News Story

Commentary: Courage, Cuts, K-12 and the Snyder Business Tax

In the summer of 2006, Michigan residents sent a proposed law to Lansing demanding that lawmakers put an end to the nation’s very worst business tax and promise to replace it with "a tax that is less burdensome and less costly to employers, more equitable, and more conducive to job creation and investment." The lawmakers approved the law … and then joined with then-Gov. Jennifer Granholm and promptly ignored their promise to come up with a better tax. Instead, they replaced the Single Business Tax with the Michigan Business Tax, an equally malicious job destroyer that was made demonstrably worse before it took effect when Lansing politicians tacked on a 22 percent surcharge (i.e., additional $614 million business tax increase on top of the $1.9 billion MBT).

By every reasonable definition, Gov. Rick Snyder and the current Michigan Legislature have just delivered on that overdue promise from five years ago. Michigan’s new corporate income tax will dent the bottom line of Michigan businesses by less than half of what the SBT did, and it’s an even larger business tax cut when compared to the MBT and surcharge. In addition to being less burdensome, the CIT is simpler and less costly to comply with, and significantly phases out the state’s command-and-control economic planning policy of picking winners and losers. Where the MBT was absurdly biased toward domestic auto manufacturers, the CIT addresses the costly tax burden on every Michigan job provider.

Today, and for the foreseeable future, Michigan business tax policy is finally “more conducive to job creation and investment” than it has been at any time in at least a decade.

Instead of spending cuts, the plan increases the tax bite on personal income taxpayers, which could have unfortunate unintended consequences. This happened because the preferred offset for a substantial business tax cut — serious spending cuts — would have prohibited the governor from fixing a wretched business tax climate until he could also overcome the cowardly behavior of the state's political class when confronted by the screeching generated by a public school political machine. Snyder got just about everything he asked for on the business tax reform because he chose to avoid a major war with the Big Education spending interests.

To understand how unrealistic a strategy of offsetting business tax cuts entirely with spending cuts might have been, consider a request that was often made of Mackinac Center staff during this dispute over the killing and replacing of the MBT. Loosely paraphrased and with a bit of sarcasm, this request boiled down to lawmakers requesting the following: “Please tell us where the magic pile of $1 billion in needless spending is located so that we can cut something politically harmless and not get in trouble for taxing retirement income.”

One lawmaker reportedly went so far as to say that the Mackinac Center wasn’t providing enough information on alternative cuts to the politicians. And he’s right … but only assuming that you want to ignore literally dozens upon dozens of reports and articles since the first of this year from this news website detailing the billions of dollars in outsized costs for employee pay and benefits within Michigan’s K-12 public education establishment. 

As was concisely summarized in “The Willie Sutton Rule” way back on Jan. 26, there is no such thing as a serious budget reformer who does not take a substantial whack at the state’s K-12 spending. And when it came to killing the MBT and replacing it with nothing but cuts, the sound of crickets chirping had more votes amongst GOP reformers and Legislative leaders than the sounds being made by the supposedly bold cost-cutters asking for advice.

Thanks to years of such fecklessness, in Michigan today some of the nation’s poorest taxpayers fork over some of the nation’s highest teacher salaries, effectively paying nearly a billion dollars more for the same public service richer states get for less. Billions more get tacked on because of outsized fringe benefits that are absurdly out of step with the vast majority of the private-sector businesses that are paying these bills. The average Michigan employer requires employees to chip in and pay for 21 percent of their health insurance premiums, yet many of Michigan’s school districts require well less than half of that — or even nothing. Just this single fact, about one of the most expensive cost-drivers in public education, has appeared in dozens of Michigan Capitol Confidential articles over the past year.

Also the subject of numerous articles this year: teacher contracts granting automatic raises that exceed the rate of inflation for years on end, and a very costly health care pension benefit for retired teachers that does not exist for most of the private sector that pays the bills for it.

More than 40 percent of the dollars forked over to the state from Michigan taxpayers gets spent on K-12 schools: a total of $10.8 billion last year. And almost 80 percent of that is spent on employee compensation. This is the most expensive thing that state government does. Yet the salaries that other states pay to public educators are significantly lower, and the health insurance benefit costs paid by the private sector are significantly lower.

Right now, this is the indisputable fact about state government budget math: Serious cuts must come from K-12 and from significant reforms to accommodate that reduction.

In his budget proposal, the governor requested an admirable (by historical standards) but modest reduction in the cost of K-12: A 4.1 percent cut in the state payment per pupil. This cut was proposed merely to balance the chronically out-of-kilter state budget, not to compensate for his business tax cut. And yet the ultimate reply from the GOP-controlled Legislature, and the Senate in particular, was to return him a cut that was smaller than what he asked for.

If Republican lawmakers were serious about finding another alternative to the governor’s decision to impose taxes on pension income to offset his business tax cut, then they would have found a way to hand him a K-12 cut much deeper than he had asked for. The options are certainly there. It is pure speculation to wonder whether he would have taken such a deal, but certainly not out of the bounds of possibility.

And then consider this: Faced with a potential extra $500 million pile of cash from larger-than-expected tax collections this year, there was talk in the Legislature of giving back even more of the modest K-12 cut that was made.

For all of the criticism he has taken from fiscal conservatives over not asking for more spending cuts to offset his business tax plan, it is important to remember that Gov. Snyder appears to have very accurately estimated the low level of courage within his own party for such a policy. And the Lansing media was even shocked by the low level of tea party pressure being applied on GOP lawmakers refusing to make even his modest K-12 cuts.

A monumental and historic overhaul of the state’s previously horrible business tax system was the result of the governor choosing to fight one war at a time and using the army that he had, rather than the one that true tea party fiscal conservatives would have preferred.

A majority of what was wrong with the way Michigan government taxes businesses has been fixed. Conversely, the major problems with how the state spends money remain mostly unmolested. Lawmakers looking for a solution to this must start with their local schools. Tea party groups looking to finish the fight that they started should be providing their lawmakers with a map to the battlefield.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.