Gov. Gretchen Whitmer had a simple message on Tuesday for legislators who questioned the need to raise taxes to improve schools and roads: Pay now or pay more later.
“Contrary to political rhetoric that should be behind us, I can tell you this: No one likes to raise taxes,” Whitmer told House and Senate Appropriations Committee members. “I wish I didn’t have to come here today and put this question before you, because I know it’s hard. But the hard truth is we’ve got to get to work. Every day we don’t we are jeopardizing our economic future.”
As the Advance reported earlier, Whitmer’s $60.2 billion fiscal year 2020 budget contains a mix of tax hikes and cuts to offset them that she says will truly solve the state’s myriad problems.
The Democrat didn’t shy away from the fact that the budget calls for a 45-cent gas tax hike in three increments over the next year, which would give the state the highest gas taxes in the country, and raises business taxes. And she appeared to play to her audience in acknowledging the tax increases.
The Democratic governor’s inaugural budget represents a 3.6-percent increase from the current $56.8 billion budget. Whitmer’s plan allocates $15.4 billion in the School Aid Fund and includes $10.7 billion for the General Fund, which is about the same as 20 years ago.
In addition to raising $2.5 billion for roads via the incremental gas tax hike, Whitmer wants to pump about $500 million into the state’s K-12 education system, eliminate the so-called pension tax and raise taxes on some small businesses.
Whitmer spent 14 years hashing out budgets as a state lawmaker, often serving in key roles, first as the ranking Democrat on House Appropriations and then as Senate minority Leader. That sets her apart from her two predecessors, Democrat Jennifer Granholm and Republican Rick Snyder, neither of which served in a legislative body.
Senate GOP spokeswoman Amber McCann acknowledged that Whitmer’s experience showed in her budget.
“She’s being a legislator and [knows] the budget. People around her know the budget,” McCann told the Advance on Tuesday afternoon. “She’s found a truly crafty way of creating a truly comprehensive plan. It’s all interdependent and I think that’s interesting.”
McCann added that it’s too early to tell whether all the pieces balance out.
Big tax changes
The core of Whitmer’s budget rests on the gas tax increase. The governor and and Budget Director Chris Kolb made the case that the tradeoff is better roads, the pension tax disappearing and increases to the Earned Income Tax Credit (EITC) for low-income people.
Meanwhile the loss of about $300 million in revenue from the pension tax repeal would be offset by boosting the corporate income tax on S-corporations and limited liability companies (LLC), Whitmer and Kolb said.
Many initiatives roll back key parts of Snyder’s tax code overhaul in 2011.
Whitmer’s plan calls for boosting the EITC over the next two years from 6 percent to 12 percent as a way of offsetting some of the pain drivers would feel at the pump. The tax credit was at 20 percent, but Snyder curtailed it in 2011.
However, Whitmer’s proposal is still far below a proposed hike to the tax credit from state Sen. Jeff Irwin (D-Ann Arbor), who has introduced legislation to raise the EITC to 30 percent, as the Advance has previously reported.
Eliminating the exemption for pensions also was part of Snyder’s 2011 tax overhaul. Wiping out the pension tax has been a point of agreement for Whitmer and Republicans in the Legislature, several of whom have taken to saying that we shouldn’t “be balancing our budget on the backs of seniors.”
Efforts have already been taken this year in the Legislature to repeal the tax.
To help make up that lost revenue, about $300 million, Whitmer has called on the Legislature to expand the state’s 6-percent corporate income tax to more S-corps and LLCs. Those types of companies only pay 4.25 percent currently.
In her presentation, Whitmer said she’s hopeful that the Republican Legislature will work with her in good faith on the proposed budget, calling it a “real plan” to invest in core needs around the state.
“You need to acknowledge that incremental fund shifts like the ones we’ve seen in the past won’t fix the problems we’re facing now,” Whitmer told committee members. “They will only slow our decline. And I have no interest in managing the decline of the state that I love.”
State Senate Appropriations Committee Chair Jim Stamas (R-Midland) said the proposals will need to be more thoroughly reviewed during the committee process between now and Oct. 1, when the new fiscal year starts.
“I think that a lot of taxes have been proposed in this budget, and so each of those taxes needs to be reviewed,” Stamas told reporters after Whitmer’s presentation. “We want to make sure that we’re getting the money to our residents, our families, and having them spend the dollars where they feel they’re best spent.”
