Study: Michigan crumbles under outdated tax system

From the Detroit Free Press:

California’s state finances are awful, but Michigan is among nine other states that aren’t far behind the Golden State in economic trauma, according to a new study.

The shock waves of the domestic auto industry’s decline, home foreclosures and persistent state deficits could last for decades, according to the Pew Center on the States.

The report quoted Donald Grimes, a University of Michigan senior research specialist, saying he expects new data this year will show Michigan is among the nation’s 10 poorest states.

If Michigan’s economy suddenly grew at the rate it did during the prosperous 1990s, it would be 2025 or 2030 before it recovered all the jobs it’s lost in the past decade, said Susan Urahn, managing director for the Pew Center on the States.

“Michigan is essentially adjusting to a new normal, where the state may just have to deal with a permanent set of pared-back services,” she said. “It is simply not one of the most prosperous states anymore.”

The report says Michigan’s population is becoming older and less affluent, and its outmoded tax system can’t support state government.

Generous tax exemptions for retirees and businesses, and the exclusion of services from sales taxes, are two reasons for persistent state deficits, according to the report.

Couples can receive up to $110,000 in pension and other retirement income without paying anything to the state.

“In 20 years, we’re going to look like Florida does now if the demographic trends continues and no one’s going to be paying taxes except those that are working,” Mitch Bean, director of the nonpartisan House Fiscal Agency, told Pew researchers.

Last year, the state offered $6.3 billion more in business tax breaks than it collected in taxes.

“Left with few options, Michigan is being forced to diversify its economy and confront long-neglected structural imbalances in its budget under some of the most unfavorable conditions since World War II,” the report says. “The beleaguered state is adjusting to a new normal.”

To balance its budget over the past decade, Michigan has relied on $8 billion in onetime fixes, not including the billions of dollars it received in federal stimulus money this year, the report concluded.

Joining Michigan and California on the Pew Center’s list of fiscally endangered states are Arizona, Florida, Illinois, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin.

Those states share, to varying degrees, these four troubling traits:

• Economies too reliant on single industries, such as the auto industry for Michigan.

• Persistent gaps between state spending and tax revenues.

• Limited ability to raise taxes or reduce spending.

• Inability to enact long-term fiscal reforms.

The report says the 10 states’ financial woes could result in higher taxes, layoffs, longer waits for public services, crowded classrooms, higher college tuition and less support for unemployed and poor people.

Because those states account for one-third of the U.S. population, their actions to either raise taxes or cut spending could slow the nation’s economic recovery, the report says.

The report comes on the heels of more budget tumult for Michigan. A finished 2009-10 budget is still under debate, with Gov. Jennifer Granholm locked in a bitter feud with Senate Republicans over additional tax revenues to stave off major cuts in state aid to schools.

The Pew assessment is no surprise to state finance officials. A new Senate Fiscal Agency report says tax revenues to run the state and public schools are nearly 13% less than a year ago (from November 2008 to October 2009).

September marked the ninth straight month in which tax collections were lower than previous year levels.

Precipitous drops in state aid to cities and schools have rekindled talk in Lansing of overhauling Michigan’s tax system.

Bean told the Pew researchers: “Even if we can straighten out our tax code some, I see no way around a dramatic change in government at all levels in Michigan. There’s going to be fewer services.”