Are Michigan Citizens Undertaxed?

This article originally appeared in the April 5, 2001 issue of the MIRS newsletter in answer to the question: "Given the recent economic downturn, and looming state budget cuts, did the Governor and the Legislature act too hastily and too drastically in their tax-cutting regime?"  A condensed version of this article was released as a Mackinac Center Viewpoint.

The answer to this question is obviously yes ! Government never has enough money and the people who earned it always have too much. When times get tough, it's the government, not the people, which should be taken care of first. What could the people possibly do with their cash that would be more important than what enlightened legislators and state employees have in mind for it? Government spending is never a problem, but undertaxation is an ever-present danger.

Of course, I'm being facetious. I'm also a little annoyed that at both the federal and state levels of government, it seems that most pundits and lawmakers alike are always more concerned that they might not be taxing enough than that they might ever be spending too much. Republicans and Democrats in Washington and Lansing reveled in a spending porkfest last year and now some of them are worried that perhaps hard working, taxpaying citizens aren't coughing up enough.

Those who would seriously answer the above question with a "Yes" will posture as compassionate advocates for the young, the old, the dispossessed, the possessed, and any number of fill-in-the-blank, vote-for-me-and-I'll-give-you-somebody-else's-money special interests du jour. They should be honest enough to tell us what they really think: When the economy turns down and people concerned about keeping their jobs and paying their bills are curtailing their expenses to make ends meet, government shouldn't be expected to do the same.

Will someone in Lansing please muster the political courage to defend tax cuts and declare that spending is the real problem?

Let's recall where Michigan was barely a decade ago. The economy was mired in stagnation, with unemployment chronically above the national average. In 1991, the state budget had a deficit as big as today's rainy day fund. Not coincidentally, we were among the highest taxed states in the nation. What turned all that around was a period of spending restraint and tax reduction that grew the economy and made Michigan an attractive place in which to do business again. Though spending later picked up speed, we kept making progress on the tax front with further reductions, most notably in the income tax and single business tax.

Today, Michigan is better off than it was ten years ago but it's no tax-free Renaissance Zone. Our per capita tax burden during the last decade fell from oppressive to being just about in the middle of the pack. We don't have the luxury of being so far ahead of the rest of the country that we can forget about any more tax cuts and stay competitive. Indeed, Senate Fiscal Agency data showed that by 1998, Michigan's total state and local tax burden had risen once again to the level we faced when Governor Engler came to office in 1991; the main reason we're average among the states today is that so many others have practiced even less tax and spending discipline.

Have the tax cuts of recent years starved state government? Hardly. Well over a billion dollars is sitting in the Budget Stabilization Fund. Even after accounting for Proposal A's shift of funding to the state, per student K-12 spending has soared well beyond inflation and population growth, and the School Aid Fund is in surplus. Legislators last year and in recent months have dramatically boosted spending both for K-12 and for higher ed. The General Fund/General Purpose (GF/GP) budget is up $2 billion, or nearly 25 percent, over its level of 1991. The Gross Budget has grown by a whopping 99 percent since 1991. Many Michigan citizens who work to pay government's bills as well as their own have not see their own budgets grow by such percentages.

Remember the hundreds of millions of dollars in pork the Legislature passed last year with barely a handful of no votes? Rep. Robert Gosselin, R-Troy, is the only legislator to vote "no" on every budget proposal that increased GF/GP spending faster than inflation. He says, "Tax cuts are the easy part for politicians. It's keeping a lid on spending that requires real political courage." And that's precisely what is needed now in Lansing as revenues that were gushing in not so long ago begin to slow with the economy.

Consider this: Michigan citizens and businesses are forced to pay more than a quarter billion dollars in unnecessary construction costs every year because of the Prevailing Wage Act of 1965. That special interest legislation effectively mandates union-scale wages on projects that take more than a penny of state funding, including schools. Neighboring Ohio has passed legislation exempting public schools from a similar state law there, so that schools can realize some construction cost savings and put that to work in the classroom or give local taxpayers a break. Michigan has not followed suit. It's worth noting that many of the people who are whining right now about government revenues are also the same people who can't muster either the courage or the good sense to support even a partial repeal of the Prevailing Wage Act.

Too many in Lansing these days are worried that citizens might not be taxed enough at the same time that government at all levels is bigger than ever. That's a sad commentary on how little some people have learned about what makes for genuine progress in a free society. But it's also an opportunity to stand back from the day-to-day debate over this or that tax or spending measure and contemplate the bigger picture.

We need to raise some issues with our statist friends who just can't seem to ever get enough government and who always ask the wrong question the moment revenues slow down.

At the start of the 1900s, government at all levels in America claimed about five percent of personal income. A hundred years later, it takes more than 40 percent—up by a factor of eight. Why is this not enough? Will the anti-tax cut, big spending folks please tell us how much they really want? At what point do they expect to have their fill? Fifty percent? Seventy percent? Do they want all of it? To what extent do they believe a person is entitled to what he (or she) has earned? These questions ought to be answered before anybody assumes that revenues are down because people are taxed too little.

We need specifics, not platitudes, and we don't need to change the subject to all the allegedly wonderful things legislators could do with other people's money if they only had more of it. A few million Michiganians are planning for their retirements or their children's college education, and they need to know. They've already sacrificed a lot of plans to pay the bills of government, but if Lansing and Washington are aiming for more, they may have to curtail their charitable giving, their discretionary spending, their savings for a rainy day, their future vacations, and many other worthwhile things.

This is essentially how government gets bigger almost all the time while still behaving as if it's being starved of income. The less people have of what they've worked hard to earn, the more government can do, of course. But it also means that people must do less for themselves. Then along comes the statist snake oil salesman who declares, "Well, it seems the people are in need of something. Call government." The government then takes more and spends more. Does the salesman then say, "Hmmm, maybe we should back off so more of the people's needs can be met by the people themselves?" He wouldn't be a snake oil salesman any more if he said that. Instead, he argues that the more we tax, the less the people spend so the government must tax still more and spend it for them.

Now is as good a time as any for genuine leadership on behalf of Michigan citizens. Like families do when their budgets are squeezed, the Legislature and the Governor should put a microscope to spending and scrutinize each item within this framework:

• Does the item duplicate what other state agencies or the federal government are doing in that area?

• Does the item primarily benefit a single favored constituency or area rather than the state as a whole?

• Does the item attempt to accomplish a task that is best left to private firms, charities, or families?

• Are direct users or beneficiaries of the service paying a reasonable amount of the cost?

• Does the item create or expand an "entitlement" that cannot be reasonably withdrawn if necessary or advisable in the future?

• Has the item received significantly more money in recent years but not used that money in the most effective way?

• Does the item discourage self-help and personal independence or encourage reliance upon government unnecessarily?

If anyone in Lansing needs help in finding where to make reductions in a record $38 billion budget, they can start with any number of  common-sense Mackinac Center recommendations. 

So, back to the original question which loosely but accurately re-stated reduces to this: "The economy is turning sour, which means that people, many of whom work and pay taxes, are about to get hurt. State government has cut some taxes but still spends as much as ever. In hindsight, was state government too generous in letting hard-pressed citizens get some relief and keep a little more of their money, and shouldn't it take some of that relief back?"

Answer: no!