Monday, February 21, 2011

You Didn't Expect Him To Keep His Promises?

Governor Rick Snyder ran for office on a platform of offering a massive tax cut to Michigan businesses while otherwise slashing government spending in order to balance the state's budget, which faced a massive shortfall even before business tax reform. And now he's doing what he promised. Is the surprise that a politician is keeping his promises?

I was discussing Snyder after the recent election with somebody who was concerned about the Republican monopoly on the state's three branches of government. I argued that the Republicans have no impediments to implementing their reforms and thus can be fairly judged by whether or note the reforms they promise will turn around the state's persistent downward slide in fact work. If they bring about disaster for the state, at least in theory they should face disaster in the next election. The reply, "But what if they succeed?" Well, it's hard to argue with success.


Right now a lot of people are upset about Snyder's proposed budget. You see, it turns out that when you have a massive budget deficit, add a major tax cut to the mix and rule out any tax increases... except for senior citizens who receive pensions (they're probably icky people anyway, like retired union workers, teachers and public employees)... you have to do a lot of cutting. And people who believed that they were immune from budget cuts because it's only other people who benefit from government spending are finding out, in a hurry, that they in fact did receive benefit.

If Snyder's business tax cuts inspire more businesses to locate in Michigan or help existing businesses grow, that would be good news for the state. One of the things that has been lost in the avalanche of analysis over the federal deficit is how much of the deficit is attributable to the recession. How much better off we would be if and when the economy rebounds, and how much better it is to close a budget gap through growth than through cuts - how ill-considered cuts can actually worsen the employment situation and prolong a recession.

But if that business income doesn't start pouring into Michigan, I'm not sure that low corporate taxes will do much for the state. If you slash spending on education, while school districts remain hampered in their ability to raise money through local taxes, you will see deterioration of schools: physical deterioration, a narrowed curriculum and a greater difficulty finding and retaining teachers. If you cut state support for colleges, you'll see similar things happen in higher education - and Michigan, which already bleeds talent to other states, will see more of its capable high school seniors leave the state before college as opposed to after graduating. Large businesses looking to enter a state can be expected to consider if the state will be attractive to employees. Many employees will tolerate a Michigan winter, but how many will also tolerate crappy schools? Despite a substantially higher cost of living, how many businesses will choose to locate in Snyder's hometown of Ann Arbor, as opposed to, let's say, Willow Run schools? Similarly, what of road conditions, availability of skilled workers, public spaces and cultural opportunities?

Snyder also claims to want an even playing field. That's how he justifies the proposal for taxing pensions - to quote Snyder's Chief of Staff, "A young, unmarried mother of two gets taxed on her earnings. Why should any other group be exempted?" The same "fairness"1 logic, apparently, is being used to justify cutting tax credits for the film industry. Why should the state issue tax credits that favor one type of business over another? All business are created equal, right?

Except, of course, some businesses aren't like the others. A film production company may look more ore less like any other company, but each film it produces is a creature unto itself. I read an interview with a producer who made a joke to the effect that every script he reads "Fade in: A tax incentive state." Because that's the number one consideration when choosing where to shoot a film. It may not be "fair" but as a businessman Snyder should be fully aware by now that, even though it's been very good to him, life isn't fair. Film productions are like tourists, and if two hotels look pretty much the same they're going to pick the one that costs less.

Snyder shouldn't attempt to be cagey about it - he should be prepared to admit, flat-out, that he knows his budget proposal is likely to kill Michigan's film industry. I personally don't want to hear that we have to kill a nascent industry because it's "unfair" that the state is subsidizing its development. I want to hear the cost-benefit analysis of how a mature film industry will benefit the state, or how due to high subsidies the state will be better off even if it throws away the jobs and spending associated with film productions.

Snyder has the idea that tax credits should be replaced with "incentive grants" that can be evaluated on a year-to-year basis, and in many ways such an approach is superior to making optimistic projections about tax credits in order to get them into the budget with little subsequent regard for whether they work. But conventional brick-and-mortar businesses aren't simply looking at the coming year, and transient businesses like major film productions aren't likely to be choosing a shooting location at the last minute, so that approach can actually create considerable uncertainty. Besides, whether you offer tax credits or "incentive grants", you won't be offering them to every business so the "playing field" remains unequal. From a bean counting perspective this may make sense, and perhaps some inefficient grants will be ended as a result of annual review, but from any other perspective the proposed policy seems as bad as or worse than the status quo.

As I initially suggested, though, this is what Snyder promised. Nobody who voted for him should be complaining about getting exactly what they ordered. The shame is that we don't have a time machine, as I suspect the better time for Snyder to have been governor would have been during Engler's years, when the state was put on the receiving end of tax "reforms" that helped lock in place its ongoing decline. I don't know that Snyder would have done better, but if there is something to this "put a businessman in charge" thing, we at least had some room to play around with the budget without wreaking havoc.

1. Seriously, fairness? When did Snyder become a Democrat?

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