Office of Legislative Affairs

Legislative Update

For the week of August 17, 2009 . . .

BUDGET TALKS CARRY ON AS DEFICIT GROWS - With one member alleging a stalemate had been reached in the talks-a stance quickly denied by the other participants-Quadrant members and Governor Granholm spent last week continuing their closed-door meetings trying to resolve the budget, with the Governor reportedly laying out new revenue enhancement proposals while the legislative fiscal agencies continued to report declining revenues.  Last week, a Senate Fiscal Agency (SFA) report claimed state revenues would fall some $130 million to $170 million below expectations agreed to at the May Revenue Estimating Conference.  The House Fiscal Agency (HFA) reported the revenues collected in the Third Quarter of the current fiscal year fell 12.5 percent below the monies collected during the same time period in the prior fiscal year.  The HFA revenue review found combined General and School Aid Fund collections totaled $4.8 billion for the Third Quarter, down from the $5.5 billion generated during the Third Quarter of the 2007-08 Fiscal Year.  That, the HFA study said, meant an additional $150 million shortage in expected state revenues.  The report also noted that year-to-date collections have generated $13.6 billion in income for the state while dropping 12.6 percent when compared to the prior fiscal year; but that the total was still nearly $2 billion less than the prior fiscal year's income.  And, with the exception of the Michigan Business Tax-which has yet to complete its first year of operation-and the Sales Tax on vehicles-aided by the "Cash for Clunkers" program-the HFA report noted all major state tax programs were reporting year-to-year revenue declines.

Meanwhile, although participants to the closed-door meetings have agreed to forego public comment on the talks throughout their duration, sources reportedly close to the talks claimed Governor Granholm had presented Quadrant members and other key legislative leaders with a new revenue enhancement proposal that would reportedly generate some $685 million in new revenue.  Based on the latest reports, Ms. Granholm would, in addition to her traditional call for "loophole closings," impose new taxes on cigarettes-along with other tobacco products-bottled water and entertainment tickets, reduce the scope of the state's new Film Tax Credit along with the Earned Income Credit, eliminate the special tax credits currently provided to the Michigan International Speedway and phase-out the 22-percent surcharge on the Michigan Business Tax over a three-year period starting in 2011.

The largest single revenue generator is the "ticket tax" which the Administration estimates will bring in some $87.3 million while a one-cent tax on bottled water would raise another $17 million.  The Governor's plan would also impose the state's 6-percent Sales Tax to service contracts-for $29 million in revenue-and vending machines-for another $28 million in revenue while a 25-cent boost in the existing $2-per-pack Cigarette Tax is predicted to generate some $54 million more despite industry claims the higher price will drive smokers to other, less expensive vendors for their cigarettes.  The plan would also double the tax on "other tobacco products" for an estimated revenue increase of $45 million in an admitted effort by the Administration to "head off" those smokers who might opt to "roll their own" in order to avoid the tax hike.

Conversely, the Governor's plan would reduce revenue losses by paring back various tax credits.  The state's nation-leading Film Production Tax Credit-long a target of Senate Republicans whose proposed budget would cap the credit at $50 million for a $98 million savings-would be cut from 42 percent of qualifying costs to 30 percent saving an estimated $7.8 million under the Governor's proposal.  Likewise, an estimated $83 million would be saved by cutting the Earned Income Tax Credit from 20 percent to 15 percent as the Governor has reportedly suggested while $3.6 million would be recovered by ending the two "carve-out" credits afforded the Michigan International Speedway.  Finally, the Governor's plan would generate some $27 million in new revenue by eliminating various tax loopholes and concessions.

Notably missing from the latest Administration proposal was a reported suggestion that the state double the tax on beer which was estimated to generate some $41 million in additional revenue.  As previously reported, the beer tax was last revised in 1966-when it was actually lowered-and currently stands at 1.9 cent per 12-ounce bottle or can.  The Governor had reportedly suggested raising the tax to 3.8 cents per bottle or can to compliment her Executive Budget proposal to also boost the Liquor Tax-untouched since the mid-1970s.  But, observers to the budget process quickly indicated a move toward an increase in either the beer or Liquor Tax would certainly generate a major political-and probably unwinnable-battle for both parties with industry interests with most observers contending neither the Administration nor the legislature have the stomach for such a protracted struggle.  With that issue seemingly off the table at the moment-if it was ever seriously being considered in the first place-observers may have been correct in their assumption the budgeters have opted to fight their battles in other less hostile venues.

And, that is what tobacco interests are hoping as well.  Arguing the state already levies one of the highest Cigarette Taxes in the nation, representatives of tobacco manufacturers, distributors and suppliers are contending an increase will actually drive down state revenues.  While being one of many unconfirmed revenue enhancement rumors, industry representatives quickly took the offensive against boosting the tax to $2.25 per pack, warning such a move could adversely impact businesses-especially those in operation at or near the state's borders.  Convenience store operators, charging that their gas business was at best break even, claimed they would lose over $1,300 in profit if the tax on cigarettes is raised by a quarter while a spokesperson for a leading business organization noted the proposal was a "job killer."

As all eyes were trying to focus in on the budget discussions, others were busy offering opinions on what should or should not be done to resolve the state's fiscal problems.  For example, despite the Governor's alleged proposal to trim the tax back, the current film tax credit gained another key supporter as Representative Chuck Moss went on record in support of the tax credit program.  Saying he felt the program was a success, Mr. Moss, the ranking GOP member on the House Appropriations Committee, argued the success of the tax program-which he labeled a "controlled experiment"-shows "what happens when we reduce the burdens of government."  Mr. Moss also went on to stress the proposed House Republican budget plan balances the budget without resorting to tax increases of any kind while emphasizing he was not open to discussions on revenue enhancements.  Conversely, a new report issued by the Center on Budget and Policy Priorities argues the state could realize $2.5 billion in new revenue by taxing a broad range of services-something the Legislature attempted and quickly abandoned in 2007.  The report also contends Michigan is one of a handful of states-including California, Colorado, Illinois, Massachusetts and Virginia-that could realize "substantial" revenue by doing so.  The report, noting Michigan currently taxes only 20 of the report's 168 listed services, suggests the tax not be applied to health care, housing or business-to-business services.

