Brief commentaries and opinion pieces on issues of the day. Published periodically, sometimes in conjunction with Michigan Roundup.

Written by various staff members.

Technology in the Classroom - January 17

January 17, 1997

Technology in the Classroom

by Christine F. Hollister, Vice President and Senior Consultant for Public Policy

The technological revolution has left few aspects of our lives and work untouched. We can shop without leaving our homes, visit the Louvre without stepping foot in Paris, read magazines without touching a piece of paper, and do research without visiting the library. Young and old are jumping on the “Information Superhighway” and there’s no turning back.

Naturally, we want schools to teach our children how to effectively use this technology; otherwise, they will be ill-prepared for living and working in the next century. The good news is that the opportunities are almost unlimited. The bad news is that teaching technology is expensive: Schools must invest extensively in computer hardware and software, continually upgrade both, and, more important, teach teachers how to integrate computers into the curriculum.

Where schools have and spend sufficient money for technology and training, transformations can occur in the way teachers teach and learners learn. Technology is fast, fun, and expansive. It can motivate students to learn and enhance their ability to work with others, and it can extend the “reach” of both teachers and students far beyond their local school and community. Students can communicate with others at schools across town or across the world, find information and learn to evaluate it, publish their own ideas, and learn at their own pace. Teachers can use the technology to enrich lesson plans, communicate with others about professional interests or classroom problems, obtain up-to-date information, and provide project-oriented, problem-solving experiences for their pupils. Technological resources, particularly the Internet, will be to the classroom of the Twenty-first Century what the textbook has been to this one.

Unfortunately, too few teachers and students are reaping the benefits of computer technology. The biggest problem is money. Almost all school budgets are limited, and many are shrinking. As common and integral as computers are in today’s workplace, it is shocking to find classrooms that have none. In those that do, there usually are too few to enable every student to have adequate learning opportunities: The national school average is one computer for every 10.5 students.

Equally troubling is that most teachers have little or no training in how to incorporate technology into the curriculum. When school budgets get squeezed, professional development is one of the first areas to be cut, and because professional development is not “sexy,” it usually goes quietly—parents (and students) don’t express the outrage that usually accompanies cutbacks in athletics and other programs.

For technology to be an effective instructional tool,

  • students must have it available to them,
  • teachers must be trained and required to use it, and
  • administrators and taxpayers must find ways and be willing to pay for it, on an ongoing basis.

Technology is here. The clock will not be turned back to simpler times. Youngsters have to learn to use it. Educators have to teach it. The public has to insist on it and pay for it. The country’s and our children’s future depends on it.

Copyright © 1997

Land: Using and Losing It - February 21

February 21, 1997

Land: Using and Losing It

by Michele VanAllen, Senior Consultant for Environmental Policy

Public Sector Consultants has monitored land use trends and participated in the debate on land use issues for the last decade.

In 1992 we issued a report, Michigan’s Environment and Relative Risk, stating that in our state, the absence of land use planning “that considers resources and the integrity of ecosystems” is among the highest environmental risks to our future. This coincided with the emergence of land use as a subject of local deliberation. Today this issue is discussed across the state, in city halls and chambers of commerce. Land use no longer is seen as merely an environmental concern; there now is recognition of its serious economic effect on even the smallest community.

Many land use issues have to do with urban decline and population loss. As people move from city to suburb, businesses, commercial centers, and industrial parks follow, leaving behind infrastructure, vacant buildings, and sometimes contaminated sites. As suburban areas grow, residents demand urban-type services, such as good roads, police and fire protection, and public water and sewer service. Subdivisions grow, and sprawl becomes established.

Sprawl is low-density, land-consumptive, automobile-oriented, decentralized development, and unfortunately, it is widespread in Michigan. Studies show that if current land development and density trends persist, in 20 years the population will have grown 12 percent, but the amount of “urbanized,” or developed, land, will have increased 63–87 percent—we will have well over half again as much developed land as we do now. At current development rates, in 20 years it will take nearly as much land to accommodate 1.1 million new people and 900,000 new jobs as was needed for 9 million people and 3.5 million jobs in 1978.

Michigan cannot continue to indulge in this rate of development: It is inefficient and too expensive. For every household (or business) that leaves an urban area, there are roads, water and sewer lines, and electric wires left behind, which still have to be supported by the city—and the remaining taxpayers—despite the fact that the city’s tax base has been diminished by the departure of that household (or business); moreover, the older the infrastructure becomes, the more expensive is its maintenance. A 1995 Detroit News article reported that to bring inadequate southeast Michigan water and sewer lines into compliance with state regulations, sewer bills would have to triple for the next 20 years—the cost would be hundreds of dollars annually per household.

