply its specifications which drives up the cost to over $20 million, which it does not have.

The solution which appears to be shaping up is a negotiated agreement between MDOT, the Monroe County Road Commission, Bedford Township (and perhaps other townships segments of the road go through and perhaps the County itself) under which MDOT agrees to use the combination of techniques recommended as an "experiment" in exchange for the Road Commission giving up its about $18,000 it receives each year in Act 51 dollars for the road for a negotiated number of years and contributing some labor, as well as Bedford Township contributing a negotiated amount for a negotiated number of years as well. 

Obviously, the foregoing indicates that there is much negotiation that needs to successfully take place to make this happen, but the desire and intent to do so appears to be there on the part of all parties. The recommended treatment would be considered "experimental" because although each of the components of the plan is a proven technique, the combination of techniques apparently has never been used together, much less on a road in this bad a condition. But, the parties believe it could work, and if proven, is a combination that could be applied to an untold number of other roads throughout the state that need attention. Stay tuned, as we are now attempting to get the meeting set up where the negotiation would take place.

Lavoy Road Bridge. Also, negotiations are underway to get the closed bridge on Lavoy Road near Telegraph replaced with Economic Development money controlled by MDOT. An application is being prepared by the Road Commission (with the cooperation of many, including the businesses affected by the bridge closure) to apply for the funds. If successful, construction would likely not occur until 2012.

Progress on Long-term Solution. The long-term solution to transportation funding is exactly what I am working on as the lead person on a work group. We are almost done on the first step of determining just how much money do we need to raise to maintain our roads in reasonable condition. It is a more complex task than most appreciate, and I am not about to simply take someone's word that we need "$3 billion more" or whatever. I expect that this is something we will take legislative action on in the fall, along with other parts of the expected "Governor Snyder's message on infrastructure".

Tax Reform: Repeal of the MBT and Impact on Seniors

In the tax reform package just enacted, in the midst of the historic elimination of the Michigan Business Tax (replaced by the 6% income tax on “C” corporations), we have faced criticism for the changes made to the way pensions are taxed (or not) in Michigan.

We are required to have a balanced state budget, so the questions are always "what is the most fair tax system that has the least impacts on skewing the economy" and "what are the essential services that we must or should fund". Good, intelligent people can have different opinions on such matters but the bottom line in Gov. Snyder's thinking (and agreed upon by a majority of legislators) was that it was not fair for some people to be taxed on their earned income while retirees were exempt from taxes. The fact that previous legislators had catered to seniors for votes did not mean that now our current lawmakers should do the same. We have provided for a reasonable transition period, provided for “household resources” thresholds so that the elderly poor are protected, and allowed those more aged and already retired to continue to be exempt. That appeared to be a reasonable approach so I voted for the tax bill.

What must be kept in mind is that a prime goal of the tax reform was to improve the business climate to create jobs. The tax bills enacted not only relieves the double taxation burden on many small businesses who are significant job creators, but also empowers these businesses to spur additional job growth in Michigan.

Further, the underlying motivation for the change is clear. The percentage of Michiganders who are over 65 is growing rapidly and is expected to grow to over 20% by 2030. Meanwhile, an exploding part of the budget, Medicaid, is significantly affected by the growing nursing home population. To create a structurally sound budget, now and into the future, the “tax expenditure” of the senior exemptions needed to be trimmed. And if we did not do it now, it would be even harder to do in the future when an even higher percentage of the voters would be the special interest group affected by the change.

After the Governor’s initial tax proposal, the input I received from many in the district, including seniors, was that the taxation of pensions would be acceptable as long as there were some income threshold such that the elderly poor were not being taxed on their pensions. $20,000 for a single person and $40,000 for a couple appeared to be what was accepted by most.

The negotiated agreement between the House and Senate leadership and the Governor put in such an income threshold in the form of a “household resources” threshold, but also reduced the impact on seniors in other ways (although it did get more complicated than I feel comfortable with).

The result is a three-tiered system which determines whether retirement income is taxed.

· People born before 1946 will continue to receive the current retirement income exemptions, as well as the personal exemption ($3700), Social Security exemption and the exemption for dividends, interest and capital gains. That is, public pensions will not be taxed. Private pensions will not be taxed if under the current exemption threshold of $45,120 for single filers and $93,240 for joint filers (indexed to inflation). 401(k)s and IRAs will be taxed as under current law. (That is, these are subtractions from income in MI 1040 Schedule 1: (a) Retirement distributions from a 401(k) or 403(b) plan attributable to employer contributions or attributable to employee contributions to the extent they result in matching contributions by the employer and (b) IRA distributions received after age 59½ or described by Section 72(t) (2)(A)(iv) of the IRC (series of equal periodic payments made for life.)

