As Washington struggles to reach a fiscal-cliff deal, Michigan offers an instructive example. Faced with a wrecked economy, the Wolverine State has tried both tax hikes and tax cuts to address its cavernous deficit and drowsy economy. And it finally seems to have found a strategy that works.
From 2003 through 2010, under the direction of Democratic governor Jennifer Granholm, Michigan implemented the Obama model for financial catastrophes. During her tenure the state ran annual deficits of around $1.5 billion, according to the Department of Technology, Management, and Budget. Nonetheless, Granholm doubled down on spending, or “investment,” as she termed giveaways to public employees and favored big businesses.
“Michigan is actually a wonderful model for Obama versus Romney,” observes Henry Payne, the editor of TheMichiganView.com and an editorial cartoonist for the Detroit News. In her day, “Granholm tried what Obama did nationally. . . . She put in place a big stimulus with a large public investment primarily aimed at green companies.”
#ad#That “stimulus” was expensive. She was governor for eight years of a decade during which Michigan’s annual expenditures increased by more than $10 billion, despite the state’s shrinking population. To pay the tab, Granholm supported the biggest tax hike in the state’s history. Michigan ended up with a weird business tax copied by no other state — a combination gross-receipts tax and profits tax, with a surcharge tacked on top. Personal income taxes went up too, by more than 6 percent. And tax policy was not only misguided but badly handled; one business-tax provision was repealed less than 24 hours after it was enacted, contributing to a pervasive mood of uncertainty. No wonder entrepreneurs were afraid to open or expand businesses during those years.
Predictably, Granholm’s strategy turned out to be disastrous, stifling the businesses that create jobs and drive economic growth. Even before the 2008 financial crisis, Michigan was weathering a one-state recession. When Granholm took office, the Small Business and Entrepreneurship Council ranked Michigan the ninth-friendliest state in the country. By the time she left, it had fallen to 26th. And during her tenure, the state’s unemployment was, on average, 37 percent higher than the national rate, often the highest in the nation. Business Leaders for Michigan, a non-profit led by some of the state’s CEOs and senior executives, reported that between 2000 and 2009, the state accounted for more than half the private-sector jobs lost in the United States, adding that “Michigan has underperformed the national job growth average in 86% of the nation’s 22 job categories from 2004–2009” — all Granholm years.
That’s the situation Governor Rick Snyder inherited when he took office in 2011. Wasting no time, he pursued aggressive tax reform. Working with the new Republican legislature, he immediately scrapped the state’s unwieldy business tax, instead imposing a flat 6 percent corporate rate. The reform cut taxes on businesses by around $1.6 billion, according to the U.S. Chamber of Commerce. Michigan also began taxing pensions, a step toward more balanced revenue-raising. Now Snyder’s allies in the statehouse are seeking to eliminate the personal-property tax, which would encourage business investment, particularly in the manufacturing sector.
These radical reforms were a feat of leadership, said Gary Wolfram, a former senior economist for the Michigan state Republican staff and a professor at Hillsdale College.
“It was really amazing because when you think about it, you’ve got a lot of winners and losers whenever you change a tax,” Wofram said. “To have so quickly gotten rid of the state’s business tax and replaced it — I was surprised at how quickly it happened. . . . It simplified the tax, reduced the tax, and created certainty about what the tax was going to be. Those three things made a big difference, especially compared to what Granholm was doing.”
There’s been spending reform, too. Snyder pushed through an emergency-manager law, which gave troubled municipalities and school districts a powerful tool to check unions and get their finances under control. Though voters overturned the law last month, legislators will likely work on enacting a new, refined version. The state has also capped welfare benefits after four years, an effort to maintain help for the needy while still reducing long-term government dependency.
Though Snyder has been in office for less than two years, the initial results have been impressive. Last year, Michigan’s job growth outpaced the rest of the country’s. Bureau of Labor Statistics data show that throughout Snyder’s first 22 months, the state has added almost 80,000 jobs. During Jennifer Granholm’s last month, unemployment was at 11.2 percent; now, it’s at 9.1 percent. Furthermore, CNBC ranked Michigan sixth in the nation for job creation this year, and the Chamber of Commerce placed it in the top five for short-term job growth. The economy is expanding, too. Last year, it grew 2.3 percent — the sixth-best figure among the states, according to the U.S. Bureau of Economic Analysis.
The Left would like to attribute this economic turnaround to the auto-industry bailout, but the numbers don’t back this up. The Small Business Association of Michigan estimates that in 2012 alone, small businesses generated 13,209 jobs — and none of its top ten industries are directly linked to the auto industry. Furthermore, looking at the job numbers since 2009, the University of Michigan has predicted that manufacturing will continue to lead the state’s job growth, but the auto industry directly accounts for less than half of this. At its annual economic-outlook conference last month, the University of Michigan reported that the professional and business sectors have also been major job creators. And health care, construction, and other industries have also generated a large number of employment opportunities for Michigan residents. Such expansion almost certainly wouldn’t have happened without the lower taxes and regulatory certainty that have marked Snyder’s term in office so far.
Furthermore, since the reforms, tax revenues have consistently been higher than projected. During his first year in office, Snyder used both spending cuts and tax reform to balance the budget. It worked so well that last year he didn’t have to cut spending, and his spokesman said no cuts are expected in the next budget either. Snyder and the Republican legislature have also begun saving money for unfunded pension liabilities, which Granholm had ignored, said Michael D. LaFaive, director of the Morey Fiscal Policy Initiative at Michigan’s Mackinac Center.
There’s a nationally important lesson to be learned here. Granted, the federal government has bigger entitlement problems and more intractable spending. And under Obama’s watch, the federal government has set a pattern of ever-higher spending. And $16 trillion in debt is positively daunting.
But Granholm’s high-tax, high-spending approach only created more economic problems in Michigan. In contrast, by cutting both spending and taxes on businesses, Snyder was able to balance the budget, jumpstart the economy, and begin responsibly planning for future liabilities.
“We’ve been complaining about our hyper-complicated federal tax system for decades,” LaFaive said. “What we need is a bold stroke to the Gordian knot like the one Snyder applied in Michigan, and one that might be bolder.”
— Jillian Kay Melchior is a Thomas L. Rhodes Fellow for the Franklin Center for Government and Public Integrity.