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Legislative BanquetKent Intermediate Association
of School Boards
April 22, 2004
Tom ClayDirector of State Affairs
Citizens Research Council of Michiganwww.crcmich.org
Michigan’s Budget CrisisAn Update
Michigan’s Budget CrisisAn Update
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Citizens Research Council of MichiganCitizens Research Council of Michigan
• Founded in 1916• Statewide• Non-partisan• Private Not-for-profit• Promotes sound policy for state
and local governments through factual research
• Relies on charitable contributions of Michigan businesses, foundations, and individuals
• Founded in 1916• Statewide• Non-partisan• Private Not-for-profit• Promotes sound policy for state
and local governments through factual research
• Relies on charitable contributions of Michigan businesses, foundations, and individuals
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Five Years of Budget ProblemsFive Years of Budget Problems
• Declining General Fund Revenues• Slow Growth - School Aid Fund
Revenues
• Situation Cyclical or Structural?
• Prospects for Improvement?
• Declining General Fund Revenues• Slow Growth - School Aid Fund
Revenues
• Situation Cyclical or Structural?
• Prospects for Improvement?
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The National SituationThe National Situation
• Worst State Budget Crisis Since World War II
• Revenue Structures Mismatched With Spending Responsibilities
• Spending Demands Outpacing Revenue Increases
• Medicaid a Nationwide Problem • Corrections Growing Rapidly in Michigan
and Some Other States
• Worst State Budget Crisis Since World War II
• Revenue Structures Mismatched With Spending Responsibilities
• Spending Demands Outpacing Revenue Increases
• Medicaid a Nationwide Problem • Corrections Growing Rapidly in Michigan
and Some Other States
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• Total State Budget - $39.1 Billion• State’s Two Major Funds:
General Fund - $8.7 Billion School Aid Fund - $12.5 Billion
• Other State Funds Restricted for Other Purposes, e.g. Transportation, Federal Revenues
• Total State Budget - $39.1 Billion• State’s Two Major Funds:
General Fund - $8.7 Billion School Aid Fund - $12.5 Billion
• Other State Funds Restricted for Other Purposes, e.g. Transportation, Federal Revenues
The Michigan BudgetThe Michigan Budget
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General Fund Budget General Fund Budget
83% of General Fund Spending in 4 Areas:• Higher Education ($1.8 B)• Community Health — Mental Health, Public
Health, Medicaid ($2.5 B)• Corrections ($1.7 B)• FIA — Family Services, Juvenile Justice,
Public Assistance ($1.1 B)
All Other General Fund Programs - $1.5 B
83% of General Fund Spending in 4 Areas:• Higher Education ($1.8 B)• Community Health — Mental Health, Public
Health, Medicaid ($2.5 B)• Corrections ($1.7 B)• FIA — Family Services, Juvenile Justice,
Public Assistance ($1.1 B)
All Other General Fund Programs - $1.5 B
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School AidSchool Aid
• State Provides About 80% of Total State & Local Revenues to Local Districts & Charter Schools
• Almost All of the Revenue Base Earmarked Specifically for Schools
• Sales Tax is Principal Revenue Source (41%)
• State Provides About 80% of Total State & Local Revenues to Local Districts & Charter Schools
• Almost All of the Revenue Base Earmarked Specifically for Schools
• Sales Tax is Principal Revenue Source (41%)
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External Causes of the Budget Problem
External Causes of the Budget Problem
• Weak Economy
• Stock Market Decline
• Michigan’s Deteriorating Share of Auto and Light Truck Market
• Weak Economy
• Stock Market Decline
• Michigan’s Deteriorating Share of Auto and Light Truck Market
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How Weak is the Economy?How Weak is the Economy?
