Five ways to put $1.3 billion surplus to work without affecting revenue

By: Dave Palmer

Michigan appears to be in the throes of the financial better days many people looked forward to after 2008’s economic meltdown. The Detroit News reported that Michigan’s Senate Fiscal Agency projected “…in December that the state will exceed prior revenue projections by $434 million
this budget year, $327 million in 2013-14 and $514 million in 2014-15 — a total of $1.3 billion.” No sooner than that information came to light, politicians jockeying for re-election this year on both sides of the aisle immediately began dreaming up ways to spend the surplus. Ideas such as decreasing the Michigan Income Tax (favored by Republicans), shoring up the School Aid Fund (favored by Democrats), improving roads (one of Governor Snyder’s fiscal priorities), and some other localized spending options floated in the legislative air.

Snyder appears to be cautious about any sort of surplus talks with official estimates due today and the upcoming January 16 State of the State address.

Snyder’s concern is not unfounded. Just because we have a projected surplus does not mean that we will still have a surplus at the end of the fiscal year. And even if we do, should we go about planning ways to give it back to taxpayers or spend it before we know how much of a surplus we actually have?

It is indeed too early to tell how much of a surplus we have, much less making plans regarding how to spend that surplus. But, just for fun, let’s assume for a moment that we will have the projected $1.3 billion in surplus. Reducing the income tax sounds like a great idea until you consider what happens when the surplus dries up and the income tax becomes too little to cover the expenses it is intended to cover.

If you said “painful budget cuts” you are absolutely right. Anyone up for re-election will tell you that it is practically political suicide to talk about raising taxes, especially for Republicans who run on the platform of returning to the taxpayers what is already theirs. Not that Democrats believe any differently, they are just more willing to admit that sometimes the price of governance increases and sometimes increasing revenue is a better way to deal with a shortfall than slashing budget items like the School Aid Fund or municipal services.

Instead, the legislature should consider the following five ways to deal with a possible $1.3 billion surplus that doesn’t involve setting future politicians up for failure when taxes need to be raised once budgets are slashed to bare bones and there is no other option to make up a shortfall.

  • Stop taxing pensions: Not so long ago, near the beginning of Snyder’s current tenure as governor, he approved “belt tightening” legislation that taxed pensions for the first time in Michigan history. If Republicans are bound and determined to return the money to the taxpayers, then they should start with the most vulnerable financially speaking; retirees. They already live on a fixed income that will never increase and in some cases gets decreased as a municipal cost-saving measure. Let’s get them back out in the economy spending money on wants and needs, not just needs.
  • Return the Earned Income Tax Credit to its previous level: Another “shared sacrifice” Snyder and the GOP controlled legislature imposed was to slash the Earned Income Tax Credit from 20 percent of the rate used by the federal government to just six percent of the rate. This crushed needy families and for the first time, middle class families tended to owe money to the state rather than receiving a refund, while wealthy individuals saw their refunds increase. (I went from getting an $80 refund to owing about $300.) This is another way the legislature could give back to the citizens without an across-the-board cut to income taxes.
  • Increase state revenue-sharing with communities: The state has been steadily cutting its revenue-sharing with local communities, a fact cited by Detroit as one of the reasons it entered bankruptcy. Other communities that have an emergency manager seem to have suffered a similar fate whereby cuts to state revenue-sharing filled their accounting ledgers with red ink. As a result, they have had to cut such basic service budgets as police, firefighting, schools, trash collection, and road maintenance. If the state increased their revenue-sharing with local communities, the taxpayers would certainly benefit, though not directly on their paychecks.
  • Reinstate public mental health institutions: Governor Engler was responsible for shuttering nearly all of the state’s mental health hospitals, stopping services on a dime and turning any patients who didn’t get picked up by family out onto the streets with a month’s worth of meds and a prescription for a refill to last them another month until they could get other mental health services. Since people who are mentally ill enough to be in a hospital rarely seek those services out themselves, many ended up homeless or in jail where they treat people with mental illness with the same deference as you might bestow on a redheaded step child. Bringing back public mental health services would create jobs, provide the proper medicinal treatment so mentally ill individuals would have a chance to rejoin society as a functioning citizen and clear space in our prisons for real criminals.
  • Shore up the School Aid Fund/Invest in K-12 education:  This could be the most important and  longest-lasting return we could get from returning a budget surplus to the taxpayers without an income tax break. The School Aid Fund and funding for schools in general has been cut and cut again just about every time the state starts running out of money for just about any other budget line item. Yet, the legislature’s approach to correcting this problem thus far has been to lambaste teachers and throw good money after bad on unnecessary standardized tests. (Each junior in Michigan is required to take the ACT, which is paid for by the state to the tune of $52.50 per test. Assuming there are 100,000 juniors statewide that comes to $5.2 million spent every year on a test students used to have to pay for themselves if they planned on going to college.) At the federal level, the belief is that improved early childhood education creates the greatest return on investment, while others believe that an across the board investment in better technology, building improvements, and better teacher salaries is the ticket. No matter what your stance on what facet of education brings the best results, Michigan lawmakers definitely need to consider making schools better rather than cutting income tax.

The bottom line is that Michigan legislature needs to quit counting their chickens before they hatch. We only have rough projected numbers now, and over time there could be unplanned expenses that chip away at the surplus. If we do wind up with the full $1.2 billion, an across the board cut to income tax percentage would give the greatest benefit to the wealthiest Michiganders and leave the middle class and the poor with a pittance of savings. The suggestions above will create a much greater benefit for the community at large, and represents more responsible ways to deal with a budget surplus. Contact your representatives in Lansing and tell them to save the tax cuts for when we have a budget surplus after enacting reforms that will truly benefit all of Michigan’s citizens.