GOVERNOR SEEKS QUICK ACTION ON 2% SERVICES TAX PLAN
Governor Jennifer Granholm will seek quick action Thursday on her tax proposals, including a 2 percent tax on services, to erase deficits this year and next by raising $1 billion in net revenues and cutting spending by $400 million. The governor wants the new sales tax to be effective June 1 so the state can forestall a cut in school aid and otherwise help address an $800 million current-year deficit.
The current year cuts include $160 million in Executive Order cuts that the administration will outline in more detail on Thursday.
State officials confirmed the sales tax proposal first disclosed Tuesday by Gongwer News Service (See Gongwer Michigan Report, February 6, 2007), and provided additional details of what will be included in the tax and budget plan.
The officials, who provided background information to reporters, called it a “two-penny plan” to allow the state to invest in education, health care and other priorities laid out by Ms. Granholm in her State of the State address.
The officials said the entire package is designed to fill a $3 billion hole in the budget, including $1.9 billion that will be lost December 31 when the Single Business Tax is killed, and will raise additional revenues as well. They said it would once and for all fix a broken tax system.
The 2 percent sales tax on services would exclude government purchases, health care and educational services as well as advertising and college sports events, though professional sports would be taxed. Much of the detail will not be released until Thursday, but officials said things such as day care would be considered exempt health care, as would a number of transactions related to business like agriculture production and mineral extraction.
The Michigan Business Tax, worth about $1.4 billion, would replace the $1.9 billion Single Business Tax and would be identical in basic points to what was proposed in December with the same rate and same base, but including a new tax credit for large companies headquartered in the state. It would retain as well the cut in personal property taxes.
The administration calculates that a family of four earning $57,300 annually would pay $67 a year more on the tax on services, which would embrace things like hair cuts, lawn mowing services, legal and accounting services and professional entertainment.
The revenue from the new tax on services would not be subject to the Constitution’s provisions dividing up the revenue from the 6 percent tax on goods – such as the 75 percent going to the school aid fund – but officials said the law would have its own earmarking provisions.
The officials are calling for the Legislature to complete work on the tax plan by March 31, the date members begin a two-week spring break, largely to make sure schools will not suffer a $224 per pupil cut in the current fiscal year. They also said an increase will be included in the 2007-08 budget recommendations.
The general fund is facing a $605 million deficit in this fiscal year, along with current year spending pressures of $158 million for increased caseloads for services within the Department of Human Services and a rise in prison population.
The state will also not be able to carry over an expected $110 million from 2006, mainly due to unanticipated spending pressures within DHS, Corrections and State Police over the last year.
Administration officials expect opposition to the plan, but said this represents leadership by the governor on the chronic fiscal issues faced by the state.
Granholm press secretary Liz Boyd said, “The Governor’s tax plan is simple and fair. We believe it is worth two pennies to invest in Michigan’s future by protecting health care, education, and public safety.”
The proposal did, in fact, draw immediate barbs from Republicans and some businesses, but many others said they crave more detail before they could provide a better assessment.
G.O.P. LEADS SKEPTICAL OPPOSITION TO TAX PLAN
Prospects for a consensus – let alone quick action – on Governor Jennifer Granholm’s proposed tax on services appeared dim given the comments from Republicans who control the Senate and whose support in both houses would be crucial politically to the success of the plan.
Ms. Granholm began her effort to round up support as she provided details of her tax and budget proposals to Democratic caucuses late Wednesday afternoon.
Senate Majority Leader Mike Bishop (R-Rochester) said he would not consider any new taxes until the state first seriously focused on restructuring government to save taxpayer funds. And he said it would be irresponsible to promise new investments in education and worker training with money the state does not have and which will build a bigger government.
“From the perspective of long-term budgeting, we must determine what government services are essential for the safety and well-being of Michigan citizens, then we determine the revenue necessary for those service,” Mr. Bishop said. “Tax increases only penalize Michigan residents and businesses already struggling to make ends meet.”
Senate Finance Committee chair Sen. Nancy Cassis (R-Novi) said she would be concerned if the proposal is an “additional tax on businesses on services as well as on individuals”, especially “for those citizens holding on to their wallets when there is so little in the wallets.”