Michigan also cannot afford to lose to sprawl the agricultural lands and open space that sustain our economy. Agriculture is a $37 billion-a-year industry in Michigan, yet from 1982 to 1992 an estimated 300,000 acres of cropland were converted to nonagricultural use; the potential loss in local farm revenue is $60–$120 million a year.

Land use is a serious issue; Michigan citizens, businesses, and governments must recognize its ramifications and work together to remedy the problems. If governments will coordinate their land use decisions, controversial development decisions can be averted and infrastructure planning and maintenance ensured. Involving both citizens and business in planning decisions is key to collective solutions. When communities work with their residents and with each other and plan how they want their communities to look in the next 20 years, they can use land wisely, to the benefit of all economic sectors, and at a rate commensurate with population growth (not five times as fast).

Copyright © 1997

A Conversation with House Minority Leader Ken Sikkema (R-Grandville) - March 28

March 28, 1997

A Conversation with House Minority Leader Ken Sikkema (R-Grandville)

by Jonathan Hansen, Senior Consultant

On the Republican agenda and the last two years of GOP control in the House “There has been nothing like the last two years—and there won’t be again—because it wasn’t just a matter of having complete Republican control, but there was this pent-up policy demand. There were so many things that we wanted to do, and we went right after them—one after the other—but frankly, we ran out of time. In the months ahead, we’ve got to work together to find some common ground—Republicans, Democrats, the House, the Senate, and the governor.”

On the need for repairing Michigan roadways “There’s no question in my opinion that the state of our roads demands more money, demands a lot of changes in the way we spend our money, and demands a fair shake from Washington; it’s intolerable what goes on today with the federal gas tax. Those changes have to occur before we raise the gas tax. Now, none of that will change unless we force it to change. Nothing in government changes unless a crisis has occurred—it just doesn’t. We have to force those changes before we raise a gas tax for Michigan citizens. I think we will get to a point where we’re going to have an increase in gas tax to deal with our road issues. The infrastructure issue is important to our economy, but I think it’s very important to get some of these reforms first, otherwise you’ll never get to the reforms.”

On education reform “First, What is our goal? Our goal is improving public education. And then, What is our strategy? I have a very clear strategy: objective standards; regular testing measurements for those standards; consequences if the standards aren’t being met; and maximum flexibility for local districts, school boards, and parents as to how to meet those standards. You have to have consequences if you have a goal that you say is important—and you keep measuring to learn if you’re getting there. Without consequences, you have no reason to improve.”

On GOP environmental initiatives of the last session “I think Lansing Republicans in the last two years have gotten unfair criticism on the environment. We’ve done a number of things that actually are going to result in the improvement of environmental quality. The changes in the cleanup law are already having a positive impact in terms of more cleanup, more investment in the urban areas, and more reuse of contaminated land.”

On health care reform “I think a fundamental issue is access to quality health care for the working poor. I think our philosophy is to look at approaches that will find ways to provide an incentive for the private sector to cover the working poor, rather then having to craft a system that government will control and pay for.”

On GOP chances in the 1998 elections “We’re going to win the majority back in ’98 for the House; the weaknesses that the ’96 election exposed will become our strengths in ’98.”

A similar conversation is scheduled with the House majority leader and Speaker, Curtis Hertel, and will be reported in a few weeks.

Copyright © 1997

Tuition Tax Credit Benefits Few - April 25

April 25, 1997

Tuition Tax Credit Benefits Few

by Laurie A. Cummings, Senior Consultant for Economic and Education Policy

House Bill 4191, recently passed by the Michigan House, would help ease the burden of college tuition for the state’s students by giving them (or their parents) a tax credit. The bill expands on the tuition tax credit currently in use in Michigan, permitting more students to be eligible and raising the maximum amount students can receive in tax relief. Unfortunately, because of the way the bill is designed, this expanded eligibility and higher maximum credit will not make much difference—students attending public institutions would receive very little tax relief under the bill, and private-school students would benefit most.

Currently, college students (or their parents) paying tuition to public and private colleges/universities get a tax break only if the school keeps its tuition hikes at or under the inflation rate: Taxpayers may claim four percent of tuition/fees paid to qualifying institutions, up to $250. House Bill 4191 would change current law by making students attending all institutions of higher education eligible and also by increasing the maximum tax credit to $500 from $250; it does not increase the percentage of tuition/fees that may be deducted.

On its face, it appears that HB 4191 would provide much more tax relief than does the current law. However, because it does not raise the percentage of tuition and fees that can be deducted, the change would make little difference to most students. We made some simple calculations to determine the amount of the tuition tax credit students at Northern Michigan University (NMU) and University of Michigan (UM) could have expected under the new bill in the 1996–97 school year. We also calculated the average credit for all public university students and the average for private college/university students. We find that the tax break for the cost of a full-time class load at NMU, which charges relatively low tuition and fees, would have been only $119 in the 1996–97 school year, well under even the existing $250 cap.

