Michigan Economy Not Yet Hit Bottom - $1 Billion State Deficit Looms

LANSING – Michigan’s fiscal situation has not yet hit bottom, Gov. Jennifer Granholm said Thursday in outlining a dire budget scenario that could include revenue proposals next year in order to protect services.

The governor, in a year-end media roundtable, rebuffed repeated questions regarding whether tax increases or a restructuring of taxes are under consideration, but pointed to a looming deficit of $1 billion or more and her re-election which she said was a vote to balance state investments with a competitive business climate.

Still, the budget situation is so critical, Granholm said as she prepares for a second term, that more cuts are unavoidable and that some programs that have not been hit in the past will be cut.

Republican leaders and a leading state business group raised immediate objections to even broaching the subject of higher taxes, saying more can be cut in state spending.

The economy, taxes and budget dominated the session with reporters, as it is expected to dominate the next year, beginning with the governor’s State of the State address in January, the revenue estimating conference in mid-January and the State of the State and 2007-08 budget recommendations in the first week of February.

The first big issue to tackle will be to eliminate the budget problems in the current and upcoming fiscal years, estimated to be in the range of some $1 billion, but a clearer picture will be provided with the revenue estimating conference on January 18.

“We are looking at another huge deficit looking forward,” she said, adding that is why she vetoed the capital outlay budget (see related story) and nearly every other bill among the some 250 the Legislature passed this month that have revenue implications.

The current-year budget faces a likely deficit of some $500 million or more, a shortfall in school aid of over $300 million even with savings due to fewer than expected students in school, and the rest from the general fund. Another $500 million is projected in 2007-08 just to maintain current services and the state has to deal with the $2 billion that will be lost when the Single Business Tax is repealed December 31, 2007.

The governor cautioned that the new business tax proposal that she will put before the Legislature for what she hopes will be early action may not be identical to the revenue-neutral proposal she outlined earlier this month.

Saying she would await the determinations of the revenue estimating conference on January 18, Granholm said, “If the climate and conditions are changed significantly in January, I’m not certain that the exact offer will be made.” She said whether it would still be revenue neutral depends on what the revenue projections are, emphasizing the need to invest in the workforce, higher education, and a quality of life while keeping a competitive economic climate.

One idea repeatedly raised in some sectors is extending the scope of the sales tax to services, which would permit its rate to be lowered, and Treasurer Robert Kleine has said he would not oppose putting that issue before the voters.

But Granholm at this stage would not go near that issue, or for that matter other questions on whether she would raise taxes. She said she would not get into “hypotheticals” about a tax structure, but said the state’s tax structure should be one based on the 21st century economy, much as she did when proposing a new business tax.

“I’m not giving you a headline to write,” the governor said. “I am giving you the priorities we have always stated. There will be cuts, we have made cuts and there will be cuts in this budget as well. But I am preparing people that this will be significantly challenging for the Legislature this year coming up.”

Granholm, who won a second term with a 14-point margin over Republican candidate Dick DeVos, said residents understand the long-term economic transformation of the state that is taking place and by their vote reinforced a plan to replace lost business taxes and invest in areas such as education, emerging businesses and health care for the vulnerable.

The governor, who once in her first term ordered prorated cuts in the foundation grant to K-12 schools because of shortfalls in the School Aid Fund, said she does not want to issue another proration letter. “But unless we get the funding to be able to hold schools harmless, the cuts are going to have to be made in areas that to this point have been spared.”

Granholm said the first thing she would do is “wring out inefficiencies” in state government, and would renew some revenue proposals the Legislature has declined in the past to take up, such as decoupling the state’s estate tax from the federal system.

“I will not cut all business taxes and have citizens pay for it one way or another,” Ms. Granholm said.

But she stood firm on other widespread cuts to balance the budget. “It would not be a wise course, I think, to cut the things that I think make us competitive as a state.”

The governor, who touted new high school standards among the accomplishments of 2006, said she will back additional education reforms, adding she has not ruled out anything, including changes in school health care insurance and pension systems that proponents say will save hundreds of millions of dollars.

“That is something that is very complicated,” Granholm said. “I don’t want to take away any benefit to those who were promised benefits. The question is can you structure a system that captures the money in the future. I think that’s possible.”

Granholm said she has no reason not to believe projections by University of Michigan economists that Michigan’s economy will finish bottoming out in 2007 and the beginning of 2008. “I expect that to be true and I think we need to make wise decisions right now to make sure that’s true and that means a state that is on a financial footing that enables us to invest in our citizens,” she said.

“The state budget situation will get worse before it gets better,” Granholm said, noting that the automotive industry is close to bottoming out with its restructuring and buyouts that have put tens of thousands of employees out of work as of the end of this year.

“I will not cut all business taxes and have citizens pay for it one way or another,” Granholm said.

But she stood firm on other widespread cuts to balance the budget. “It would not be a wise course, I think, to cut the things that I think make us competitive as a state.”