Why Michigan is a Basket Case

Governor Jennifer Granholm has plans to fix Michigan's economy in 2008.

Among her top priorities will be changing sentencing laws to shrink the number of people heading to prison, potentially saving the state hundreds of millions of dollars. She proposed the changes early this year, but the state's budget problems overwhelmed nearly everything else, leaving many of her proposals undone.

"It's not good public policy to take all of these taxpayer dollars at a very tough time, and invest it in the prison system when we ought to be investing it in the things that are going to transform the economy, like education and diversifying the economy."

Granholm also wants lawmakers to pass several of her education proposals pushed aside this year, including making kindergarten mandatory, requiring teenagers to stay in school until age 18 rather than 16, and setting aside more money to hire educators to train thousands of nurses.

But the naturally buoyant governor also said 2007 is not an experience she wants to repeat.

"This year was the year from hell. It was really a horrible year. But now that this terrible fiscal crisis has been to a large extent resolved - although we still have more to do - I am eager and excited about transforming this economy, or at least setting the right policies in motion to make that happen," she said.

"We are anxious to turn the page on this year and especially focus on the things we think are really going to make Michigan pop."

Granholm's Four Pronged Platform To Make Michigan Pop

• Make kindergarten mandatory at taxpayer expense
• Require teenagers to stay in school until age 18
  
• Hire 500 educators to train 3,000 nurses at taxpayer expense
• Turn criminals loose on the street earlier
  

Wow. That's quite a platform.

Amazing Action by the Michigan Legislature

Please consider Bracing for the service tax.

So will it stick or won't it? The new 6% service tax is like one of those bad snowstorms that everybody hoped would skip town. Even the forecasters warned that this thing couldn't last long. This oddly crafted tax on services -- 6% on
nails but not hair; 6% on ski lift tickets but not golf -- is so dopey that most expected it ultimately had to be repealed.

Susan Shea, manager of Antonino Salon & Spa in Birmingham, said she really isn't sure how the salon would collect the tax Saturday.

"We have absolutely no plan to go into effect. First of all, I didn't think it was going to go through because it was so stupid," Shea said.

Right now, a customer pays one bill at Antonino for one day of pampering, say a haircut, a pedicure and a manicure. Under the new tax, there would be no service tax on the $75 haircut, but there would be a 6% tax on the $45 pedicure and a 6% tax on the $20 manicure.

"I can see it being a real pain," Shea said.

Tax repealed the first day in action.

It was ugly.
Facing widespread pressure to repeal a tax on more services before it took effect first thing Saturday, the Legislature got the job done - barely.

But not before the tax became law, although lawmakers said businesses could ignore it. Not before the business community faced two months of uncertainty in Michigan's already troubled economy. Not before some companies racked up attorney and accountant fees to comply with the 6 percent sales tax on services.

Repeal of tax illustrates why so many voters frustrated.

Nearly as soon as they voted in October to create a 6 percent sales tax on certain services, many state lawmakers realized they had made a mistake. The tax, part of a last-minute deal to balance the state's new budget, drew howls of protests and warnings that it would drive business out of the state.

Yet even with many lawmakers from both parties supporting repeal of the unpopular and confusing tax, it actually became law for a few hours Saturday before politicians finally could agree on how to get rid of it and replace the estimated $600 million it was expected to raise.

Members of the House and Senate waited until their backs were against the wall before they took action. In agreeing to do away with the sales tax on services, they replaced it with a 21.99 percent surcharge on the new Michigan Business Tax, which takes effect Jan. 1.

The surcharge will be in effect at least until 2017, when it will be eliminated if certain economic conditions are met. Democrats didn't want any expiration date, while Republicans wanted to kill the surcharge by 2011. Democrats had proposed a higher surcharge, while Republicans wanted a lower rate. In the end, everyone had to compromise.

A New Tax for a New Economy

I was curious about the new Michigan Business Tax and I found some details from the office of the governor Granholm. She calls it a "New Tax for a New Economy".

Making Michigan’s business climate more competitive is a key component of Governor Jennifer M. Granholm’s comprehensive economic plan. She proposed an overhaul of the state’s Single Business Tax (SBT) and signed into law more than $600 million in tax cuts to help Michigan businesses.
...
Under the MBT, approximately 111,000 businesses should expect lower tax bills, while 34,000 will see an increase. That’s 77% winners – a ratio of a three to one of winners to losers.

Michigan Business Tax Recap

• Michigan passed $600 million in business tax relief along with a business tax overhaul.
• This in theory created 111,000 winners and 34,000 losers.
• This also created a $600 million budget shortfall.
• To make up for the shortfall Michigan passed one of the most convoluted service taxes in history.
• Everybody hated the service tax bill including those who passed it, yet the governor signed it anyway.
• It was not repealed until after it went into effect.
• A mechanism is now being put into place to return any taxes collected.
• The net effect was yet another $600 million budget shortfall.
• To make up the shortfall, a 21.99 percent surcharge on the new Michigan Business Tax was put into effect.
• The surcharge lasts until 2017. Democrats and Republicans alike voted for this compromise.
  
• A revised winners and losers list is not yet available that I could find.

Those who think Michigan's problems are all about the auto industry are quite mistaken. One look at the above recap by both the governor and the legislature should stop any wondering about why Michigan is such a basket case.

Addendum:

I received many Emails about the governor's plan to release prisoners early. Most of them were related to minor drug offenses. I am actually sympathetic to the idea. But releasing prisoners is not the right solution. The correct solution is to not waste time arresting, prosecuting, and imprisoning such people in the first place.

The war on drugs is a complete failure and a total drain of resources. Instead of playing all these games, Michigan has a chance to step to the forefront and lead the way. If someone does not belong in prison, don't put them there in the first place. If they do belong there, then don't release them early. The governor's plan is a copout. I suspect she does not have the courage to ask for what is right. Someone needs to step up to the plate and decriminalize drugs. If the federal government wants to stop drug traffic in Michigan, let them foot the bill. Every state should do the same. It only takes one state to start a chain reaction. Who has the guts to be first?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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