Summit Focuses On State's Future

March 17, 2006
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ANN ARBOR — Last week, more than 200 business, educational and municipal leaders from around Michigan convened at a forum at the University of Michigan to share their thoughts on the future of the state’s economy. They also shared looks of surprise, raised eyebrows and low whistles at some of the numbers they heard.

More than half of the state’s general fund is spent on prisons and Medicaid. In five years, economists predict a $1.5 billion discrepancy between state revenues and spending. It will be nearly 10 years until the state recovers the 340,000 jobs it has lost in the most recent economic downturn.

Shocking as the numbers may be, dwelling on a negative picture of the state’s economy was not on the agenda at the conference, entitled “Where Do We Go From Here? An Agenda-Setting Conference for the Economic Issues Facing Michigan.” Instead, the event’s organizers hoped to produce an informed snapshot of the most troubling aspects of the state economy, in order to bring about concrete solutions for those problems.

Over the course of nine hours, the group managed to make a respectable start toward that goal. Here are some of the areas of consensus that emerged from the conference.


Politics

Although it was designed as a non-political event, politics in Lansing brought it to life. Philip Power, founder of “think-and-do tank” The Center for Michigan and host of the conference, hopes to appeal to what he alternately refers to as the “sensible center” or the “muscular middle.”

“Michigan’s government and political system is largely paralyzed, preoccupied with partisan squabbles and unable to develop or put in place comprehensive long-range solutions to our present troubles,” Power wrote in a position paper, explaining the goals of the center and of the conference. “The center is not interested in re-fighting the battles of the past — management versus labor, city versus suburb, white versus black, east side versus west side. Instead, we are all about helping the state through our present difficulties and building a better Michigan for us all.”

Through lectures at plenary sessions, and discussion in break-out groups, the group came to agree that legislative term limits, while well-intentioned, are among the primary causes of intractable political polarity in Lansing.

Traditionally Republican districts elect their legislators in the Republican primaries. Democrats do likewise in Democratic primaries. In order to win those primaries, Power said, candidates try to outdo each other in proving how far right or left they are. By electing candidates so diametrically opposed, he said, voters are setting the stage for inaction.

“The net political outcome so far is largely paralysis, marked by an odd combination of harsh rhetoric and repeated pussyfooting around basic problems,” he said.

Removing term limits will be among the center’s first recommendations.

“We need to get the public to understand that legislators who only serve such a short period of time cannot deal with long-term issues,” said Birgit Klohs, president of The Right Place Inc., and one of nearly 20 West Michigan conference attendees.


State Budget Woes

The discussions surrounding the state’s budget were the most likely to rehash doom-and-gloom arguments that the participants had already heard, but also the most likely to reveal new, glaring statistics and facts that begged for correction. These revelations came in discussions of both taxation and spending.


Taxation

Perhaps the most surprising tax fact was that Michigan is not a high-tax state. Economist after economist harped on the fact that, compared to other states, and compared to decades past, Michigan’s tax burden is quite manageable. Charlie Ballard, a Michigan State University economics professor, predicts that this year the share of state and local taxes paid in Michigan will fall below 10 percent, as a percentage of personal income.

What became clear is that Michigan’s taxes are confusing, or “irrational and counterproductive,” as Power phrased it. As for fixing that system, there were some currents of thought, though there was a lack of total consensus.

In general, participants believed that the Single Business Tax requires a “significant reform or revision.” Some argued that it should be done away with entirely. Others preferred the idea of simplifying it and removing some of its loopholes. What was in near universal agreement was that removing the roughly $2 billion brought in by the SBT could only be justified if there was a new or expanded tax elsewhere that would make up the revenue shortfall. Doing otherwise would be “irresponsible to the highest degree,” according to Ballard.

Some suggested that the SBT’s reputation is too damaged to allow it to be saved.

“The SBT, to be quite blunt about it, most people that I deal with don’t mind the tax at all,” said Klohs. “But it has become so unpopular that it has become almost untenable to keep it. It has become the poster child to throw darts at.”

In order to bring in more revenue, or replace the revenue from a “killed” SBT, two suggestions arose. First, and most popular, was the idea of broadening the scope of the sales tax so that it would cover services, not just goods. Some suggest that broadening the base would allow for a reduction in the 6 percent rate. That would make the tax less burdensome to low-income individuals, while restoring revenue to the state coffers.

According to Tim Bartik, an economist at the Upjohn Institute for Employment Research who attended the conference, that is sound economic policy.

“This broadening is more economically efficient because it does not arbitrarily discriminate against goods and in favor of services, a discrimination which lacks good economic justification,” he said in an interview after the conference. “In addition, this modification would help the state’s sales tax base expand proportionately with the economy, as services increase in importance.”