· Taxpayers born between 1/1/1946 and 12/31/1952 will have the Social Security exemption and the $3700 personal exemption until age 67, but will be taxed on other retirement income (defined as public pensions, private pensions, 401(k)s and IRAs). Taxpayer in this age range can take an exemption of $20,000 for a single return and $40,000 for a joint return against retirement income until age 67. Upon turning 67, they receive a $20,000 single and $40,000 joint senior exemption against all income in addition to Social Security and personal exemptions.

· People born after 1952 receive the personal exemption and Social Security exemption until they turn 67, but will be taxed on other retirement income (defined as public pensions, private pensions, 401(k)s and IRAs). When 67 and older they receive a $20,000 single and $40,000 joint senior exemption against all types of income. This exemption can be taken instead of the Social Security and personal exemptions if it is more beneficial to the filer.


· On a joint return, it is the year of birth of the older spouse that controls the tax treatment of both spouses' pensions.

· For people born in 1946 and after, the retirement income and senior exemptions are phased out if total household resources exceed $75,000 for single filers and $150,000 for joint filers. Public pensions are subject to state taxes as of Jan. 1, 2012. People born before 1946 are not affected by either change.

· Military pensions continue to be exempt regardless of age.

· The current deduction for interest, dividends and capital gains for seniors in the maximum amount of $9,420 single and $18.840 joint is eliminated for all age groups.

· The current additional “over 65” personal exemption of $2,300 is eliminated.

· Seniors may also be affected by the elimination of any Homestead Property Tax Credit if the taxable value of the homestead exceeds $135,000. The Credit will also phase out earlier than currently, between $41,000 - 50,000 of household resources. Further, the percentage of the credit allowable has been changed. Only seniors with household resources of $21,000 or less will qualify for the full 100% credit, with it phased done to the 60% everyone else qualifies for for a senior with household resources of $21,000 to $30,000.

Overall, the tax plan enacted is a net tax reduction for the state which aggressively positions the state to be economically competitive. Despite the expected unhappiness by those who will be negatively affected by the tax reform (and in any reform there will be some “winners” and some “losers”), the question is not the fairness of the changes, but whether the final result is fair. I support the changes we have made.

Disclaimer: This is intended to provide you with a general summary of the new provisions. You should always consult with your tax advisor regarding the application of these change to your particular situation.

Saturday, June 11, 2011

The Truth about the Emergency Financial Manager Bill (PA 4 of 2011)

The Emergency Financial Manager Bill (Public Act 4 of 2011) has received ample criticism and demagoguery. PA 72 of 1990 already provided for the appointment of an emergency financial manager. Robert Bobb was appointed under this act for the Detroit Public Schools. His authority under the act was constantly challenged as restricted only to financial matters, and he was handcuffed from doing much of what needed to be done to turn the district around. In January, a couple of Michigan cities (most notably, Hamtramck and Flint) were near declaring bankruptcy. This created urgency for state action to avoid the local bankruptcies which would have negatively affected the state's bond ratings and the interest rates paid by all Michigan municipalities, including school districts.

PA 4 provides for an early "alert" system, a thorough review process, the possibility of a consent agreement between the review team and the municipality. If, and only if, the consent agreement is breached or the economic condition of the municipality continues to deteriorate, then an emergency manager (EM) can be appointed. The EM has broader powers under PA 4 than previously under PA72. The most criticized enhanced power is the power to set aside collective bargaining agreements, but this power is no greater than that of a bankruptcy judge. The goal is to create sufficient incentives for the local government to take care of its own business responsibly so the rest of the state is not negatively affected, but if the local government cannot or will not do its job, then the EM is appointed.

Opponents of the new act have characterized the bill as "anti-democratic" and worse, in such reports as:

· Maddow on Emergency Manager Takeover of Benton Harbor, Michigan

· Save Jean Klock Park: What Benton Harbor’s Emergency Manager Could Mean for JKP!

To get the real facts, rather than the sensationalism and misrepresentations of the facts by partisan commentators, I suggest you refer to:

· Benton Harbor Facts: Implementation of an Emergency Financial Manager, by the Community Alliance (where the criticized action was actually taken by an EFM under PA 72, not the new act, and did not get rid of Jean Klock Park but actually increased its size by almost 40 acres while at the same time leasing a portion (less than 23 acres) of the existing park away from Lake Michigan for a golf course which added to the community's tax base)

· Local Government and School District Fiscal Accountability Act by the Citizens Research Council of Michigan, a non-partisan, credible source

· Bill Analysis of HB 4214 by the Senate Fiscal Agency, also non-partisan

A similar misrepresentation of the facts has been regarding the repeal of the Michigan Business Tax. Opponents claim that Meijers now will escape taxation, for example. The Meijer President Mark Murray has said, however, that his company would probably incur a slight increase in its business taxes due to the changes. Mackinac 2011: Michigan Business Tax's death was great for Meijer, right? Not quite Darn inconvenient facts, huh?

We need to regard attacks on much of what we are doing as simply the partisan attacks, trying to maintain the status quo, rather than making serious efforts at making this a better state.

