Economists: Business Tax Reform Helping, Not Hurting, Michigan

Union leader's claim about 'corporate special interests' proves false

By Tom Gantert | April 23, 2013

While Michigan’s unemployment rate dropped to its lowest in almost five years at 8.5 percent and Michigan’s labor force has grown the last four months, a top union leader is attacking one of the reasons leading to the improvements.

In an April 17 column in The Detroit News, Michigan AFL-CIO President Karla Swift wrote: "Gov. Rick Snyder presides over an unprecedented redistribution of wealth favoring those who are already wealthy. Annually, $1.4 billion is being given away to corporate special interests in the form of new tax breaks with no job-creation requirements attached."

Swift's statements are inaccurate, says James Hohman, a fiscal policy analyst for the Mackinac Center for Public Policy.

The state didn't give $1.4 billion to "corporate special interests." Instead, it eliminated the Michigan Business Tax and replaced it with a corporate income tax. Hohman said Swift's comment about "corporate special interests" makes it appear that particular big business, industries and companies favored by politicians received some of that $1.4 billion as special deals, similar to a state film incentive program that gives money to out-of-state movie producers.

In reality, it was mostly small businesses that received a tax cut because they are not corporations and hence don't pay the corporate income tax.

Gary Wolfram, a Hillsdale College economics professor, said it was Gov. Snyder's tax changes that are leading to an improving economy.

"The elimination of the Michigan Business Tax and its replacement with the corporate income tax was a major contributor to the improvement in Michigan's economic climate," Wolfram said. "The MBT was a very bad tax, with improper incentives, inefficient structure, and a high burden on small- and medium-sized businesses."

University of Michigan Economist Don Grimes found that in 2011, Michigan ranked second in the nation in terms of private-sector job gains behind North Dakota. Michigan had 32,528 job gains due to the "competitive effect," which is the difference in employment growth for a specific industry between a local area and the national average.

"How much of this can you credit Snyder with? I don't know, but I do know the state is now on the right track," Grimes said in an email last month.

Charles Owens, Michigan director of the National Federation of Independent Business, said reports show small business are the ones creating most of the new jobs in the state.

"The change from the Michigan Business Tax to the corporate income tax mostly benefited small business owners and job providers and actually resulted in higher taxes for most larger corporations," Owens said.

Swift didn't respond to a request for comment.

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.

School Pension Fund Needs Fewer Gimmicks

Legislature still putting off real reform

By James M. Hohman | April 23, 2013

Michigan legislators are considering a bill to rework the school pension underfunding problem but the legislation will do nothing to stop the state from continuing to improperly fund the system.

Indeed, the bill represents just another pension gimmick, and a harmful one at that. Lawmakers should instead consider real pension reform.

House Bill 4190 would change the way that the state apportions the costs of catching up on years of school pension system underfunding. The $22.4 billion gap between what has set aside to cover future employee retirement benefits and what the system expects to pay out in pensions must be closed. To do so under current law, for every dollar that a school district pays in employee salaries, it must send in a certain amount for deposit into the statewide pension fund.

Under HB 4190, instead of assessing this amount as a percentage of payroll, districts would send in an amount determined by their "current operating expenses." These include payroll as well as other expenses, including payments to vendors.

The bill's proponents believe payroll-based assessments are a problem because there are fewer people in the system due to contracting out. The trend to privatization is well-documented. But by itself, contracting out does not cause pension problems. In fact, by having fewer people in the system, it has decreased the total liabilities of the system.

Still, proponents recognize that the state has not met its assumptions about payroll growth.

The direct solution is to lower the estimates of future payroll growth. However, this legislation would instead switch the pension cost assessment basis to one that includes most school operating expenditures. Its proponents repeat the mistake they think they're solving by assuming these costs would increase at the same rate as those faulty payroll projections.

Legislators who have not examined the divergence between past projections and actual performance should be especially skeptical of this approach.

In addition, catching-up on the unfunded liabilities by anticipating growing payrolls or operational expenses backloads pension fund contributions into future years. Kicking the can down the road in this way may be a standard practice, but it's one that has served the state poorly.

Without backloading the contributions, the state would have to put more money into the system in the near-term. There's little political desire to do such a thing — especially after school officials complaints about the system's already-high contribution rates.

A better alternative is to contain the already inflicted damage by closing the current defined benefit system to new employees, instead providing them with a defined contribution retirement system. These defined contribution plans do not require the state to make such risky projections, and transitioning will contain the state's ability to rack up unfunded liabilities. This can be accomplished without paying alleged "transition costs."

Closing the defined benefit pension system and switching new hires a defined contribution retirement system will ensure that henceforth benefits are paid as they are earned, as required by the state constitution. That is decidedly not the case with the current system.