Michigan’s Recent Statistics:
-46th in Personal Income Growth
-48th in Unemployment Rate
-49th in Employment Growth (Decline for Michigan)
-49th in Index of Economic Momentum (Population, Personal Income, Employment)
Michigan’s Recent Statistics:
-46th in Personal Income Growth
-48th in Unemployment Rate
-49th in Employment Growth (Decline for Michigan)
-49th in Index of Economic Momentum (Population, Personal Income, Employment)
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Michigan Job LossesMichigan Job Losses
• 285,000 Jobs Lost in Three Years
• Manufacturing Employment Down 174,000
• 19% Fewer Manufacturing Jobs
• 61% of Job Losses in Manufacturing
• 285,000 Jobs Lost in Three Years
• Manufacturing Employment Down 174,000
• 19% Fewer Manufacturing Jobs
• 61% of Job Losses in Manufacturing
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The Stock MarketThe Stock Market
• Michigan Income Tax Receipts From Non-Salary Income Dropped Over $500 Million in Three Years (Nearly 40 Percent)
• Affected General Fund and School Aid
• Hangover Will Remain For Several Years
• Michigan Income Tax Receipts From Non-Salary Income Dropped Over $500 Million in Three Years (Nearly 40 Percent)
• Affected General Fund and School Aid
• Hangover Will Remain For Several Years
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Total U.S. Vehicle Sales & Big 3 Share 1992-2003
0
5,000,000
10,000,000
15,000,000
20,000,000
Sale
s Le
vel
52%54%56%58%60%62%64%66%68%70%72%
Total U.S. Sales Light Vehicles Big 3 Share of Total Sales
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Internal Causes of the ProblemInternal Causes of the Problem
• Revenue Structure Mismatched With Spending Responsibilities
• Spending Growth Outpacing Revenue Increases-Medicaid a Nationwide Budget Problem for the States-Corrections Growing Rapidly -Some Programs Are Being Crowded Out of Budgets
• Tax Cuts Eroding the Revenue Base• Failure to Implement Permanent Budget-
balancing Changes
• Revenue Structure Mismatched With Spending Responsibilities
• Spending Growth Outpacing Revenue Increases-Medicaid a Nationwide Budget Problem for the States-Corrections Growing Rapidly -Some Programs Are Being Crowded Out of Budgets
• Tax Cuts Eroding the Revenue Base• Failure to Implement Permanent Budget-
balancing Changes
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The Tax Rate CutsThe Tax Rate Cuts
• Single Business Tax - 26% of General Fund Revenue
• Individual Income Tax Cut - 8% of General Fund Revenue
• Implication: State Could Afford to Finance Existing Programs w/1/3 Less Revenue
• Roughly 13 Percentage Points of 34 Percentage Points Gone ($1.3 B)
• Single Business Tax - 26% of General Fund Revenue
• Individual Income Tax Cut - 8% of General Fund Revenue
• Implication: State Could Afford to Finance Existing Programs w/1/3 Less Revenue
• Roughly 13 Percentage Points of 34 Percentage Points Gone ($1.3 B)
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Summary of One-time Resources
(in Millions)
Summary of One-time Resources
(in Millions)
Rainy Day Fund $1,363
FY2000 School Aid Fund Surplus 984
FY2000 General Fund Surplus 212
Medicaid Benefits Trust Fund 561
Advance State Education Tax Collection Date 455
Tobacco Settlement/Merit Award Revenues 317
Temporary Federal Fiscal Assistance 655
Bond for Pay-as-you-go Capital Projects 211
Revenue Sharing Accounting Change 181
Refinance Bonds 209
Employee Wage Concessions 110
Other 759
$6,017
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($1,200)
($1,000)
($800)
($600)
($400)
($200)
$0
$200
$400
$600
($ i
n M
illi
on
s)
FY00 FY01 FY02 FY03 FY04 FY05
