Transcript Michigan League for Human Services Update on the State Fiscal Crisis October 2005 Sharon Parks Vice President for Policy 1115 South Pennsylvania Avenue, Suite 202, Lansing,

Michigan League
for Human Services
Update on the State Fiscal Crisis
October 2005
Sharon Parks
Vice President for Policy
1115 South Pennsylvania Avenue, Suite 202, Lansing, MI 48912-1658  (517) 487-5436
Fax: (517) 371-4546  Web site: http://www.MiLHS.org
A United Way Agency
Michigan League for Human Services
Michigan’s Fiscal Crisis Is In
Its Fifth Year
• Revenue decline began in 2001
• State revenues are nearly 30% lower than in 2000
• State revenues are at their lowest level since 1972
Michigan League for Human Services
State Actions to Address the Crisis
• One-time revenue measures--over $6 billion since 2001
— Rainy Day Fund and Medicaid Trust Fund are depleted
— Federal fiscal relief
— Employee wage conesssions
• Program reductions totaling more than $3 billion since 2001
— Higher Education
— Revenue sharing
— Medicaid reduced
— School Aid Foundation Allowance flat; pro-ration reductions;
categorical funding reduced
— State workforce smallest workforce since 1974
Michigan League for Human Services
State Actions to Address the Crisis
Cont’d.
•Some revenue increases
—Approximately $1 billion -- less than 13% of total deficits
since FY 2001
Cigarette and tobacco increases
Casino taxes
Bad driver fees
Michigan League for Human Services
Why Do Michigan’s Fiscal
Problems Persist?
• National economy only partly to blame
• Jobless recovery
—Nearly 300,000 jobs lost in Michigan since 2001
—61% of job losses in manufacturing
• Michigan’s deteriorating share of auto market
• Federal fiscal policies have hurt states (e.g. loss of federal fiscal
relief, internet sales, No Child Left Behind)
—Cost to Michigan 2002-2005 -- $5.5 billion or nearly 7% of
General Fund budget
—President’s budget could do more harm
Michigan League for Human Services
Why Do Michigan’s Fiscal
Problems Persist?
Cont’d.
• Multi-year state and federal tax reductions have eroded the
state’s revenue base
—Five year reduction in personal income tax rate; now at 3.9%
—Phase out of the Single Business Tax
—Phase out of federal estate tax
• Since 1999 revenue losses from these tax cuts equate to as much
as three-fourths of the $7.8 billion in deficits since their enactment
Michigan League for Human Services
How We Have Coped:
Revenue Reductions Associated with Multi-Year Tax Cuts
Compared to Michigan’s Annual Deficits
(Dollars in Billions)
$3.5
3.2
Tax Cuts/Revenue Losses
$3
.3
Deficits Covered by:
1.7
$2.5
$2
$1.5
Fees and Taxes
1.9
Program Reductions
.4
One-time Reserves
and Adjustments
.1
Unresolved Deficit
.9
$1
.5
$0.5
.6
.3
1.5
1.4
1.4
1.3
1.1 .2
.4.4
1.3
.4
1.2
1.0
.4
.6
.8
.7
.5
.1
$0
1999
2000
2001
2002
2003
Fiscal Year
Prepared by Michigan League for Human Services
Michigan League for Human Services
2004
2005
2006
Forecast
Tax Cuts Contribute to Deficits:
Michigan’s Cumulative Multi-Year Tax Cuts Compared
to Cumulative State Deficits
(Dollars in Billions)
7.8
$8
Cumulative Tax Cuts
1.
$7
$6
6.3
.6
Deficits Covered by:
5.9
3.
Fees and Taxes
2.4
$5
Program Reductions
$4
$3
.7
One-time Reserves
and Adjustments
3.2 3.1
.3
2.1 1.8
$2
.3
1.2
$1
.1
.6
4.5
3.8
3.3
2.1
1.4
.4
$0
1999
2000
2001
2002
2003
Fiscal Year
Prepared by Michigan League for Human Services
Michigan League for Human Services
2004
2005
FY 2005-2006 Budget Continues a
Mix of Solutions
• Addressed a shortfall of approximately $700 million
• No new taxes or fees
• More one-time revenue fixes
•Significant cuts in Medicaid/Human Services avoided
We can have our cake and eat it too—but for how long?
