How To Replace the SBT With Nothing (Viewpoint on Public Issues)

There is a broad consensus that the state’s complex Single Business Tax harms Michigan’s economy. The conventional wisdom in Lansing is that this tax must be replaced with a different tax, because it’s impossible to cut spending by the $1.855 billion the SBT brings in.

That "wisdom" is wrong. Here’s how to save $1.855 billion by injecting competition into government operations, providing public employee fringe benefits comparable to (generous) private-sector plans and eliminating non-core functions. Some of these dollar amounts come right out of current and proposed spending. Others are speculative. This is intended as an illustration of what’s possible, not a precise road map.

• Reform the financing of higher education. Adopt a standard "per-pupil foundation grant," with the money attached to the students, rather than each university getting a fixed amount. When colleges must compete for students to get state money, they will "sharpen their pencils," rein in costs and eliminate inefficiencies like those highlighted in recent audit reports. Cutting costs by just 5 percent would yield $70 million.

• Shift state police road patrols to less expensive county sheriff deputies. With benefits and related expenses it costs more than $100,000 per year to employ a state trooper; most sheriff deputies cost much less. Effect on public safety: zero. Savings: $65 million.

• Adopt the Hay Group report recommendations on rationalizing public school health insurance, including realistic co-pays: $422 million.

• Eliminate the Michigan State University’s cooperative extension service and agriculture experiment station: $61 million.

• Repeal the "21st Century Jobs Fund," an industrial planning boondoggle whose annual debt service will cost $40 million.

• Privatize prisons. A Rio Grande Foundation report shows that placing 5 percent of prisoners in privately managed prisons can save 14 percent on overall prison spending. Savings: $192 million.

• Eliminate "History and Arts" subsidies, and cut state library subsidies in half: $35 million.

• The Citizens Research Council has noted, "A number of changes have occurred … that have reduced the need for intermediate school districts." Cut ISD operations grants: $32 million.

• Cut so-called "20j" payments to affluent school districts in half. These payments are an optional luxury. Savings: $26 million.

• Cut transit funding in half. Eliminating protectionist local restrictions would allow empty city buses to be replaced with private-sector innovations like jitneys, commercial van pools, "call-and-ride" services, car-sharing and more, improving service for transit users at a much lower cost: $112 million.

• Repeal the "prevailing wage" law that requires above-market-rate wages on school construction projects: $150 million.

• Don’t send extra money to school districts with falling populations, as proposed by the governor. Instead, consolidate and downsize administrative functions: $50 million.

• Reduce the Merit Award Scholarships by 50 percent. Non-need-based college scholarships are a subsidy Michigan can no longer afford: $60 million.

• Reform Medicaid and welfare. Medicaid is a command-and-control monstrosity rife with perverse incentives. Giving recipients incentives to economize and take better care of themselves could save millions of dollars and increase the freedom and choice of recipients. Reducing just 1.6 percent of these programs would save $240 million.

• Stimulate growth. The SBT is arguably the nation’s most complex and burdensome business tax. Eliminating it would send a powerful message that Michigan is open for business. The dynamic effects on income, property and sales tax receipts would easily raise $300 million.

Total: $1.855 billion. That’s how much the Single Business Tax now takes in.

Opponents of these common-sense reforms complain, "That’s not the way we’ve done it in the past." That won’t cut it anymore. The price of failing to improve Michigan’s business climate would be to become a state characterized by declining incomes, homes that every year are worth less than the previous year, and lonely parents whose children and grandchildren had to go elsewhere to find careers.

On the other hand, most people would not even notice these cuts and reforms. However, if the SBT were eliminated, Michigan residents would likely notice something else instead: Our economy growing, property values increasing, and jobs and income rising. If citizens, not special interests, come first, then these reforms are slam-dunks.

Jack McHugh is a legislative analyst for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.