Public universities on the high end of the tuition/fee scale fare only slightly better under HB 4191. The tax credit for UM students—the maximum for a public university, because it is the most expensive—would have been only $228, slightly under the existing cap and well under the proposed $500 cap. Since tuition at most community colleges, per credit, is less than at four-year institutions, and community college students tend to take fewer credits annually, HB 4191 would do even less for them than it would for public university students. Only for attending a private university can the credit approach the $500 cap. To get the full $500 tax break, a student (or parent) must pay $12,500 in tuition/fees, an amount more than three times the average-public-university tuition

The bottom line is that expanding eligibility for the credit and raising the cap simply won’t make much difference to the majority of Michigan’s college students. Students attending private institutions would benefit most, even though they or their families are often in higher income brackets. While we support the concept of a tuition tax credit, and we applaud lawmakers for addressing this difficult issue, we believe HB 4191’s tax relief is too small to be significant and helps private-college students more than public-college students. To give significant tax relief to most students, more than four percent of tuition and fees must be eligible for the credit. The $35.5 million cost of this credit might be better spent for direct appropriations to public universities or increased financial aid for students.

Copyright © 1997

Social Security and the Long-Term Federal Budget Outlook - May 2

May 2, 1997

Social Security and the Long-Term Federal Budget Outlook

by Robert Kleine, Vice President & Senior Economist

A recently released Congressional Budget Office (CBO) report entitled Long-Term Budgetary Pressures and Policy Options concludes that although the federal budget deficit as a share of Gross Domestic Product (GDP) has dropped to a 22-year low, the long-term outlook is less promising due to the coming retirement of the baby-boom generation (those persons born from 1946 to 1964). The retirements will drive up costs for three important government programs: Social Security, Medicare, and Medicaid, all of which account for more than 40 percent of total federal government expenditures. (Senior citizens currently make up about 13 percent of the total population; by the year 2030, seniors will comprise about 20 percent.)

The CBO is projecting that by the year 2020 the federal deficit as a share of GDP will increase to 5 to 7 percent from the current level of 2 percent. By 2050 the federal deficit is projected at 13 to 18 percent of GDP. To prevent this sharp rise in the federal deficit, revenues will have to be increased (by up to 4 percent of GDP), or spending on the major federal programs must be stabilized as a share of GDP.

The CBO has outlined several options for slowing the growth in Social Security and Medicare. Presented below are the CBO’s summary discussion of Social Security and analysis of potential savings. The discussion of Medicare will be the topic of a future Periscope.

CBO Options to Reduce Social Security Spending

To prevent Social Security spending from growing faster than the economy, policymakers would have to curtail substantially commitments made under current law. Three options illustrate the tradeoffs that the Congress would face in trying to reduce the growth in Social Security spending:

  1. The initial benefits of future Social Security beneficiaries could be reduced below the levels that current law now provides. Across-the-board cuts in initial benefits—announced well before they took effect— could produce substantial savings while still preserving the basic benefit structure of the Social Security system. In principle, workers could offset the cut in their future Social Security benefits by either working longer or saving more. However, some people would not be able to make the necessary adjustments and could therefore have much lower income when they stopped working.
  2. The age at which a worker would become eligible for full retirement benefits—the “normal retirement age”—could be raised to reflect increases in life expectancy. Under legislation enacted in 1983, the normal retirement age is already scheduled to rise from 65 to 67. Some proposals would speed up the transition to age 67 and then further increase the age to keep up with future gains in life expectancy. Raising the age at which a worker would become eligible for full benefits is, for most purposes, equivalent to cutting initial benefits, with similar advantages and disadvantages.
  3. Future annual cost-of-living adjustments (COLAs) could be reduced. Current law ties the basic Social Security benefit to the increase in the consumer price index (CPI), beginning when a worker becomes eligible for benefits. Many analysts feel that the CPI overstates increases in the cost of living, although the magnitude of the overstatement and what should be done about it are subject to much debate. The Advisory Commission to Study the Consumer Price Index (also known as the Boskin Commission) recently estimated the size of the upward bias to be about 1 percentage point per year. If that is the case, then Social Security beneficiaries have been receiving increases that exceed the changes in the cost of living. Unlike across-the-board reductions in benefits and increases in the normal retirement age, substantial changes in COLAs eventually would reduce benefits, most particularly for the oldest beneficiaries and for those who initially became eligible for Social Security on the basis of disability.