School Aid Fund
General Fund
($1,200)
($1,000)
($800)
($600)
($400)
($200)
$0
$200
$400
$600
($ i
n M
illi
on
s)
FY00 FY01 FY02 FY03 FY04 FY05
School Aid Fund
General Fund
General Fund & School Aid Operating Deficits
General Fund & School Aid Operating Deficits
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Perspective On RevenuesPerspective On Revenues
• Actual General Fund Revenues in FY03, FY04, & FY05 Below FY1995
• 10 Years of Higher Costs & Increased Needs Go Unfunded
• Some Programs Crowding Out Others• School Aid Revenues Up $3.5 B Over
Same Period (45%)
• Actual General Fund Revenues in FY03, FY04, & FY05 Below FY1995
• 10 Years of Higher Costs & Increased Needs Go Unfunded
• Some Programs Crowding Out Others• School Aid Revenues Up $3.5 B Over
Same Period (45%)
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FY2004 Review—General FundFY2004 Review—General Fund
• Budgets Cut $1.7 Billion– General Fund - $1,335 Million– School Aid - $361 Million
• Onetime Resources & Savings - $807 M
• Fees & Other Revenues - $453 M
• Other Changes - $155 M
• Tax Increases Off the Table
• Budgets Cut $1.7 Billion– General Fund - $1,335 Million– School Aid - $361 Million
• Onetime Resources & Savings - $807 M
• Fees & Other Revenues - $453 M
• Other Changes - $155 M
• Tax Increases Off the Table
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FY2004 School Aid ReviewFY2004 School Aid Review
• School Aid Down Year to Year— $128 Million
• First Decline Since Proposal A
• Retirement Percentage Held at 12.99%--Reserves Used to Postpone Increase
• School Aid Down Year to Year— $128 Million
• First Decline Since Proposal A
• Retirement Percentage Held at 12.99%--Reserves Used to Postpone Increase
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Summary of Other Budget CutsSummary of Other Budget Cuts
• Higher Education Cut 14% in 2 Years - $297 M
• Revenue Sharing Cut 15% in 3 Years - $293 M
• State Workforce Down 8,500 in 3 Years (14%) - Smallest Workforce Since 1974
• Higher Education Cut 14% in 2 Years - $297 M
• Revenue Sharing Cut 15% in 3 Years - $293 M
• State Workforce Down 8,500 in 3 Years (14%) - Smallest Workforce Since 1974
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Revenue Sharing PaymentsFiscal Years ’93 through ‘04 Revenue Sharing PaymentsFiscal Years ’93 through ‘04
$800.0
$1,000.0
$1,200.0
$1,400.0
$1,600.0
$1,800.0
Fiscal Year
In M
illio
ns
Statutory/Constitutional
Actual/Proposed$800.0
$1,000.0
$1,200.0
$1,400.0
$1,600.0
$1,800.0
Fiscal Year
In M
illio
ns
Statutory/Constitutional
Actual/Proposed
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MedicaidMedicaid
• Spending Up 40 Percent in 4 Years - Nearly Double Digit Increases
• Caseload Up 27 % During Same Period• Program Now Covers 1.35 Million
Michigan Citizens• Pressures on Rates Paid Providers -
Could Add Significantly to Growth in Future
• Spending Up 40 Percent in 4 Years - Nearly Double Digit Increases
• Caseload Up 27 % During Same Period• Program Now Covers 1.35 Million
Michigan Citizens• Pressures on Rates Paid Providers -
Could Add Significantly to Growth in Future
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CorrectionsCorrections
• Largest State-Operated Program• Most State Revenue Goes to Other
Organizations - Universities, Schools, Hospitals, Local Government, etc.
• 50,000 Prisoners• Over 30% of State Workers• Share of Budget Has Increased 4
Percentage Points Since FY2000
• Spending Up $253 Million (17%)
• Largest State-Operated Program• Most State Revenue Goes to Other
Organizations - Universities, Schools, Hospitals, Local Government, etc.