Bartik pointed out that there would likely be exemptions for business-to-business sales, to prevent “tax pyramiding,” or multiple taxation.

The other tax reform suggestion called for an increase in the income tax rate, with new tax credits for low-income individuals. This was offered as an alternative to making the state’s current flat income tax progressive, like the federal income tax. Doing so would require a constitutional amendment. Like the broadened sales tax, this proposal would replenish state revenues without causing undue stress on those who earn the least.


Spending

Perhaps the two biggest surprises of the day for conference participants came in discussing the particulars of funding Medicaid and the state corrections system. The 2006 budget apportions nearly $5 billion between corrections and community health (which includes Medicaid as well as mental health and public health programs). In comparison, there is $1.9 billion budgeted for higher education.

“There was genuine astonishment about how much we spend on prisons,” said Klohs. “People don’t understand that we’re headed down a path where we spend more on keeping people in jail than on keeping people in school. At the same time, we want to get people into knowledge industries. We’re not going to do that while they’re sitting in jail.”

As Power pointed out in his closing remarks, it costs more for the state of Michigan to incarcerate a felon for a year than it would to send him to Harvard Law School.

“This is a very strange outcome of public policy,” he said.

The general consensus was that spending on programs such as corrections and Medicaid need to be curbed, in order to correct the “relatively low priority on investments in the future,” according to Power. Those investments include not only K-12 and higher education, but also research and development.


Education

A recent study conducted by Western Michigan University suggested that an educated work force was the primary factor that causes companies to start in, or relocate to, a particular geographical area. Numerous other practical and lifestyle concerns rounded out the top five. Tax structure was well down the list. That came as a surprise to many participants.

“We need to come to terms with the fact that we are deep in this knowledge economy,” said Elisabeth Gerber, director of the Center for Local, State and Urban Policy at U-M. “We need to invest in education from preschool, to K-12, to higher education, through lifetime learning opportunities. And we need to re-examine what we’re educating for.”

That means not only making curricula pertinent to the new economy, but also strengthening the role of civic education, with the hope of avoiding in the future the level of civic disengagement facing the state today.


Spreading The Word

Many of the conference participants walked away with surprising new information about the state of Michigan’s economy. For some, that is troubling.

“One thing that was kind of sad: This is a pretty erudite group — albeit mostly aging white men — that cares a lot, but they were surprised at many things that they learned. That tells us how far we have to go in terms of getting the word out about what the real issues are,” said Grand Rapids City Manager Kurt Kimball, in an interview after the conference.

The conference identified the need to inform the people of Michigan about those “real issues,” as one of the top priorities required to see the other economic and political changes through. In the long run, a change in civic education would help, but in the short term that duty falls on the shoulders of the conference participants.

“The group generally shares the feeling that something is very, very wrong with the state in terms of its taxation and spending priorities,” said Kimball. “And, secondly, nothing is seemingly being done about it.”

He said that he left the conference very encouraged about the likelihood that it was the first step toward important changes.

“Let’s put it this way: I don’t know of a better way to try to move the mountain than what was attempted (at the conference),” he said.

Klohs was of a similar mind.

“There are still a lot of people in this state who love it and want to make it what it used to be,” said Klohs. “For me, that was very heartening and encouraging.”


Where To Now?

Eventually, the goal of the Center for Michigan is to develop “a broadly acceptable long-term strategic agenda for the rebirth of our economy,” as well as making “the workings of leadership in our state more civil, less ideological, less partisan and more effective,” according to its mission statement. For now, that means assembling the findings from the first conference and planning at least three more: one with greater participation from the business community, one to gather the input of Michigan’s young people, and one session targeted at the state’s elected officials.

Out of those conferences, the center hopes to create a positive plan that takes advantage of the best Michigan has to offer, in order to eliminate its worst.

“This is still a state with an awful lot of advantages and an awful lot of assets,” said Klohs. “And we’re currently in the mood, as a state, where we’re looking at the glass as almost empty, versus partially full.”

Power is definitely taking the latter view. Kimball described Power’s dedication to reforming the state “powerfully resolute.” He also has the means to make his efforts known. Last year, Power sold his HomeTown Communications Network, a chain of 62 community newspapers, to Gannett Co. The Wall Street Journal reported the sale price as $150 million. Power has been quiet as to the financial aspects of the center’s plans, but his personal wealth suggests that the group will be well-funded.

The underlying message of the conference was clear in Power’s speech at the end of the day. He sees a chance for Michigan to once again become an economic role model for the rest of the country. Some might see the state’s current economic straits as more of a cautionary tale than an example to aspire to. Power just sees more room for improvement.

“Precisely because of the problems that Michigan is facing today, it is the ideal place to think about how to solve those problems.”    

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