Potential Savings

Each of these approaches could be used to achieve considerable savings, with the amount dependent on the specific changes. Estimates provided by the Social Security Administration’s Office of the Actuary illustrate the magnitude of the changes that would be required (see exhibit). Cutting the initial benefits of each successive cohort of workers who become eligible for Social Security disability or retired worker benefits by one percent a year, starting in 1998 and ending in 2032, would ultimately reduce spending by about 30 percent. But the full savings would take a long time to achieve. By 2030, spending under current law would be about 20 percent below the projected amount for that year—not quite enough to keep Social Security spending from increasing as a percentage of GDP. Under this option, workers with a history of average earnings who retired at age 65 in 2030 could receive lower Social Security benefits (adjusted for inflation) than workers retiring now at age 65, according to the Office of the Actuary.

Speeding up the rise in the normal retirement age to age 67 and then linking it to increases in longevity would achieve smaller savings. Under this option, the age at which full benefits would be paid rises to age 70 in 2029 (for workers born in 1967) and then goes up by one month every other year, increasing to age 71 in 2053. The option would reduce spending by less than 10 percent in 2030.

Cutting COLAs would achieve savings more rapidly because it would affect all beneficiaries, not just new ones. It would take an extremely large reduction, however—about 2.5 percentage points below the increase in the CPI—to cut spending by 25 percent. Alternatively, the preceding option to increase the normal retirement age could be combined with a smaller reduction in the COLA (roughly CPI minus one percentage point) to achieve comparable savings.

Conclusion

The Advisory Council on Social Security considered these and other approaches in its recent publication, Report of the 1994–96 Advisory Council on Social Security. Council members were unable to reach a consensus on how to improve the financial status of Social Security and, instead, presented three alternative plans. Much of the public attention about those plans has focused on aspects that either require workers to invest a certain percentage of their earnings in retirement accounts or the government to invest a portion of the balance in the Social Security trust funds in equities rather than Treasury securities.

Ultimately, the success of a proposal to prepare the economy for the retirement of the baby boomers rests on the extent to which it would increase national saving. Some of the specific provisions in one or more of the plans would do that by slowing the growth in spending for Social Security—for example, by reducing initial benefits or increasing the normal retirement age. Other provisions could increase national saving by requiring workers to save more than would otherwise be the case or by raising taxes.

Comment

Our view is that Social Security is not facing a crisis, and no one is in danger of losing his/her benefits. The changes needed to ensure the solvency of the program for the next 75 years are relatively painless, but the longer they are delayed the more painful they become.

Effects of four options for reducing growth in social security spending

Copyright © 1997

Medicare and the Long-Term Federal Budget Outlook - May 16

May 16, 1997

Medicare and the Long-Term Federal Budget Outlook

by Robert Kleine, Vice President and Senior Economist

A recently released Congressional Budget Office (CBO) report entitled Long-Term Budgetary Pressures and Policy Options concludes that although the federal budget deficit as a share of Gross Domestic Product (GDP) has dropped to a 22-year low, the long-term outlook is less promising due to the coming retirement of the baby-boom generation (those persons born form 1946 to 1964). The retirements will drive up cost for three important government programs: Social Security, Medicare, and Medicaid, all of which account for more than 40 percent of total federal government expenditures. (Senior citizens currently make up about 13 percent of the total population; by the year 2030, seniors will comprise about 20 percent.)

The CBO is projecting that by the year 2020 the federal deficit as a share of GDP will increase 5 to 7 percent from the current level of 2 percent. By 2050 the federal deficit is projected at 13 to 18 percent of GDP. To prevent this sharp rise in the feral deficit, revenues will have to be increased (by up to 4 percent of GDP), or spending on the major federal program must be stabilized as a share of GDP.

In 1996 federal spending for Social Security and Medicare exceeded $500 billion, about 7 percent of GDP. By 2030 these two programs will consumer nearly 14 percent of GDP. Most of this increase will occur between 2010 and 2030, when retired baby boomers become eligible for these programs. If spending for Social Security and Medicare can be kept form growing more rapidly than the economy, the long-term outlook for the federal deficit and the economy will improve dramatically.

The CBO has outlined several options for slowing the growth Social Security and Medicare. Presented below is the CBO’s summary discussion of Medicare. The discussion of Social Security was included in an earlier Periscope.

CBO Options to Reduce Medicare Spending

Medicare has been highly successful in achieving its original objective of ensuring access to mainstream medical care for the aged and later the disabled, but Medicare costs have become increasingly burdensome to the economy. In 1996 Medicare spending net of premiums paid by enrollees was 2.4 percent of GDP. If no changes are made in current law, net spending is expected to reach 4.1 percent of GDP by 2110 and 8.6 percent by 2070. Underlying these projections is an assumption that growth in Medicare spending per beneficiary will slow gradually between 2005 and 2020, becoming more in line with growth in income per capita. This may be optimistic assumptions given that these are no policies in place to slow spending.