Michigan League for Human Services
Michigan’s Problems Go Well
Beyond Current Crisis
• We cannot grow our way out of this problem
• Michigan’s revenues will not keep up with the normal
growth in government programs and services—particularly
Medicaid and corrections. (i.e., a structural deficit)
• Michigan’s current tax structure cannot generate sufficient
revenues
Michigan League for Human Services
Continuing Pressures on the Budget
• Medicaid spending has increased (40% of GF
appropriations in 2005)
• Medicaid caseload up; growing numbers of uninsured
• 1.4 million people covered by Medicaid (1 in 7)
• Growth in Medicaid spending exceeds normal economic
growth
• The baby-boomers will enter the Medicaid program in a
few short years; implications for long-term care
Michigan League for Human Services
Continuing Pressures on the Budget
Cont’d.
• 75% of Medicaid enrollees are children and non-elderly
adults
—30% of spending
• Elderly and disabled – 25% of enrollees
—70% of spending
Michigan League for Human Services
Continuing Pressures on the Budget
Cont’d.
• Increased needs in many areas
—Basic needs/Safety net
—Mental Health
—Child Welfare
—Prevention services
—Early childhood education
• Corrections budget continues to grow
—Sentencing guidelines
—Aging prison population; implications for health care
Michigan League for Human Services
Continuing Pressures on the Budget
Cont’d.
K-12 Education More Dependent on State’s Fiscal Health
Pre-Proposal A
Post-Proposal A
Michigan League for Human Services
Continuing Pressures on the Budget
Cont’d.
• GF contribution to the School Aid Fund is declining
• Teacher retirement and health care costs outstrip
revenue forecasts for School Aid Fund
• Per pupil funding drops with enrollment declines even
though operating costs do not
Michigan League for Human Services
Continuing Pressures on the Budget
Cont’d.
• One-time revenues no longer available
—What about the next recession?
—Rainy Day Fund depleted
—Business cycle has not been repealed
• Tax expenditures continue to grow while state
revenues do not
Michigan League for Human Services
Michigan Tax Expenditure and
Revenue Trends
(Actual Dollars in Billions)
C har t I V
M i chi gan T ax E xpendi t ur e & R evenue T r ends
$30
(A ct ual $ s i n B i l l i ons)
Estimated Actual Tax Expenditures
~$27.7
~$28.10
~$29.4
~$26.5
~$26.8
$25
~$26.0
Treasury Reported Tax Expenditures
~$23.7
Total State Revenue Trend
$20
$18.56
$18.67
~$18.52
~$18.72
$15
2002
2003
2004
2005
Data Sources: Michigan Department of Treasury and November 2004 Special Consensus Revenue Forecast
Michigan League for Human Services
What Does This Mean for the Future?
• Without actions to address the structural deficit, shortfalls
of approximately $400 million/year are likely for the
foreseeable future
• Cutting spending is not the answer (W.E. Upjohn Institute
for Employment Research: $1 billion in reduced spending
equals a loss of 23,000 jobs statewide)
• Further tax cuts are not the answer: Michigan is not a
high tax state; MI compares well with other states
• A structural deficit requires a structural solution
—Preserve all revenue possible
—Overhaul the state’s outdated tax structure
Michigan League for Human Services
Ten Year Forecast of Michigan General Fund &
School Aid Revenues and Liabilities
(Dollars in Billions)
28
$25.9
Expenditure Trend Line
23
Structural
Deficit
$20.8
18
Revenue Trend Lines
$18.7
13
2000
2005
2010
Fiscal Years
2015
 The expenditure trend line assumes inflation adjusted average annual growth of 3 percent. This growth rate, however, may be understated given
continuing double digit health care cost increases and the likely growth in demand for services associated with declining insurance coverage, a
rapidly aging population and significant increases in obesity and diabetes in Michigan. Projected increases in the state’s prison population may also
increase the rate of expenditure growth.
 The revenue trend line assumes average annual revenue growth of 1 percent beginning in FY2006. This growth reflects a return to more typical
historic trends subsequent to estimated real declines of 3.9 percent in FY2004 and .8 percent in FY2005 per the May Consensus Revenue
Conference, and assumes action is taken to reform or replace the SBT in a manner that preserves current receipts.