Legislators in other states where sales taxes on services were proposed ran from the idea, Ms. Cassis said. She worried that it would hurt lower and middle class residents. And if the proposal would be enacted without a vote of the people, Ms. Cassis said that could hurt its credibility with the public.
But she said the goal of enacting the tax by March 31 “is not doable,” and that the best way to promote development in the state is by cutting taxes.
Some Democrats found more to like, though House Speaker Andy Dillon (D-Redford) declined to comment until the full package is made public on Thursday. He did say that the sales tax on goods is only bringing in half of what it once was and that services are a growing area where taxes could be applied.
Mr. Dillon said in terms of Ms. Granholm’s March deadline on implementing any increase in revenues that he would be willing to work on that schedule. Although he also said that he has asked for a tax model to be run on some of his recommendations, which he did not elaborate on, but that Democrats would be working off of Ms. Granholm’s proposal.
Rep. Steve Bieda (D-Warren), chair of the House Tax Policy Committee, also declined to comment on the overall tax plan from Ms. Granholm, but added that he intends to begin hearings on all of the SBT replacement plans next week and that everyone is approaching the situation with clear slates and open minds.
Senate Minority Leader Mark Schauer (D-Battle Creek) said, “You are going to hear a lot of ‘sky is falling’ rhetoric on this plan, but look at the facts. Everyone agrees we are in a fiscal crisis, this is a comprehensive plan that includes cuts, reforms, and revenue, and it makes sense to invest in our long-term success.”
The governor is expected to issue an executive order requiring departments to cut a total of more than $160 million from their current year budgets. That would be nearly half of what Ms. Granholm is expected to order in cuts over the next two years, however it was not clear where those cuts would be directed or if whether that would encompass an across-the-board reduction.
Asked whether the $400 million in cuts over two years the governor is expected to propose is enough, Mr. Dillon said it was considering the overall budget of the state, but that if Republicans find a cut that was left unturned that he would be willing to review it.
While Mr. Dillon said he was still waiting for House Republicans to ship him over a list of cuts for the budget they say is too fat, a spokesperson for Minority Leader Craig DeRoche (R-Novi) said Democrats should simply look at the House-passed version of the past two budgets to see what areas they would want to target.
Matt Resch, spokesperson for Mr. DeRoche, said that the budget cuts proposed by the Republican-controlled House over the past two years is where the caucus would like to go in terms of trimming government spending. Last year, the cuts proposed by House Republicans included $30 million from the Department of Corrections budget, $45 million from the Department of Human Services by implementing further welfare reforms, hundreds of millions from the Department of Community Health with increased co-pays and premiums for Medicaid and a ban on Medicaid eligibility for most 19- and 20-year-olds and for noncitizens.
Mr. Resch said he found it interesting that the governor had said during her re-election campaign she did not want to balance the budget on the backs of citizens, but by applying a 2 percent sales tax on services, which would affect everyone, it appeared she believed that residents hadn’t been paying their fair share all along. The middle-class in this state has suffered enough in the lagging economy and the governor’s proposal doesn’t help that any, Mr. Resch said.
In terms of having the Michigan Business Tax with a net cut of $450 million, Mr. Resch said that should have been what the governor proposed in the first place.
Tax/Budget By the Numbers
· $1.47 billion in new revenue from 2 percent tax on services
· $1.028 billion on business services
· $450 million on individuals
· $180 million cut by providing tax on difference between vehicle trade-in and new car price
Michigan Business Tax:
· $450 million net cut in business taxes compared to Single Business Tax ($250 million of that for small businesses)
· $550 million net cut for Michigan-based businesses.
· $100 million increase for out of state businesses.
· Cigarette tax increase of 5 cents per pack to $2.05 and increase in other tobacco taxes.
· Liquor tax increase.
· Estate tax when value exceeds $250 million.
· Variety of “loophole” closings
· $576 million in higher revenue in fiscal year 2007.
· $1.1 billion in higher revenue in fiscal year 2008.
· $400 million cuts combined in fiscal year 2007 and 2008.