LANSING – A study that says Michigan’s current economic woes are due almost entirely to problems in the automotive industry and that eliminating the Single Business Tax could have little effect on boosting the economy, also indicates the path the state has taken to boost higher education is the right one for Michigan’s long-term future.
Michigan Economic Development Corporation James Epolito said while the report showed there will be no quick fixes to the state’s economy, and that Michigan had to help build a healthier auto industry, it does show that the plan the state has developed to diversify the economy is on the right track.
Gov. Jennifer Granholm issued a statement saying the plan does support the long-term goals her administration has supported, especially in education.
The MEDC largely paid for the study by the Kalamazoo-based W.E. Upjohn Institute for Employment Research (it provided $55,000 of the $70,000 cost), and Epolito said it would provide the state with unbiased information to help develop plans to help diversify the state’s economy.
Saul Anuzis, chair of the Michigan Republican Party, said his party’s gubernatorial candidate, Dick DeVos, could concur with many of the study’s conclusions and that the study backs some of the proposals Mr. DeVos has called for. Ending the SBT is not the be-all of boosting Michigan’s economy, but an important first step, Anuzis said.
The study indicates a better solution for the state’s long-term economic growth would be improving its overall educational attainment. The most vibrant economic growth in the U.S. has been in those states with the highest number of educated workers, said Timothy Bartik, an economist at the Upjohn Institute and the lead author of the study.
But it was also important to remember, Bartik said, “there is no magic solution, no free lunch solution” to Michigan’s economic problems.
And as policymakers develop a replacement to the SBT they had to be careful not to make matters worse by taxing business investments, he said.
The study developed four main conclusions, the first being that the state’s ongoing economic problems are largely the result of Michigan’s greater dependence on the Big Three auto industry. Michigan’s job growth has declined since 2000, while the nation’s has grown an annual average of about .25 percent (itself sharply down from the 1.75 percent national growth from 1990-1999), but Bartik said if the state had not depended so thoroughly on automotives or if the Big Three were performing better, then job growth in Michigan would be running higher than the national average.
The second conclusion is that Michigan’s overall tax structure is slightly below the national average. In terms of all taxes, state and local taxes are 5 percent below the U.S. average per dollar in personal income, the study said, while state and local business taxes are 12 percent below the U.S. average. Most importantly for business development, Bartik said, state and local taxes on business development are 19 percent smaller than the U.S. average.
The third conclusion, possibly the most controversial given that the Legislature has voted to end the SBT in December 2007 and is now in the process of developing an alternative tax, is that ending the SBT is not likely to have a significant effect on economic development, Bartik said, especially if it results in reduced public spending.
Under the best scenario, Bartik said, by abolishing the SBT and paying for it with spending cuts could boost employment growth in the state by .09 percent. That is “less than one-fifteenth of Michigan annual growth gap versus the United States,” Bartik said.
The total value of the cut would amount to about 27 cents an hour per worker, Bartik said, although he acknowledged for the largest taxpayers that could be a significant amount of money.
Under the worst case scenario, cutting the SBT and public spending could actually hurt job growth, he said.
Cutting public spending hurts the state on the demand side by cutting public-sector jobs that affects personal spending. Plus, cutting public spending affects the services that businesses most want, he said.
Charlie Owens of the National Federation of Independent Business agreed that eliminating the SBT by itself would not turn the state’s economy around. “It’s the beginning of an overall policy, not the be all and end all. But I wouldn’t call it insignificant either,” he said.
And Anuzis said eliminating the tax was important in keeping Michigan competitive with other states.
But in her statement, Granholm argued some want to harm the state by not wanting to restore any of the between $1.8 billion to $2 billion in revenues the SBT brings. “I will fight to protect Michigan’s quality of life by strengthening Michigan’s economy for years to come,” she said.
Related to the conclusion on the SBT, Bartik said a better strategy for the state would be to cut taxes on businesses making investments in the state and raising them on businesses not making new investments.
And in a fourth major conclusion, boosting the number of people in the state with a college degree could “completely close” the gap between the state and national economic growth if the number of people with college degrees is roughly doubled.
Achieving that goal will take time, he said, and will actually show some short-term out migration as college graduates leave the state for jobs elsewhere.
But Epolito said what he has seen in the study thus far confirms the overall strategy the state is following to diversify its economy by promoting high tech industries like the life sciences and in boosting education.
In the short term, the state needs a healthy auto industry, and Epolito said there are encouraging signs even with the painful restructuring efforts underway that the industry is focusing development in Michigan.
And Granholm also said the study signals the state is on the right track with its economic revitalization efforts.
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