• 50,000 Prisoners• Over 30% of State Workers• Share of Budget Has Increased 4
Percentage Points Since FY2000
• Spending Up $253 Million (17%)
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States With More Than 500 Prisoners Per 100,000 Residents
States With More Than 500 Prisoners Per 100,000 Residents
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Shares of the General Fund Budget
0.05.0
10.015.020.025.0
Fiscal Year
Per
cen
t of T
ota
l
Corrections
Higher Education
School Aid
Shares of the General Fund Budget
0.05.0
10.015.020.025.0
Fiscal Year
Per
cen
t of T
ota
l
Corrections
Higher Education
School Aid
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State Government Employment TrendsState Government
Employment Trends
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1980
1985
1990
1995
2000
2002
2003
Fiscal Year
Em
plo
ym
en
t
Corrections
All OtherDepartments
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1980
1985
1990
1995
2000
2002
2003
Fiscal Year
Em
plo
ym
en
t
Corrections
All OtherDepartments
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State Employee CompensationState Employee Compensation
• Increases in Employee Compensation Costs Not Funded In FY2004 Appropriations
• Pay Raises Negotiated in 2001—Three Year Contract—2%(‘03), 3%(’04), 4%(’05)
• Other Increases—Group Insurance & Retirement Contribution Rate
• General Fund Costs---$140 Million• Concessions Preventing Loss of 3,000 Jobs in
Place
• Increases in Employee Compensation Costs Not Funded In FY2004 Appropriations
• Pay Raises Negotiated in 2001—Three Year Contract—2%(‘03), 3%(’04), 4%(’05)
• Other Increases—Group Insurance & Retirement Contribution Rate
• General Fund Costs---$140 Million• Concessions Preventing Loss of 3,000 Jobs in
Place
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Areas of Continuing RiskAreas of Continuing Risk
• Economic and Revenue Outlook
-Traditional Michigan Recovery not Likely
-Auto and Light Truck Sales Already Strong
-Incentives, Rebates and Low Interest Loans Borrowed Sales From Future
-Big Three Losing Sales Share
• Revenues Not Likely to Hit Forecasts
• Economic and Revenue Outlook
-Traditional Michigan Recovery not Likely
-Auto and Light Truck Sales Already Strong
-Incentives, Rebates and Low Interest Loans Borrowed Sales From Future
-Big Three Losing Sales Share
• Revenues Not Likely to Hit Forecasts
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Revenue Forecasts for FY2005 January Consensus Agreement
Revenue Forecasts for FY2005 January Consensus Agreement
• Recovery and Steady Growth Projected for Economy
• Economic Forecast Produces
4% Percent Revenue Growth
• Most of Growth Needed to Replace FY04 One-time Revenues
• Recovery and Steady Growth Projected for Economy
• Economic Forecast Produces
4% Percent Revenue Growth
• Most of Growth Needed to Replace FY04 One-time Revenues
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The FY2005 General Fund Budget Challenge
The FY2005 General Fund Budget Challenge
• Projected Deficit of $1.15 Billion• Projected Revenues $234 Million Below FY2004
Appropriations• Additional Requirements---$916 Million
– Medicaid---$447 Million– Employee Compensation-Existing Contract and
Expiring Concessions---$246 Million– Corrections---$44 Million – Family Independence Agency---$25 Million– Higher Education Tuition Restraint---$52 Million– Other---$102 Million
• Projected Deficit of $1.15 Billion• Projected Revenues $234 Million Below FY2004
Appropriations• Additional Requirements---$916 Million
– Medicaid---$447 Million– Employee Compensation-Existing Contract and
Expiring Concessions---$246 Million– Corrections---$44 Million – Family Independence Agency---$25 Million– Higher Education Tuition Restraint---$52 Million– Other---$102 Million
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FY2005 Proposed Revenue ChangesFY2005 Proposed Revenue Changes
• Increase Cigarette Tax $.75 - $295M• Decouple From Federal Estate Tax-$94M• Increase Liquor Markup - $32M• Merit Scholarship Accounting Change -
$64M (One-time)
• Increased Revenue Enforcement - $30M• Most of Revenue Earmarked for Medicaid
• Increase Cigarette Tax $.75 - $295M• Decouple From Federal Estate Tax-$94M• Increase Liquor Markup - $32M• Merit Scholarship Accounting Change -
$64M (One-time)
• Increased Revenue Enforcement - $30M• Most of Revenue Earmarked for Medicaid
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FY2005 Proposed General Fund Spending Changes
FY2005 Proposed General Fund Spending Changes
• Eliminate Revenue Sharing for Counties-$183 M - Create One-time Fund For Counties By Collecting All Property Taxes In Summer
• Close Women’s Prison - $23 M• Proposed Employee Savings & Concessions -
$148 M• Eliminate Private College Scholarships - $65 M• Limit Payments in Lieu of Taxes - $10 M• Reduce GF Grant to School Aid - $196 M
• Eliminate Revenue Sharing for Counties-$183 M - Create One-time Fund For Counties By Collecting All Property Taxes In Summer
