Michigan budget expert: Slash public employee compensation, tax breaks in 2011
One of Michigan’s top state budget experts said today he expects that the next governor and Legislature will succeed in enacting structural reforms to contract state bureaucracy.
Senate Fiscal Agency director Gary Olson, who is retiring after three decades of service, told economists at a University of Michigan conference this morning that public employee compensation has expanded disproportionately with the state’s revenue.
Olson also said that the amount of tax breaks, credits and deductions the state distributes to individuals and businesses is now 7.5 percent higher than the total tax revenue the state collects.
With federal stimulus money gone - the state used $4.7 billion of temporary federal money to help plug deficits over the last three years - tough decisions are looming.
“In my opinion, 2011 is likely to be the year during which the scope and purpose of state government are adjusted to more reflect the economic realities of the state,” Olson said.
His comments come a day after Gov.-elect Rick Snyder told Republican governors in San Diego on Thursday that public employee compensation cuts are necessary to help balance a budget deficit Olson projects as $1.7 billion for 2011-12.
The average total cost of a state employee, a figure that includes benefits, rose 58.2 percent from $54,412 to $86,100 from 1999-2000 to 2009-10, Olson said.
Over the same period, the average personal income for individual Michigan residents grew 24.1 percent, the lowest of the 50 states, Olson said.
“I think this is an issue that will probably be addressed and needs to be addressed in the future,” Olson said.
But Olson also laid out a litany of other structural problems with the state budget, including the way the state collects taxes, the amount it spends on corrections and impact of the poor economy on revenue.
Fueling the state’s chronic deficits is a massive increase in the number of people qualifying for Medicaid, he said. That figure has increased from 1 million in 1999-2000 to 1.8 million a decade later.
Olson said Michigan needs to expand its sales tax to cover services, a politically controversial proposal that the legislature briefly enacted and then repealed in 2007.
He also suggested that corrections spending is too high. That figure rose 31 percent over the last 10 years from $1.51 billion to $1.99 billion.
Snyder has proposed a $1.5 billion tax cut for Michigan businesses by replacing the Michigan Business Tax with a 6 percent corporate income tax.
Olson said Snyder's proposal would require additional major budget cuts.
Michigan’s “economic collapse” and tax breaks have undercut the state budget, Olson said.
Michigan’s total tax revenue equaled 9.55 percent of residents’ personal income in 1999-2000. That led to a small tax refund at the time because the state constitution dictates that tax revenue cannot exceed 9.49 percent of personal income.
By 2009-10, total state tax revenue was down to 6.96 percent of residents’ personal income.
During that same 10-year stretch, the amount of tax expenditures the state distributed to businesses and individuals -- which includes tax breaks, credits and deductions -- rose from $14.1 billion to $26.2 billion.
Business tax expenditures rose 39.7 percent to $1.92 billion, individual income tax expenditures rose 88.8 percent to $4.78 billion, and consumption tax expenditures rose 93 percent to $6.77 billion.
“We’re basically providing more tax expenditures than we are collecting in revenue, and it’s a serious issue that needs to be faced by the state,” Olson said.
Compounding the problem, Olson said, is a lack of knowledge about the state’s budget problems.
“I’m absolutely convinced that the general public and the policy makers in Lansing, including the 38 senators that I work for, the 110 members of the state House and certainly the general public do not have a general understanding of what’s happened in the state,” he said.
But he offered a sliver of optimism, too, with a new governor and a new legislature taking office.
“You have an opportunity to fundamentally restructure this state for the future and you have to look at it, I think, in that sense,” he said. “It’s going to be painful, but it could be a great accomplishment, and I would urge the members of the next legislature and the governor to look at the situation that way. I think there will be some political carnage along the way, but it’s an opportunity.”