Three fundamental approaches could slow in federal Medicare spending: Congress could reduce the number of people eligible for benefits, collect more of the costs form beneficiaries, or restructure Medicare to reduce total health care cost per beneficiary (see the exhibit).

Increase Age of Eligibility

One approach is to reduce the number of eligible for benefits by increasing the age of eligibility form 65 to 70. This ultimately would reduce federal Medicare spending by about 15 percent compared with current law. Despite such considerable savings, net spending as a percentage of GDP would continue to grow after 2010, reaching 7.3 percent of GDP by 2070. Furthermore, this approach would do little to reduce health care costs. It also would lenghten the period of time during which people who opt for early retirement under Social Security might have difficulty getting insurance coverage.

Increase Medicare Premiums

A second approach is to increase premiums collected from beneficiaries to cover 50 percent of Medicare’s total costs for both Parts A and B. Because premiums paid by enrollees now cover only about 10 percent of costs and that share will fall steadily after 1998 under current law, nearly all of the increased collections would represent federal savings. This option would keep net Medicare spending as a share of GDP from rising above the target level until 2060. However, that result would be accomplished by shifting costs to beneficiaries rather than by constraining the growth in total health care costs. Without any changes to improve the efficiency of the Medicare program, premiums would consume an ever-larger share of enrollees’ income. Indeed, Medicare premiums would equal about 30 percent of enrollees’ income by 2070, compared with 3 percent in 1996.

Restructure Medicare System

A third approach is to restructure the Medicare system, giving patients and providers greater incentives to make cost-effective choices. One way to do that would be to set up a system of competing health care plans and limit growth in the amount Medicare would contribute toward the premiums charged by the various plans. In such a restructured system, Medicare’s fee-for-service sector could be just one of a number of plans competing for enrollees. Because enrollees would be responsible for any excess premium amounts and would receive rebates for plans costing less than Medicare’s contribution, they would have financial incentives to be prudent purchasers of health plans. Also, because plans would be at risk for any costs above their predetermined premium collections, they would have financial incentives to operate efficiently. Control of Federal Medicare spending would be assured because the financial risks from higher growth in health care costs would be shifted to health plans and enrollees. Although the federal subsidy per enrollee would be smaller than it would be under current law, competition among plans and providers might spur efficiency and increase real health benefits for each dollar spent.

For example, Medicare’s defined contribution could be set to equal net spending per enrollee in 2000, increased annually by 6 percent through 2005, 5 percent through 2010, and 4.2 percent thereafter. Under this option, federal savings would be 42 percent of currently projected spending by 2030 and 62 percent by 2070. This option would keep federal spending from exceeding the target through 2030 and keep it below the target in later years. Consequently, growth in the federal contribution might be increased once the baby-boom generation had been fully absorbed.

However, the effects of this approach on total costs for a basic-benefit package—and therefore on the costs that beneficiaries would bear—are uncertain. If the incentives generated for more cost-conscious behavior reduced annual growth in total costs per enrollee only to the rate assumed by Medicare’s trustees, premiums for enrollees would steadily increase, reaching 37 percent of their average income by 2070. If, instead, growth in costs per enrollee slowed to match the annual growth in the federal defined contribution, premiums would represent only 2.2 percent of the average income of enrollees in 2070.

In practice, the effects would probably differ among various enrollee groups. Some basic plans probably would keep their costs low enough to avoid having to charge supplemental premiums. However, the access to providers and quality of services available in those plans might limit their appeal, especially to low-income enrollees. Higher-income enrollees might gravitate instead to plans that charge supplemental premiums and provide better access and quality.

Conclusion

Costs must be reduced substantially if net federal spending for Medicare is to be limited as a percentage of GDP. To keep net spending at or below 4.1 percent of GDP, savings equal to about 50 percent of currently projected spending must be generated annually from 2010 onward.

Our view is that Medicare will be much more difficult to deal with than Social Security for three reasons. First, Medicare costs are expected to increase much faster than Social Security costs. Second, the Medicare Trust Fund is already in deficit. Third, Congress and the president do not have the political will necessary to make the painful cuts required to keep Medicare spending from increasing sharply as a share of federal spending. Long-term solutions to the Medicare funding problems are a long way off.

Effects of three options for reducing growth in net spending for Medicare
Copyright © 1997

The Good Times Continue - May 23

May 23, 1997

The Good Times Continue

by Robert Kleine, Vice President and Senior Economist

The current economic expansion has now reached 75 months, the third longest since World War II, and there is no end in sight. Michigan, with its continued dependence on the manufacturing sector, has benefitted as much as any state. Michigan per capita income grew at an annual rate of 5.4 percent from 1991 to 1996, compared with the national rate of 4.3 percent. In 1991 Michigan per capita income was 2.6 percent below the national average; five years later, in 1996, it was 2.4 percent above it. In the past year the Michigan economy has begun to cool, due in part to a slowdown in the growth of motor vehicle sales; in 1996, Michigan per capita income increased 3.6 percent compared with a 4.5 percent nationally.

