Good, Bad and Ugly of Gov. Snyder's Budget

Gov. Rick Snyder’s first budget fell short of the “atomic bomb” promised by Lt. Gov. Brian Calley, in part due to the fact that a megaton of further spending and tax cuts were left on the table. Overall, the budget moves the state in a positive direction with greater tax simplicity, more transparency, less corporate welfare and fewer discriminatory tax policies.

Among the lost opportunities is the fact that the net effect is a tax shift, not a tax cut. Yet as Mackinac Center analysts have shown, by bringing government employee benefits in line with private-sector averages, $5.7 billion in savings could be made available for real tax cuts without reducing programs or laying off employees.

That said, there’s plenty of good news here: Gov. Snyder intends to scrap the complicated and hated Michigan Business Tax and surcharge, replacing it with a simpler corporate flat tax of 6 percent. The Washington-based Tax Foundation estimates this will move Michigan from 48th place in its business tax rankings to 22nd even without a net tax cut.

Also positive is Gov. Snyder’s intention to eliminate the Michigan Economic Growth Authority and other discriminatory tax breaks. Given that the governor was once the vice chair of the Michigan Economic Development Corp. that presides over the state’s current corporate welfare regime, this has a certain “Nixon goes go to China” aspect. It’s not quite the “fair field and no favors” recommended by Mackinac Center scholars, because special treatment for certain firms won’t be eliminated entirely, but the process will henceforth will be done through straightforward legislative appropriations, bringing a huge leap in transparency.

And there are real cuts in this budget, including revenue sharing haircuts of up to $300 million, trimming school grants by $300 per pupil from current year levels, and $280 million from higher education spending. However, there are devilish details that may partially undercut potential savings — schools, universities and local governments may be able to reclaim some of those dollars by agreeing to meet some type of reform or performance metric.

The most unfortunate part of the budget is the proposal to raise taxes on pensions. While the tax fairness and simplicity arguments are not invalid, it’s still a very large tax hike, and one that’s totally unnecessary — those $5.7 billion in potential government employee fringe benefit savings would save several times the estimated $700 million in new revenue from this tax.

State officials must remember that taxpayers are not gentle sheep waiting to be sheared, and many won’t. In effect, the move charges a retiree with a $40,000 annual pension $1,700 a year for choosing to remain in Michigan rather than move to sunny, income tax-free Florida.

The governor also let slip an opportunity to call for even bolder reforms in government employee relations, such as those now occurring in Wisconsin and Ohio. That may come in the future, and meanwhile there’s much to like in this budget and tax proposal. In summary, Gov. Snyder’s budget represents a huge change from a tax-and-spend system that is opaque and dishonest to one that is far more transparent and forthright.