Gov. Gretchen Whitmer last month proposed a $60.2 billion budget for the next fiscal year, which includes spending on everything from K-12 education to clean drinking water to the state police.
As her negotiations with the GOP-led Legislature loom, the Michigan Advance sat down this month with two of the governor’s cabinet officials in charge of the state’s finances.
State Treasurer Rachael Eubanks and Budget Director Chris Kolb discussed crafting the state budget, deciding on spending priorities, how Whitmer’s tax plans work and fitting into their new roles.
It’s part of the Advance’s new video series, “Inside Michigan Government,” interviewing key state department directors and taking you behind the scenes of your government and how decisions are made.
Taking on new roles
Eubanks previously worked closely with the Treasury Department. She describes becoming state treasurer as more of a homecoming than stepping into a brand-new role.
“In my prior position with Robert W. Baird [& Co.], I worked very closely with Treasury,” Eubanks said. “I actually had the opportunity to work with four state treasurers very closely. Starting with Treasurer [Robert] Kleine, [then Andy] Dillon, [Kevin] Clinton and [Nick] Khouri. Working with them through most of their interactions with Wall Street. From that, I really got a direct perspective on what it’s like to have this job. And understand a lot of the difficult and creative decisions that need to be made at times.”
The state treasurer has a wide range of responsibilities, including sitting on 15 separate boards and commissions that represent a variety of financial interests in Michigan.
“The easiest way to think about the treasury is that it’s the state’s bank,” she said. “We collect, we invest and disperse all state dollars. And we make sure that they are being used efficiently and effectively according to the laws we have in place.”
Whereas Eubanks has worked closely with her predecessors, Kolb said it was somewhat unexpected for him to step into the role of budget director.
“I think everyone thought I was destined for another position,” said Kolb, a former state House member. “I did serve over four years on the Appropriations Committee in the Legislature. For the House Democrats, I handled about five different budget bills for them.”
Crafting a state budget
Whitmer appointed Kolb and Eubanks last December. Kolb began meeting with staff immediately afterward and began putting the fiscal year 2020 budget together at the beginning of January. The new fiscal year begins on Oct. 1.
“What goes into building a budget is an amazing process,” Kolb said. “When you’re in the Legislature, you only see the tip of the iceberg. You think you might know, but you have no idea.”
Each department was able to have a hearing with both Whitmer and Kolb to support investment or budget changes for their respective departments. Because this was his first term as budget director, Kolb was required to prepare a budget in a much shorter period of time than normal.
“We had to get a budget done in 60 days. Normally, you would start working on a budget around Labor Day and continue to work on it until early February,” he said.
“This governor had very aggressive priorities and we had to make sure that each of her priorities fit into that budget. I really told the department heads at the first cabinet meeting that if they were going to make recommendations for increases, they had to meet one of the governor’s priorities.
“I grouped those into three buckets: transportation, ‘fixing the damn roads,’ improving Michigan’s education system and protecting public safety and health. If they could do that, I would take a look at it. If they couldn’t fit into one of those categories, you might want to wait until next year.”
On March 5, Kolb sat next to Whitmer as they presented her administration’s first budget to a joint meeting of the House and Senate Appropriations committees, which are in charge of approving state spending bills.
The biggest sticking point to have emerged, so far, is on infrastructure.
Any solution to fix Michigan’s roads will require an additional $2.5 billion dollars, according to Department of Transportation Executive Director Paul Ajegba. Whitmer’s proposed budget raises that funding by increasing the tax on gasoline 45 cents.
Kolb believes that taxing gas is one of the only options available, as well as the most fair.
“There’s only a handful of revenue sources that you can use to raise $2.5 billion dollars,” he said. “Transportation has traditionally been a user fee basis. The gas tax, in this case, is the easiest one to go after. The more you use the roads, the more you pay. I drive over 30,000 miles a year. It’s going to cost me more, but it should cost me more, because I use the system more.”
As previously reported by the Advance, Whitmer’s proposed budget provides two means of relieving the financial burden for lower- and fixed-income residents: an increase on the Earned Income Tax Credit, from 6 to 12 percent, as well as removing an income tax on pensions created by the former Gov. Rick Snyder administration in 2011.
In order to balance the cost of eliminating the so-called “pension tax,” Whitmer’s proposed budget will institute a 6-percent tax on pass-through business entities. Increasing taxation of businesses is a primary point of contention for Republican legislators.
“The Snyder administration was looking to achieve a substantial business tax cut, and to pay for that there was an increase in pension tax as part of it,” Eubanks said. “The corporate income tax was changed to 6 percent for [larger] C-corporations.
“The other “pass-through” entities could be an S-corporation, an LLC [Limited Liability Company], some other type of partnership, they did not pay the 6-percent income tax rate. As the income passed through the business to the individual, they paid the individual income tax rate of 4.25 percent.”
The proposed tax increase would instate a flat, 6-percent tax on businesses. Kolb and Eubanks both believe that this is a step forward in achieving tax parity.
“To accomplish that, there would be a new pass-through tax of 6 percent and then individuals will receive a credit of 4.25 percent on their individual income tax return,” Eubanks said. “The net payment will be the 6-percent payment for those pass-through entities. We believe that this structure is also appealing for federal tax purposes.”
Eubanks added, “The 2018 [federal] tax cuts and jobs act limited the amount of state tax deductions to $10,000 dollars for these entities, but there’s no similar limitation on pass-through income unlike individual income, so they will then be able to increase the amount of federal deductions.”
Additionally, the first $50,000 dollars of income for small businesses would not be taxed.
The Appropriations subcommittees have been holding hearings on various aspects of the next budget. But negotiations are mostly in a waiting period until the Republican-led Legislature provides its counter-proposal, particularly on roads.
“It is now up the the Legislature to put forward their budget suggestion,” Kolb said. “Then we’ll start negotiating. But now that the ball is in their court; we’re waiting to see what they propose.”