The strong economy has had several positive effects on the state’s finances.

  • State leaders have been able to significantly reduce taxes while maintaining a reasonable level of spending (adjusted gross appropriations less school aid increased at an annual rate of 4.8 percent from FY 1989–90 to FY 1996–97, or 1.8 percent adjusted for inflation); in FY 1996–97, cumulative state and local tax cuts amount to about $1.9 billion.
  • The state’s “rainy day fund” now has a balance of $1.2 billion, up from only $20 million in FY 1991–92.
  • The combination of the strong economy and system-wide reforms has pushed the welfare caseload to a 25-year low.

How long can this good news continue? Apparently, a while longer. Despite the length of the current recovery and evidence of a slowdown in Michigan, state revenues continue to outpace estimates. On Thursday, state revenue officials from the legislature and the executive branches agreed on revised revenue estimates for FY 1996–97 and FY 1997–98. The new projections for general fund/general purpose (GF/GP) and school aid fund (SAF) revenues are $185.4 above the current estimate for this fiscal year (1996–97) and $91.2 million higher for next fiscal year (1997–98). The increase is due mainly to a surge in income tax, use tax, and lottery revenues.

  • The income tax revenue estimate is up $105 million for FY 1996–97 and $58 million for FY 1997–98.
  • The use tax collections estimate is up $40 million for FY 1996–97 and $35 million for FY 1997–98.
  • The lottery receipts estimate is up $12 million for both FY 1996–97 and FY 1997–98.

These new estimates assume slower growth in FY 1997–98, 3.9 percent, down from the January projections of 4.5 percent. Our view is that these figures are conservative. The Senate Fiscal Agency estimates were up, from the January consensus, by $261 million for FY 1996–97 and $168 million for FY 1997–98, and we believe these numbers may be closer to the truth.

The new revenue estimates have two immediate implications.

  • Some of the new money added to the governor’s recommended budget, particularly for education, likely will stay in the budget.
  • There now is a strong chance that there will be additional tax cuts. The Senate GOP caucus agreed this week on how to divide the new revenue between tax cuts and increases in education spending.

There are, of course, almost as many proposals for what to do with the extra revenue as there are legislators. Some want to put the money in the Budget Stabilization Fund (BSF); others, to prevent a gasoline tax increase, want to give some of the money to transportation; still others would like to use all of it for tax cuts.

Our view is that the money should be divided among education funding, tax cuts, and a modest contribution to the BSF. The BSF balance currently equates to about 7 percent of GF/GP and SAF spending. Although this is one of the highest levels in the nation, it still is inadequate to protect against a major economic downturn. We would not, however, want to see the balance exceed 10 percent of the state budget; at that point it would be appropriate to revise the formula and use excess revenues for tax cuts.

Tax cuts almost always make good political sense, and sometimes they make good economic sense. If the gasoline tax is hiked, it makes sense both politically and economically to cut other taxes if excess revenue is available. The gasoline tax is likely to most heavily affect low-income taxpayers, which means the most equitable tax relief would be (1) an income tax credit tied to the amount of gasoline tax one pays, (2) a state earned-income tax credit, or (3) an increase in the income tax personal exemption. The most prudent cut would be a one-time income tax refund of 2–4 percent, similar to that on 1995 income taxes, as there is no guarantee that the good times will continue for much longer. For business, the major tax issue is the personal property tax, and although some of the excess revenue could be used as a down payment on phasing out or reducing the level of the tax, the amount available for tax relief is small compared with the $1.7 billion in annual revenue generated by the personal property tax.

Good times cannot last forever, but no one likes a Cassandra. It makes news if one says that the sky is falling, but the fact is that it isn’t. This legislature and governor have done a good job of managing the state’s finances, and we have no reason to believe that they will not make prudent use of the state’s latest windfall.

Copyright © 1997

The Balanced Budget Agreement: What Does It Mean to You? - August 1

August 1, 1997

The Balanced Budget Agreement: 
What Does It Mean to You?

by Robert J. Kleine, Vice President and Senior Economist

The president and the Congress have reached an historic agreement to balance the federal budget by 2002. Over the next five years we will see about $144 billion in tax cuts and about $50 billion in tax increases, for a net reduction of about $94 billion. There also will be $272 million in budget cuts (including $11 million in interest savings) and $24 billion in increased spending, for a net spending reduction of $248 million.

The federal budget deficit already has declined sharply—from a peak of $290 billion in 1992 to an estimated $40 billion in the current fiscal year—but without action it would begin to climb again in FY 1998–99. In January the Congressional Budget Office (CBO) estimated the FY 2001–02 deficit at $188 billion. However, due to the strong economy, revenue is coming in well above estimates, and the budget outlook has improved significantly; even without the budget agreement, the deficit in 2002 could be under $100 billion.

