In 2007, the state faced a situation much like the current one.
Henry Payne
Thursday, July 28, 2011
Gov. Jennifer Granholm — the charismatic, silver-tongued, Harvard Law School–trained Democratic executive (with no executive experience) who tried to remake Michigan as a “Green Belt” state via stimulus spending and windmills — brought the state to the precipice with a 2007 budget shutdown. Now we are watching Obama’s remake.
The similarities between the two crises are uncanny — but the crucial differences teach a lesson about constitutionally mandated balanced budgets and the need for conservatives to maintain a steely spine against tax increases. Americans can only hope their Republican representatives in Congress have the courage that GOPers in the Michigan state senate lacked.
In 2007, a liberal governor’s determination to enact permanent big spending hikes and tax increases set Michigan on course for a budget war. Granholm’s threat of a shutdown came on the heels of a budget that proposed hundreds of millions of dollars in new “investments” — as she and Obama like to call spending — and, to pay for it, proposed a new services tax. This, even as Michigan’s economy swirled down the drain.
A crucial difference between 2007 and today is that Granholm had won a landslide election the year before, with Democrats regaining the house and eroding the Republicans’ senate majority. But even riding this wave of support, Granholm provoked an immediate public backlash when she suggested tax and spending hikes. A Tea Party–esque movement — led by a teabag-waving, pig-hauling activist named Leon Drolet — emerged to recall legislators who supported the tax hike.
The lines were drawn. Pro-tax Democrats vs. anti-tax Republicans.
Michigan’s economy was struggling, with an unemployment rate hovering 50 percent above the national average. Ratings services added to the drama by downgrading Michigan’s bond rating from “AA− with a stable outlook” to “AA− with a negative outlook.”
Yet Democrats insisted on hiking taxes rather than making structural reforms to the state’s Medicaid program and public-employee health benefits, which together were swallowing Michigan’s budget whole. Republicans tried to plug the $800 million budget gap with a cuts-only approach, but they controlled only one house of the legislature.
Governor Granholm reacted with a page right of Obama’s playbook. “People will die,” she said, if GOP cuts to Medicaid and other social services passed.
No leadership. No structural reforms. Just a relentless threat that she would begin “shutting down” the government. Like Obama today, Granholm “appeared to be disassociated from the process, except to issue occasional press releases criticizing ‘the legislature’ or ‘Senate Republicans’ for failing to adopt her budget recommendations,” wrote the Mackinac Center, a state think tank.
Under pressure from the state’s balanced-budget requirement — another crucial difference between Michigan then and Washington today — and after a brief government shutdown on October 1, Senate Republicans warily agreed to a deal involving a mix of tax hikes and benefits reform. They agreed to hike income taxes by 12 percent and impose a new set of service taxes on select business activity, raising $1.5 billion. In return, Republicans got fragile promises of spending reform.
“This budget agreement is the right solution for Michigan,” crowed a victorious Granholm. “We prevented massive cuts to public education, health care, and public safety while also making extensive government reforms and passing new revenue. With the state back on solid financial footing, we can turn our focus to the critical task of jumpstarting our economy and creating new jobs.”
Barack Obama couldn’t have said it better. Did it solve the problem?
“Within literally hours of passing the tax hike,” recounts Mackinac Center legislative analyst Jack McHugh, “the legislature passed bills spending the entire $1.4 billion.” By the time Granholm handed over the wheel to Republican Rick Snyder three years later, the deficit had ballooned to $2 billion amidst a stalled economy.
But the tax mirage isn’t Lansing’s only lesson for Washington. The other is that balanced-budget amendments can force divided governments into shutdowns, and force Republicans to accept tax increases. Such amendments are still — on balance — a positive for states like Michigan, but one would be a disaster for a federal government that is drunk on entitlements and needs budget flexibility for national defense.
Lawmakers in Washington should learn the lessons of Michigan’s tax showdown.
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