State lawmakers will soon face large budget deficits again, perhaps as much as $100 billion across the U.S. Here's some free budget-balancing advice: Steer clear of the Michigan model. The Wolverine state is once again set to run out of money, and it is once again poised to raise taxes even as jobs and businesses disappear.
In 2007 Governor Jennifer Granholm signed the biggest tax increase in Michigan history, with most of the $1.4 billion coming from business. The personal income tax—which hits nonincorporated small businesses—was raised to 4.2% from 3.95%, and the Michigan business tax levied a surcharge of 22%. The tax money was dedicated to the likes of education, public works, job retraining and corporate subsidies. Ms. Granholm and her union allies called these "investments," and the exercise was widely applauded as a prototype of "progressive" budgeting.
Some prototype. Every state has seen a big jump in joblessness since 2007, but with a 15.2% unemployment rate Michigan's jobs picture is by far the worst. Some 750,000 private-sector payroll jobs have vanished since the start of the decade. For every family that has moved into Michigan since 2007, two have sold their homes and left.
Meanwhile, the new business taxes didn't balance the budget. Instead, thanks to business closures and relocations, tax receipts are running nearly $1 billion below projections and the deficit has climbed back to $2.8 billion. As the Detroit News put it, Michigan businesses are continually asked "to pay more in taxes to erase a budget deficit that, despite their contributions, never goes away." And this is despite the flood of federal stimulus and auto bailout cash over the last year.
Following her 2007 misadventure, Ms. Granholm promised: "I'm not ever going to raise taxes again." That pledge lasted about 18 months. Now she wants $600 million more. Among the ideas under consideration: an income tax increase with a higher top rate, a sales tax on services, a freeze on the personal income tax exemption (which would be a stealth inflation tax on all Michigan families), a 3% surtax on doctors, and fees on bottled water and cigarettes. To their credit, Republicans who control the Michigan Senate are holding out for a repeal of the 22% business tax surcharge.
As for Ms. Granholm, she and House speaker Andy Dillon continue to bow to public-sector unions. There are now 637,000 public employees in Michigan compared to fewer than 500,000 workers left in manufacturing. Government is the largest employer in the state, but the number of taxpayers to support these government workers is shrinking. The budget deadline is November 1, and Ms. Granholm is holding out for tax increases rather than paring back state government.
The decline in auto sales has hurt Michigan more than other states, but the state's economy would have been better equipped to cope without Ms. Granholm's policy mix of higher taxes in order to spend more money on favored political and corporate interests. If any larger good can come of the experience, it is that Michigan is teaching other states how not to govern.