• Close Women’s Prison - $23 M• Proposed Employee Savings & Concessions -
$148 M• Eliminate Private College Scholarships - $65 M• Limit Payments in Lieu of Taxes - $10 M• Reduce GF Grant to School Aid - $196 M
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Closing The General Fund GapClosing The General Fund Gap
• Revenues - $451 M
• Spending Reductions - $705 M
• One-time Resources - $104 M
• Total - $1.260 B
• Revenues - $451 M
• Spending Reductions - $705 M
• One-time Resources - $104 M
• Total - $1.260 B
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The FY2005 School Aid ProposalThe FY2005 School Aid Proposal
• Foundation Allowance Minimum at $6,700• General Fund Grant Reduced by $196 M to
$132M---Lowest in More Than 25 Years• Membership Count Change “Saves” $43M• Project Great Start Partly Funded By Decreasing
ISD Operations Support• Total Spending Lower Than FY2003, $104M
Above FY2004• Retirement Rate up 1.88 Percentage Points to
14.87 Percent
• Foundation Allowance Minimum at $6,700• General Fund Grant Reduced by $196 M to
$132M---Lowest in More Than 25 Years• Membership Count Change “Saves” $43M• Project Great Start Partly Funded By Decreasing
ISD Operations Support• Total Spending Lower Than FY2003, $104M
Above FY2004• Retirement Rate up 1.88 Percentage Points to
14.87 Percent
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FY2005 School Aid Will Cause Significant Financial PressuresFY2005 School Aid Will Cause Significant Financial Pressures
• Retirement Percentages Will Consume More Than The Small Increase
• Districts Will Have Large Increases in Health Insurance Costs to Fund
• No Room for Other Higher Costs Without Cutting Staff or Using Fund Balance (a slippery slope)
• Retirement Percentages Will Consume More Than The Small Increase
• Districts Will Have Large Increases in Health Insurance Costs to Fund
• No Room for Other Higher Costs Without Cutting Staff or Using Fund Balance (a slippery slope)
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The Current Situation—FY2004The Current Situation—FY2004
• Revenue Collections Lagging Behind Forecasts—Problem Could Exceed $200 Million
-Sales Tax Weak---73% To School Aid
-Income Tax Weak—25% To School Aid• Other Budget Problems
-Medicaid---$100 to $200 Million
-Sale of State Property--$65 Million
-Higher Education Tuition Commitment---$52 Million
• Revenue Collections Lagging Behind Forecasts—Problem Could Exceed $200 Million
-Sales Tax Weak---73% To School Aid
-Income Tax Weak—25% To School Aid• Other Budget Problems
-Medicaid---$100 to $200 Million
-Sale of State Property--$65 Million
-Higher Education Tuition Commitment---$52 Million
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The Implications For FY2005The Implications For FY2005
• Most of the FY2004 Problems Flow Through To FY2005
• Revenues Would Have to Grow Faster From a Lower Base to Make Forecasts
• Medicaid Costs Will Likely Add to FY2005 Proposal Under Consideration
• Many Elements of Proposal At Risk
• Most of the FY2004 Problems Flow Through To FY2005
• Revenues Would Have to Grow Faster From a Lower Base to Make Forecasts
• Medicaid Costs Will Likely Add to FY2005 Proposal Under Consideration
• Many Elements of Proposal At Risk
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The Ongoing General Fund Structural Problem - The Budget
Beyond FY2005
The Ongoing General Fund Structural Problem - The Budget
Beyond FY2005
• Pressures On Health Care & Corrections Spending to Outpace Future Revenue Growth
• Only Fundamental Structural Changes Will Solve the Problem• Revenues - Antiquated Tax Structure• Medicaid Responsibilities -
Federal/State• Corrections Policies• Eliminate Some Programs
• Pressures On Health Care & Corrections Spending to Outpace Future Revenue Growth
• Only Fundamental Structural Changes Will Solve the Problem• Revenues - Antiquated Tax Structure• Medicaid Responsibilities -
Federal/State• Corrections Policies• Eliminate Some Programs
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The School Aid Outlook Beyond FY2005
The School Aid Outlook Beyond FY2005
• FY2005 Proposal Balances Spending & Ongoing Revenues
• Continued Economic Growth Translates to Budget Growth in FY2006
• Continued Revenue Growth Could Permit: • About 4% Spending Growth in FY2006 & Beyond• Foundation Allowance Increases• Retirement and Health Insurance Will Continue to Claim
Larger Shares of Revenues
• FY2005 Proposal Balances Spending & Ongoing Revenues
• Continued Economic Growth Translates to Budget Growth in FY2006
• Continued Revenue Growth Could Permit: • About 4% Spending Growth in FY2006 & Beyond• Foundation Allowance Increases• Retirement and Health Insurance Will Continue to Claim
Larger Shares of Revenues
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Revenue Structure IssuesRevenue Structure Issues
• Level of Revenues-Sufficient to Finance Desired
Programs -Now or in the Future?
