Mich. tax revenues diving, but not new businesses

AP News
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Posted: Dec 03, 2009 3:37 PM

Michigan is facing the prospect of more cities in receivership and school districts running out of money as state and local tax revenues plummet in the year ahead, House Fiscal Agency director Mitch Bean warned Thursday.

Nevertheless, economic development guru David Hollister said Michigan's economy is bubbling with young entrepreneurs starting up information technology companies and ignoring problems at the state Capitol.

"It's not all doom and gloom," said Hollister, of the Prima Civitas Foundation. Despite a 15.1 percent unemployment rate and falling tax revenues, getting the state back on its feet "isn't a hopeless battle."

Bean and Hollister joined Michigan State University economics professor Charles Ballard to take a look at what lies ahead for Michigan at a forum sponsored by the Michigan League for Human Services.

Bean said the state is facing falling property tax values, jobs and per-capita income, all of which have driven down state and local tax revenues.

"Most people agree there's a coming crisis in local government," Bean said, with more cities facing receivership as they deal with smaller state revenue sharing payments and less property tax revenue from declining home and commercial property values.

The state general fund has seen revenue drop from $9.8 billion in fiscal 2000 to $6.9 billion or less this fiscal year, which started Oct. 1. That means billions of dollars less for local governments to spend on police and fire protection, higher education and services such as mental health care.

Medicaid and corrections now account for half of general fund spending, crowding out "a lot of other things," Bean said. School aid revenue is expected to drop $1 billion from what it was two years ago, one reason school districts now are facing cuts of roughly $300 to $600 per student.

Ballard said Michigan could solve some of its budget woes by asking its wealthier citizens to pay higher income taxes through a graduated income tax. The state's wealthiest 5 percent now have nearly as much income as the bottom 50 percent, mirroring a national trend.

With it's 4.35 percent flat-rate tax, Michigan has one of the nation's highest tax rates on the working poor and one of the lowest on the wealthy, Ballard said.

Michigan voters would have to approve switching from a flat income tax to one graded according to income, and the issue faces opposition from business groups and others. But a statewide poll last year showed more than half of voters favor a graduated tax, said Ballard, who favors reducing or eliminating the state's main business tax and replacing it with the graduated income tax.

Hollister, a former Democratic state lawmaker and Lansing mayor, said he would support a graduated income tax and extending the sales tax to services if it would mean Michigan would have enough money to support education, local governments and a social safety net.

But he noted that the young entrepreneurs he deals with are less concerned about tax policy than they are about creating and enlarging companies that deal with everything from information technology to alternative energy.

He said recent studies have shown the Lansing area has 350 information technology companies and that the region is second only to Hartford, Conn., in the size of its insurance and finance sector.

He expects Flint _ devastated by the shrinking auto industry over the past decade _ to be come a national model for urban renewal, and noted that Michigan's top research universities are pulling in millions in national grants to work on alternative energy and other growing areas.

"We have lots of folks working below the surface, day after day, being innovative, trying to transform and diversify this economy," Hollister said. "So don't get discouraged."