The budget agreement is, however, only a down payment on what will be needed to balance the budget over the longer term. The government’s unified budget (includes the trust funds) incorporates more than $500 billion in Social Security tax revenue that is building up a surplus in the Social Security Trust Fund and will be needed when baby boomers begin to retire, in about 2010, and the fund starts paying out more than it receives in worker contributions. This year, with the Social Security surplus at an estimated $79 billion and the economy performing so well, the federal budget ought to be running a surplus already.

Balancing the budget is fine, but of more interest to most of us are the tax changes in the agreement. The most significant tax reductions are

  • a $500 per child tax credit—$400 in 1998—for children aged under 17 in families with income of $18,000– $110,000;
  • a cut in the capital gains tax rate, from 28 percent to 20 percent, except that joint filers with income under $41,200 pay only 10 percent, and, effective in 2001, investors holding assets for five years or longer pay only 18 percent; there also is a $500,000 exclusion on home sales for joint filers;
  • a tax credit for higher-education expenses of up to $1,500 during the first two years of college, followed by a credit of $1,000 (increasing to $2,000 in 2002) during the final two years;
  • a deduction of up to $2,500 for interest paid on student loans;
  • an increase, phased in over 10 years, to $1 million (from $600,000) in the tax-free amount a person may pass on to heirs; and
  • an expansion in individual retirement account (IRA) options.

The only significant tax increases are a dime-per-pack increase in the federal cigarette tax in 2000 and another nickel hike in 2002, elimination of about a dozen tax loopholes, and changes in the airline ticket tax that will mean increases for some travelers and reductions for others.

What do these changes mean for Michigan taxpayers? Over five years, we will see a total reduction of about $3.6 billion. Annually, this amounts to about 2.9 percent of Michiganians’ total federal tax liability—$74 per capita. In comparison, in FY 1997–98 alone, the state and local tax reductions enacted in Michigan since 1991 will reduce taxes by about $1.5 billion (after loss of federal deductions).

Overall, the new federal tax reductions are small, but because the benefits are targeted, the relief will be considerable for some taxpayers. For example, a family with three children aged under 17 will enjoy a tax cut of $1,500. For taxpayers with adjusted gross income of $30,000–$50,000, the average 1995 federal tax burden was $4,400; for a family in this income category with three youngsters, the tax cut averages about a one-third reduction. Families with children in college will receive substantial tax relief as well.

The capital gains reduction also will be significant for some families. The average capital gain reported on 1995 tax returns for Michigan taxpayers earning more than $200,000 was $80,610 (see the exhibit); under the agreement, the reduction in the capital gains tax for such taxpayers will be about $6,400.

For the majority of us, however, the benefits will be small or nonexistent. Only about 35 percent of all Michigan households have children aged under 17, and only 17 percent of Michiganians’ returns filed in 1995 reported any capital gains at all (of those, the average for taxpayers earning under $200,000 was only $3,700). Initially, a large portion of the tax cuts will benefit the middle class, but over the longer term, the largest benefits will go to the richest taxpayers, who have money to spend and invest.

Changes in federal tax law can affect state tax revenue, largely by changing the definition of adjusted gross income (AGI), but this budget agreement will not have great effect on Michigan in that way. The child and education credits and the reduction in the capital gains tax do not affect AGI, thus they will not affect how much income tax we pay to the state. The provisions that will reduce AGI are the increase in the capital gains exclusion for home sales and the changes in IRAs, but the revenue loss to the state from these changes will be small, less than $10 million annually. The hike in the federal cigarette tax will reduce Michigan cigarette tax collections by an estimated $15.3 million (in 2002), as higher prices reduce consumption. These small losses could be offset if the capital gains tax reduction leads to more realized gains, which is likely given the size of paper capital gains generated by the current six-year bull market.

Comment

Overall, I do not have a positive view of the tax changes in the budget agreement. First, none of the changes other than, possibly, the capital gains rate reduction likely will have much effect on the economy. Unlike reductions in marginal tax rates, which can increase the supply of labor and productivity, targeted tax credits have little influence on economic behavior. This is not to say that the agreement is bad—a lower deficit leads to lower interest rates, and this is desirable, but we could have more deficit reduction had the tax cuts not been included.

Second, most of the changes complicate the tax system and move away from the goals of the 1986 tax reforms, which reduced the number of loopholes and simplified the system. One key purpose of the 1986 action was to tax all income, regardless of source, at the same rate. The 1997 changes reverse this by taxing capital gains at a lower rate than ordinary income, which will encourage taxpayers to look for creative ways to convert ordinary income to capital gains.