• Source of Revenues-Equitable?-Representative of Economy?
• Level of Revenues-Sufficient to Finance Desired
Programs -Now or in the Future?
• Source of Revenues-Equitable?-Representative of Economy?
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Level of RevenuesLevel of Revenues
• Jury Still Out
• Elected Officials Have Not Yet Devised Permanent Solution
• Actions So Far Suggest Level Insufficient
• Economic Growth Will Not Solve Problem
• Jury Still Out
• Elected Officials Have Not Yet Devised Permanent Solution
• Actions So Far Suggest Level Insufficient
• Economic Growth Will Not Solve Problem
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Source of RevenuesSource of Revenues
• Tax System
• Narrow Base for Sales and Use Taxes• Single Business Tax Scheduled for Repeal
in 2010• Revenues Increase More Slowly than
Michigan Economy
• Overhaul of Tax System May be Desirable
• Tax System
• Narrow Base for Sales and Use Taxes• Single Business Tax Scheduled for Repeal
in 2010• Revenues Increase More Slowly than
Michigan Economy
• Overhaul of Tax System May be Desirable
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State Taxes as a Percent of Michigan Personal Income
0.0
2.0
4.0
6.0
8.0
10.0
Year
Pe
rce
nt
Percent of Personal Income
State Taxes as a Percent of Michigan Personal Income
0.0
2.0
4.0
6.0
8.0
10.0
Year
Pe
rce
nt
Percent of Personal Income
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Broadening the Sales and Use Taxes Base
Broadening the Sales and Use Taxes Base
• Most Services not Taxed• Services Constitute More Than 1/2 Private
Economic Activity• If Starting Point is Revenue-neutral,
Significant Rate Reduction Could Occur• Revenues Would Grow Faster Than Current
Sales & Use Taxes• Some Services Might be Excluded - e.g.
Health Care, Educational Services
• Most Services not Taxed• Services Constitute More Than 1/2 Private
Economic Activity• If Starting Point is Revenue-neutral,
Significant Rate Reduction Could Occur• Revenues Would Grow Faster Than Current
Sales & Use Taxes• Some Services Might be Excluded - e.g.
Health Care, Educational Services
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Reform Business TaxesReform Business Taxes
• Is it Realistic to Eliminate SBT Without Replacement?
• Is it Time to For Many to Replace One?
• SBT Replaced 7 Taxes in 1970s
• Is Business Paying the Wrong Share of Taxes?
• Should Taxes Focus on Wealth? Profits?
• SBT Produces About 25 Percent of General Fund Revenue
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A Medium-Range General Fund Budget Scenario
A Medium-Range General Fund Budget Scenario
• Assumed Revenue Growth - 4%
• Community Health Growth - 9%
• Corrections Growth - 7%
• Remaining Programs Grow 3% • Projections Begin w/FY2005 Proposed
Budget
• Assumed Revenue Growth - 4%
• Community Health Growth - 9%
• Corrections Growth - 7%
• Remaining Programs Grow 3% • Projections Begin w/FY2005 Proposed
Budget
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General Fund Projections to FY2010
$6.0
$7.0
$8.0
$9.0
$10.0
$11.0
$12.0
Fiscal Year
Bill
ion
s Revenues
SpendingPressures
General Fund Projections to FY2010
$6.0
$7.0
$8.0
$9.0
$10.0
$11.0
$12.0
Fiscal Year
Bill
ion
s Revenues
SpendingPressures
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Citizens Research Council
of Michigan
Citizens Research Council
of Michigan www.crcmich.orgwww.crcmich.org