Economics 103: Can Government Spending Spur the State’s Economy When the State’s Budget Must be Balanced?


By Rick Olson, State Representative, District 55
June 11, 2011

A question we often hear from members of interest groups whose state funding is being reduced is, “How can we expect to create jobs if we cut spending for our _______ program when positions need to be cut? Aren’t we cutting the number of jobs rather than cutting unemployment?”

We also hear, “Governor Snyder cannot guarantee a single job will be created with the elimination of the Michigan Business Tax and substituting the 6% corporate income tax.”

A rudimentary understanding of macroeconomics is needed to understand why we have done what we have done and/or are doing with the recent changes in the taxes and spending in the state.

The sum of all economic activity in a country or state can also be called aggregate demand.

“In macroeconomics, aggregate demand (AD) is the total demand for final goods and services in the economy (Y) at a given time and price level. The aggregate demand is usually described as a linear sum of four separable demand sources.

clip_image001 where

 clip_image002 is consumption (may also be known as consumer spending)

 clip_image003 is Investment,

 clip_image004 is Government spending,

(clip_image005clip_image006) is Net exports, where clip_image005[1] is total exports, and clip_image006[1] is total imports” All of the interacting factors gets complicated, but let’s simplify the model by assuming investment and net exports remain the same, such that for a given period changes in AD are only affected by changes in consumption and government spending. For the purposes of this discussion, we will also consider this a static model, without any consideration of indirect or extraneous interactions.

The Government may increase its expenditure e.g. financed by a higher budget deficit, - this directly increases AD. Income tax affects disposable income e.g. lower rates of income tax raise disposable income and should boost consumption. An increase in transfer payments raises AD – particularly if welfare recipients spend a high % of the benefits they receive.”

However, in a state like Michigan in which the state’s budget must be balanced, a budget deficit cannot occur (in the absence of use of “one-time money, accounting gimmicks, or bonding for projects) and therefore the state’s AD cannot be raised by deficit financed government spending. The government spending must be financed by taxes extracted from the state’s economy. The collection of $1 billion of taxes reduces AD the same amount as the $1 billion of government spending increases the state’s economic activity. I.e., “consumption is a function of disposable income. If disposable income decreases, consumption will also decrease. There are many ways that consumption can decrease. An increase in taxes would have this effect.”

The reason the counterbalancing reduction in economic activity is seldom considered is (1) it is not in the self-interest of the affected interest group to tell the whole story (i.e., “the truth”) and (2) while the jobs created by the government spending are clearly identified, the equivalent number of jobs lost by the collection of taxes are diffused throughout the economy in bits and dribbles.

Guarantee Jobs Due to Business Tax Cut? Because the positive job effect of a reduction in taxes is also so diffused throughout the economy, it is also impossible to directly identify the jobs created by a tax cut. Thus Governor Snyder says he can’t guarantee the jobs being created, because he could never point to any specific job created as proof of his assertion. Based on the aggregate demand model, however, we know the economic activity will occur. Further, we expect the better business climate to create greater incentives for local businesses to expand and create jobs and also to make the state more competitive in attracting business to the state. These, however, are indirect effects of the taxation levels, caused by the changed incidence or location of the tax collection which will be in addition to the AD effects of the tax cut for businesses that are not C corporations.

What About Multiplier Effects? There is also the possibility that a change in government spending accompanied by an equivalent counteracting change in taxation may change AD, the level of economic activity in the state. This is if the “multiplier” of the government spending is different from the multiplier of the taxation. The multiplier is the number of times a change in government spending (or taxes collected which is then not spent on consumption) rolls over in an economy. This is similar to the analysis of tourism spending in the state, which is first spent on a motel room, then the motel owner pays his or her workers, then the workers spend their money on food, etc., the supermarket owner spends his money on its supplies, etc., etc. The number of cumulative times the money turns over in a defined area economy (such as the State of Michigan) depends on the leakage out of the economy on each of the successive transactions. Examples of leakage would be the motel owner buying new furniture from out of state with the money received, or the supermarket buying produce from some other state, or the worker saving some of the money instead of buying something. I am not aware of any studies that have evaluated the multiplier effect of welfare payments, vs. that of wages and benefits for state employees, vs. that of wages and benefits of teachers, vs. that of taxes extracted from small businesses, vs. taxes extracted from seniors with incomes above the poverty level. Thus I have no basis for saying that the basic balancing of the government spending and the tax collections have any positive or negative direct effect on the level of economic activity within the State of Michigan.

Political Impact of Arguments. Of course, this erudite conclusion does not have the political impact of the negative sound bites currently be spewed by those negatively affected by the restrained government spending which the Michigan Legislature just enacted. Those who know this, however, and still spew the negative sound bites should know that they are spreading half-truths, and half-truths spread with the intention to misinform or cast a legislator in a negative light are as much lies are bald-face lies. No matter how you look at it, a liar is a liar.