QUESTION OF THE DAY: The $74.1 billion FY 2022-23 budget proposed by Michigan Gov. Gretchen Whitmer last week would be by far the largest in state history. If approved by the Legislature, which it won’t be, it would invest heavily in cities, K-12 schools, universities and electric vehicles, among other things. But it’s light on savings, tax relief, or paying down long-term debt. Its two proposed tax cuts — expansion of the Earned Income Tax Credit and exempting retirement/pension income from the state’s income tax — would cost the state about $400 million a year. Whitmer also wants a $2,000 rebate for electric vehicles and $500 for the charging equipment, and she would like to expand the Michigan Loan Repayment Program for mental health professionals.
As noted by MIRS newsletter, Whitmer’s plan is nearly 3% above the roughly $72 billion Michigan government is slated to spend during this current fiscal year. It depends on soaring state revenue and a federal government that wants to increase and sustain robust consumer spending in the wake of the COVID pandemic.
Just five years ago, Michigan government’s budget was “only” $55 billion, so what Whitmer is calling for represents a 34.5% jump above that. To really put things in perspective, in the lean years between FY ’06 and FY ’13 the state budget was in the $40 billion range.
How have Republican lawmakers reacted? After all, they control both chambers of the Legislature and must actually write and pass what is eventually sent to the Governor. Well, they say they saw a lot of spending, but not a lot of savings and not nearly enough tax relief.
For example, Whitmer’s historic spending plan calls for only a $52 million Rainy Day Fund deposit, which pales next to this year’s $500 million transfer to the now-$1.4 billion Budget Stabilization Fund. That’s not enough for conservative lawmakers who see a 89.6% drop in the Rainy Day Fund contribution. State Rep. Matt Maddock (R-Milford) has proposed scrapping the state’s personal income tax completely. One Republican state House candidate has even proposed sending $2,000 “inflation relief” stimulus checks to every Michigan resident. At the very least, many GOP legislators argue the state’s income levy ought to be reduced from its current 4.25% — they contend the only question should be by how much.
Bottom line: When it gets right down to it, does the Michigan electorate really care about the FY state budget other than segments of it that may personally affect them? How important will the Governor’s ability to get the bulk of her proposed spending plan passed be to her re-election chances? And can individual legislators’ chances of being re-elected be enhanced or damaged by what happens with the budget?
Answer: No, the electorate neither understands nor cares about the budget, year-in and year-out. The budget is not an issue until it IS, and that’s never happened. No election has ever been decided by a particular state budget. As long as the budget is passed without a government shutdown (and that happened back in 2007 and 2009 and didn’t affect either subsequent election), nobody cares. However, the budget process and final result is important because it is a test of competence, and the Capitol news media obsesses over it and sets a tone in its coverage that seeps into other stories that help shape the general public’s overall impression of how things are going in Lansing. If things are going wrong, who’s to blame? Yes, the Governor wants to emerge from the behind-the-scenes negotiating fracas looking good, but the current GOP legislative leadership also wants to pass budget deals in a relatively quiet and efficient way because they need wins to take home, too.
Yes, the Governor framed her State of the State message in language that the GOP loves (tax cuts), so she was hoping to land the plane quickly even if she annoyed some of her hard core Democratic base in the process. However, it turns out that her proposed budget is skimpy on the cuts, and heavy on spending.
Take the Earned Income Tax credit (EITC), for example. This idea was first championed by conservative economist Milton Friedman half a century ago. A Democratic Congress picked it up and ran with it, sending it to Republican President Gerald R. Ford, who signed it into law at the federal level. Later, a divided Congress and Republican President Ronald Reagan expanded it, so it’s got GOP/conservative fingerprints all over it. However, in the decades since, the “modern” Republican Party has backed away from it. Indeed, it’s been used more by Democrats as a fiscal policy “wedge” issue designed to pressure or embarrass Republicans into supporting it when increasingly their natural inclination has been to curtail it. In 2006, in Michigan, state Senate Minority Leader Bob Emerson (D-Flint) came up with the idea of enacting an EITC in Michigan as part of a deal the GOP had to agree to in order to get Gov. Jennifer Granholm to sign legislation to “fix” a mangled law that Republicans badly wanted that involved keeping the minimum wage under control. Even Granholm was unenthusiastic about signing such a bill, because it would cost the state treasury hundreds of millions of dollars at a time when Michigan government was scrambling to hold on to every shekel it could find. So minority legislative Democrats got a rare win in championing a new tax break that helps low-income wage earners.
That lasted about five years, until Republican Gov. Rick Snyder, who wanted to scuttle the EITC altogether, induced a reluctant GOP-controlled Legislature to scale the EITC back to the paltry low level it exists at today. Now Whitmer, in her State of the State and her budget, has proposed hiking the EITC back to its pre-Snyder percentage. In doing so, she has legislative Republicans over a barrel — GOP lawmakers are divided over whether to consent to Whitmer’s proposal, or to oppose it. Initial reaction from Republican leaders has not been favorable, but they may decide eventually they could accept it as part of any deal they make with Whitmer on the overall budget because, after all, a hike in the EITC is chump change in terms of revenue compared with the billions they’re playing with now.
Same thing with the so-called “pension tax.” Snyder induced Republican lawmakers in 2011 to scale back the credit on pension taxes that had been in place for decades, despite grumbling from many GOP lawmakers and their successors, many of whom would be happy to go along with Whitmer’s plan to get rid of the “pension tax” altogether. Again, it’s a wedge issue, dividing Republicans while legislative Democrats will have no trouble supporting their governor’s proposal if they ever get a chance to vote on it. And, yes, the drain on state coffers would be minimal compared with the massive hit the Treasury would take if one or more of the Republicans’ ideas about slashing the state’s income tax levy or some other tax cut should be approved as part of some brokered “deal” between lawmakers and the governor.
How all this plays out — whether there is some tinkering with the EITC and the pension tax, or not — will ultimately get lost in the noise of this year’s election. That doesn’t mean it isn’t important, though, especially when there are billions of dollars in American Rescue Plan COVID relief (or “stimulus”) funding at stake, all of which could be held up (and therefore not usable in political campaign ads) because of niggling over relatively minor tax policy.