EVOLUTION OF DILLON HEALTH CARE PLAN CONTINUES - Wednesday of last week was the deadline for those wishing to comment on House Speaker Andy Dillon's plan to consolidate all public employees under one health insurance plan to submit their remarks.  Mr. Dillon has said the consolidation of administrative expenses would save the state some $275 million with another $400 million to $600 million in savings coming from standardizing health care benefits for the roughly 400,000 public employees that would be covered by the plan at a lower cost to the state.  Saying he had received a plethora of commentary on his plan, ranging from comments made by teachers, school administrators, local governmental officials and other public employees, Mr. Dillon said he was in the process of wading through all the commentary with the collective input being used to craft a health care proposal that would "save taxpayers dollars" while keeping "more teachers in the classroom and police on the streets."

But, the standardization facet of the plan is exactly what most unions are opposed to, fearing the program will negate individual benefit packages negotiated at arms-length over the bargaining table.  A number of labor groups and professional associations continue to debate whether the program should be voluntary or mandatory at the local level with several unions contending only the "opt-in" approach would protect collective bargaining rights while other associations argue the absence of mandatory participation effectively negates the competitive buying power of the pool by reducing its maximum size from the outset.  And, the latter group argues, if benefits and/or participation in the insurance pool continue to be negotiated on a contract by contract basis absolutely no benefit is derived from the program.  Finally, the labor unions also argue if the state mandates the program it also accepts the program's full fiscal liability-something they argue is coming back to haunt other states that have adopted mandatory programs during these fiscally challenging times.

Rounding out the week's activities, another union came out in opposition to the Dillon Plan, a second union argued certain public employee benefit costs are below private sector costs and a constitutional authority offered his assessment that the Dillon Plan could be implemented by the Legislature without having to amend the Michigan Constitution.  The Michigan Professional Fire Fighters Union sent Mr. Dillon a letter expressing their opposition to the health care plan.  The letter noted their profession incurs "a high rate of injuries, occupational diseases and exposure to numerous hazards" making affordable, quality health care an "important element of their job," with that facet, they said, protected only through "collective bargaining rights for public employees in Michigan."  The Michigan Education Association (MEA) released a report contending the cost of health care benefits for school employees is less than the cost of similar benefits for private sector employees.  According to the study, Michigan's K-12 schools paid $1.7 billion overall on healthcare benefits for 208,942 working full-time equated employees in 2008 for a per employee cost of $8,311.  Conversely, an MEA-cited Kaiser study which examined businesses with 200 or more employees found the average per-employee healthcare benefit cost in the private sector was $12,973, with the average cost in the Midwest rising to a total of $13,225-numbers which at least one state-wide business organization immediately challenged.  Finally, when asked about the Dillon Plan and another percolating plan that would tie benefits to some sort of average of private sector benefits, Richard McLellan, chair of the Michigan Law Revision Commission and noted state constitutional authority, said that if the plan were tied to some general average it would not be "unreasonable" and, as public policy, it could be implemented by the Michigan Legislature without first having to amend the state constitution.  But, he also agreed the issue-public versus private benefits-would not be an easy fix, but one that would certainly grow over time as the level of benefits offered to the public and private constituencies continues to widen.

MAYORAL CONTROL OF DETROIT SCHOOLS PROPOSED - Having said a middle ground between making Detroit Public Schools (DPS) return to a general law school district and lowering the enrollment criteria for a first-class school district was likely, Representative Phil Pavlov unveiled his plan to attain that compromise.  Mr. Pavlov, noting House Education Committee Chair Tim Melton is "very reform minded," said he expected his measure, House Bill 5236, to be part of a package of Republican-sponsored legislation he hopes will be taken up by the committee over the coming weeks.  Mr. Pavlov also stressed he has been in discussions over his concept with Representative Lamar Lemmons, Jr., who is also actively pursuing similar legislation.  Under the provisions of House Bill 5236, the enrollment requirement for a first-class school district would be reduced to 60,000 students-a number some 30,000 students below the current DPS enrollment but significantly higher than any other Michigan school district's student population.  The measure would also abolish the district's school board effective July 1, 2010-the end of the current fiscal year-and install the mayor of Detroit as the district's head.  Direct oversight of the district would be provided by a chief executive officer who would be required to form a community advisory council that would convene on a monthly basis to provide public input and commentary on the district's operations.

ODDS AND ENDS - Calling it "another tool in the tool box," the Michigan State Chamber of Commerce announced the creation of a litigation center aimed at helping win legal cases impacting state businesses and job providers.....Republican Attorney General candidate Bill Schuette claims he is now the party's front-runner with the announcement he is supported by 83 new campaign backers, many of whom are major players within the party's heirarchy.....Department of Environmental Quality officials are working to determine the source of a fish kill along 12 miles of the Black River-thought to be due to run-off from animal waste entering the river and the extent of the subsequent damage to the fishery in the area.....State Board of Education members were told that student scores on the Michigan Merit Exam are rising and the results are being released more quickly.....with the number of known cases this year nearing 400 and with that number already exceeding the total reported in all of 2008, officials with the Department of Community Health urged Michigan residents-especially young infants-to be vaccinated against pertussis, the disease more commonly known as Whooping Cough..... Governor Jennifer Granholm has named former Representative Patricia Lockwood of Fenton interim Racing Commissioner.