Lessons 2

Yesterday I posted on lessons that the Minnesota Legislature could learn from their colleagues in Utah. Today we are shifting our focus across Lake Michigan to the state of the same name.

It's no fun to kick a state when it's down – especially when the local politicians are doing a fine job of it – but the latest news of Michigan's deepening budget woe is a national warning of what happens when you raise taxes in a weak economy.

Last year, Michigan faced a very steep budget shortfall. The governor's answer to that shortfall was to raise taxes.

Her tax plan raised the state income tax rate to 4.35% from 3.9%, and increased the state's tax on gross business receipts by 22%. Ms. Granholm argued that these new taxes would raise some $1.3 billion in new revenue that could be "invested" in social spending and new businesses and lead to a Michigan renaissance.

Did Governor Granholm's plan come to fruition? Nope...

Officials in Lansing reported this month that the state faces a revenue shortfall between $350 million and $550 million next budget year....Six months later (after the budget was enacted - ed) one-third of the expected revenues have vanished as the state's economy continues to struggle. Income tax collections are falling behind estimates, as are property tax receipts and those from the state's transaction tax on home sales.

Michigan is now in the 18th month of a state-wide recession, and the unemployment rate of 6.9% remains far above the national rate of 5%. Ms. Granholm blames the nationwide mortgage meltdown and higher energy prices for the job losses and disappearing revenues, but this Great Lakes state is in its own unique hole. Nearby Illinois (5.4% jobless rate) and even Ohio (5.6%) are doing better.

When it became apparent that Minnesota was going to be going from a $2 billion plus budget surplus to a $935 million shortfall, the DFL leadership's first instinct was to raise taxes. Those plans led one state rep to opine that it was impossible for the state to TAX (or borrow) it's way to prosperity. They ended the legislative session beaming with pride at "balancing" a budget that less than 12 months ago didn't need "balancing" - unless you consider the over collection of taxes a need to balance the budget.

Think about this.

The tax hikes have done nothing but accelerate the departures of families and businesses. Michigan ranks fourth of the 50 states in declining home values, and these days about two families leave for every family that moves in. Making matters worse is that property taxes are continuing to rise by the rate of overall inflation, while home values fall. Michigan natives grumble that the only reason more people aren't blazing a path out of the state is they can't sell their homes. Research by former Comerica economist David Littmann finds that about the only industry still growing in Michigan is government. Ms. Granholm's $44.8 billion budget this year further fattened agency payrolls.

Emphasis mine. The sad state of Michigan's economy should be a reminder to all state and national legislators of the folly of raising taxes in a tight economy. It should also be a stark lesson for Minnesota voters. Do we want to end up with an economy similar to the one they have in Michigan - where more people are leaving the state for sunnier, more taxpayer friendly climes - or do we want to have a thriving state where people want to move TO.

In the end, legislators need to realize that while there was grumbling about property taxes two years ago, there is very REAL ANGER now - people can't feed their families because the cost of everything has gone up so high....and THEN you throw taxes on top of it. We the People, don't want empty rhetoric. Say what you will do and then do it. If you can't deliver on your campaign promises then don't be surprised when the people rebel against you at the ballot box.