Likewise, McCann said that “the devil is in the details” and Senate Republicans will closely examine all proposals in the 186-page document.
The governor’s long-promised plan to “fix the damn roads” leaked out Monday. Whitmer and Kolb say that the 45-cent gas tax hike is the most feasible way of generating $2.5 billion in new revenue.
Most estimates of what’s needed to revive roads have clocked in above $2 billion.
The Michigan Department of Technology Management and Budget (DTMB) says that the state would have to raise vehicle registration fees 180 percent to get the equivalent revenue. Other options could include hikes to the corporate income tax or personal income taxes, but both would require significant raises, according to DTMB figures.
— MI DTMB (@MI_DTMB) March 5, 2019
Kolb made clear to legislators that $2.5 billion is the magic number for new, needed annual revenue and the longer they wait the more expensive it gets.
The new money for roads will then be deposited into a new “Fixing Michigan Roads Fund” and doled out to the most highly-traveled and commercially important roads at the state and local levels.
The gas tax is a regressive tax, like the sales tax, as lower-income people feel more pain, since they have less income to spend.
Gilda Jacobs is president and CEO of the Michigan League for Public Policy which advocates for economically disadvantaged people. She said that the way Whitmer’s budget proposal is structured offsets many of the negative impacts commonly associated with increased gas taxes.
“Raising the EITC also offsets some of the regressivity of a gas tax increase and the League’s concerns around its impact on drivers with lower incomes,” Jacobs said in a statement. “… We think the benefits of the raised revenue and investments in this budget — to residents with low incomes and their families as well as our state as a whole — outweigh a gas tax’s impact.”
While infrastructure largely dominated the the presentation, Whitmer also dedicated time to how she wants to improve Michigan’s underinvested education system. A key part of that is closing the so-called “skills gap.”
As the Advance reported on Monday, Whitmer plans what her administration says is the largest boost to classroom spending in almost two decades. She has proposed increasing K-12 schools spending by $507 million, with weighted funding for different types of students.
That strategy is largely based on recommendations from the Michigan School Finance Research Collaborative.
Additionally, Whitmer has proposed $1.7 billion for higher education funding, marking a 3-percent increase overall from last year. Her proposal gives each of Michigan’s 15 public universities the same 3-percent hike.
There’s $110 million for her Michigan Reconnect Program, unveiled in her first State of the State address last month. The program aims to help adults receive industry certifications or associate’s degrees to help them further advance in their careers.
Whitmer also has proposed replacing $500 million from the School Aid Fund and replacing it with General Fund money to “eliminate all School Aid Fund dollars being used to support public universities and return those funds to K-12 education purposes.”
The governor decried the “raiding” of SAF funds for non-K-12 priorities while serving in the Legislature. That’s a position shared by many education advocates.
School funding and clean drinking water were recently listed as Michiganders’ top concerns, according to a report by For Our Future-Michigan.
Whitmer has recommended $474.3 million in ongoing funding for the state’s Department of Environmental Quality.
That will soon be known as the Department of Environment, Great Lakes and Energy (EGLE), following a contentious executive order repositioning and rebranding the department.
Whitmer wishes to spend $120 million for a new Drinking Water Protection and Innovation Initiative to help with the response to PFAS contamination around the state and to assist local governments with implementing new, stricter state rules around water infrastructure.
Whitmer highlighted this initiative in a letter to the Legislature, writing: “Right now communities across the state can’t trust the water coming out of their tap.”
Health and safety net
Michigan’s largest department, Health and Human Services, accounts for about 45 percent of the state’s $10.7 billion General Fund. The governor’s proposed budget calls for ongoing funding of $25.9 billion, of which $4.7 billion is from the General Fund.
Whitmer’s budget includes a $28.2 million investment in community-based home help services to help “frail and elderly individuals can safely remain in their homes and outside of nursing facilities.” There’s also $13.9 million for monitoring and responding to environmental public health threats.
- Whitmer wants to see a 3-percent increase in state revenue sharing with Michigan cities, counties, villages and townships “to support the operations and revitalization of local governments.”
- The governor has proposed $9.6 million to help implement two voter-approved initiatives. There’s Proposal 2, which will create a new independent panel to oversee redistricting, and Proposal 3 that expands voting rights, including no-reason mail-in voting.
- Whitmer has proposed $52.9 million for 14 different projects related to improving state government information technology programs and various other state government services.