 An alternative revenue trend line reflects the loss of approximately $2 billion in revenues associated with the sunsetting of the Single Business Tax in
Calendar Year 2010.
Michigan League for Human Services
What Are Michigan’s Revenue Sources
that Fund Critical Programs and
Services?
Michigan League for Human Services
Total Revenue by Source FY 2004-2005
Total Resources: $38.1 Billion
Other Taxes
6%
State 6-Mill
Education Tax
5%
Transportation
Revenue
6%
Non-Tax
Revenue
6%
Federal Funds
30%
Income Taxes
16%
Tobacco Taxes
2%
Source: House Fiscal Agency
Business
Taxes
6%
Sales and Use
Taxes
22%
Tobacco
Settlement
Revenue
1%
Michigan League for Human Services
General Fund/General Purpose Revenue
by Source FY2004-2005
Total Resources: $7.8 Billion
Liquor, Beer,
and Wine
Taxes
1%
Sales and
Use Taxes
13%
Single
Business
Tax
26%
Inheritance/
Estate Tax
(less than
1%)
Other
Sources
5%
Tobacco
Taxes
2%
Income
Taxes
53%
Source: House Fiscal Agency
Michigan League for Human Services
School Aid Fund Revenue by Source FY2004-05
Total Resources: $12.3 Billion
State 6-Mill
Education Tax
15%
Specific
Taxes
1%
Federal
Funds
11%
Casinos
1%
Income Tax
Earmarking
16%
Real Estate
Transfer Tax
2%
Lottery
Transfer
5%
Tobacco
Taxes
4%
Use Tax
4%
Liquor Excise
Tax
(less than 1%)
Sales Tax
41%
Source: House Fiscal Agency
Michigan League for Human Services
What Should Be Done?
Cont’d.
• No more multi-year tax cuts (such as Income and SBT rate
reductions)
• Decouple from the federal estate tax
• Modernize the state’s sales tax by broadening the sales
tax base to include services and e-commerce (MI taxes
only 29 of 164 of Federation of Tax Administrators’
categories)
—Services make up more than half of private economic
activity
• Stop “silent spending” by regularly reviewing the state’s tax
expenditure budget
• Means-test tax breaks for the elderly
Michigan League for Human Services
What Should Be Done?
Cont’d.
• Stop relying on sin taxes to fund state government services
and programs
• Make the income tax more fair; Michigan is one of only six
states with a flat tax
• The SBT should be retained, or at least replaced with a
tax that generates similar revenue (the SBT represents
25% of GF revenues)
Michigan League for Human Services
What Should Be Done?
Cont’d.
• Michigan needs a tax structure for the future that is
adequate, stable and fair
• A tax structure that cannot generate growth is not
adequate
• A tax structure that fluctuates wildly is not dependable and
is not stable
• A tax structure that places the largest burden on those
least able to pay is not fair
Michigan League for Human Services
But Wait – What about TABOR?
• TABOR is a Taxpayer Bill of Rights enacted in Colorado in
1992 that constitutionally limited yearly spending increases
to no more than inflation + population growth
• Similar legislation has been introduced in Michigan
• A national group, FreedomWorks, claims 20 chapters in
Michigan formed to put a TABOR-type of initiative on the
ballot in Michigan in 2006
• FreedomWorks is active in similar efforts in numerous
other states
Michigan League for Human Services
After 12 Years of TABOR, Colorado Has
Among the Nation’s Poorest
Public Services
For example:
• Colorado ranks 47th in K-12 education funding as a share
of state income
• Colorado ranks 50th in the nation for on-time immunization
rates
• The share of low-income individuals enrolled in Medicaid
is lower than in all but five other states
Colorado voters will be asked in November to suspend TABOR
for five years and allow the state to borrow for certain purposes.
Michigan League for Human Services
Michigan already has a revenue limit—
the Headlee Amendment. Current
revenues are approximately $5.5 billion
below the Headlee limit.
If TABOR is enacted in Michigan, the
state’s structural deficit could be
substantially worse.
Stay tuned. . .
Michigan League for Human Services
Michigan League
for Human Services
The Michigan League for Human Services is a
state-level policy organization focused on the
needs of Michigan’s low-income families and
individuals. The League’s activities include
research, analysis, public education and
advocacy. The League was founded in 1912 and
is a private, nonprofit charitable organization.
Michigan League for Human Services