Third, the 1997 changes do not even approach true tax reform, so there will continue to be a push from many quarters for real change, such as a flat tax, as espoused by Dick Armey, Steve Forbes, Jack Kemp, and others. If the economy continues to grow and the deficit shrinks more than forecast, as has been the case in recent years, there will be considerable pressure for more cuts, most likely in the form of income tax rate reductions or major income-tax revisions.

Copyright © 1997

Federal Income Tax Returns, Michigan Tax Year 1995

Judicial Clowning Around - October 24

October 24, 1997

Judicial Clowning Around

by Craig Ruff, President

Ridiculing Californians is a mainstay of stand-up comics . . . and now a couple of sit-down comics on the 9th district U.S. Court of Appeals—Circuit Judges Reinhardt and Fletcher. Stretching their upper lip to their nose, the snide duo invalidated term limits adopted by California voters in 1990. Michigan’s politicians took quick notice since the term limits we imposed in 1992 are virtually identical to California’s.

How two federal clowns tossed out a state election result underscores the arrogance of the robed class. They could have argued that lifetime limits on public service—you cannot serve more than six years in the California Assembly in your entire lifetime—denies voters the right to freely associate with (i.e., elect and employ) certain office seekers. They could have argued that candidates’ rights to free speech (i.e., coughing up paid advertising) were fettered. Instead, Reinhardt and Fletcher ridiculed the whole process—torpedoing ballot referenda, insulting voters’ intelligence, and flicking the bird to the majority of voters.

The judges decided that Californians were not informed—judicial politesse for stupid. “The provision imposes a severe limitation on the people’s fundamental right to elect whomever they choose and the voters were not provided with adequate notice of that limitation.” Unfazed by the voters’ daily consumption of negative and positive newspaper editorials, condemnations and endorsements by politicians, and millions of dollars of advertising messages, the Bobbsey Twins of the Ninth Circuit conclude that Californians simply did not understand that term limits would end up setting limits on terms.

That only scratches the surface of the judges’ overreach. The constitutional amendment (Proposition 140) stated that no member of the Assembly may serve more than three terms and no senator nor governor may serve more than two terms. “Nowhere in the initiative, the title and summary, the Legislative Analyst’s statement, or the proponents’ ballot arguments, was there any mention of lifetime limits,” the judges unearthed. My 11-year old daughter got it when I ran it by her, but then, she’s a Michiganian.

The two judges write that the lifetime ban is “exceptionally” severe. Apparently, unexceptionally severe are the U.S. Constitution’s requirements that a president must be at least 35 years old and a resident of the United States for at least 14 years, that you have to be 25 years old to sit in the U.S. House of Representatives, or that a Senator has to have hit 30?

Presumably, the U.S. Senate and House of Representatives and 36 state legislatures likewise were ill informed when they initiated and ratified the 22nd Amendment to the U.S. Constitution. That amendment contains the simple wording: No person shall be elected to the office of the President more than twice. If I were Bill Clinton after he leaves office, I would move to California, get before the Reinhardt-Fletcher tag team, yack about no mention of the word lifetime, and plot my 2004 third-term bid.

The judges wisely refrained from mentioning another referendum on the same election ballot in California in 1990: Proposition 131 that limited executives to eight years and legislators to 12 years of consecutive service. That one explicitly allowed officeholders to sit out a term and make a comeback bid. California media jumped all over the contrast between the two propositions, with #140 limiting lifetime service and #131 allowing politicians to run again after sitting out a term. Voters adopted #140 by a 52-48 percent margin. They rejected #131 by nearly two-to-one.

The judges then turn their attention to the “narrow” margin by which voters adopted Proposition 140. Yes, the judiciary now gets a chance to throw out an election result that it feels to be uncomfortably close. With incomparable gall, the judges note: The initiative barely passed with an affirmative vote of 52%; a switch of approximately 2% of the votes would have resulted in its defeat. And a little later, it is likely that the number of voters who were not aware of the initiative’s principal effect was sufficiently large that it could have affected the outcome of the election.

By the same logic, Richard Nixon beat Jack Kennedy in 1960—2% of voters were not aware that Nixon was preferable to Kennedy. How about asking the U.S. Senate to take another look at its confirmation of Reinhardt and Fletcher? Did Senators really know at the time how bizarre these guys would turn out to be? Or, because the third judge on the 9th Circuit panel dissented from this decision, we reverse the majority and award victory to the minority’s viewpoint.

You do not have to support term limits to be insulted by the court ruling. You would have to be a fool to use it to contest or defend Michigan’s term limits.

If some judges’ anti-democratic decisions were not so ludicrous, they would be funny. There is, however, nothing funny about lifetime-appointed, self-deluded demigods wrinkling up their noses and telling voters to go to hell.

Copyright © 1997

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