Alice in budgetland

In a turn of events Lewis Carroll would appreciate, America, over the course of a decade, has gone through the looking glass and entered a fiscal Wonderland.

Liberals, not long ago derided by conservatives as tax-and-spenders, are excoriating President George W. Bush for proposing a budget that calls for $300 billion in deficit spending (a figure that doesn’t include the cost of a war with Iraq), with barrels more red ink on the horizon for years to come.

Meanwhile, at the state level, advocates of conservative economic policy are calling Democratic Gov. Jennifer Granholm a hero for refusing to propose raising taxes in the face of a budget shortfall of $1.7 billion.

Curious, indeed.

“If you were dropped here from another planet, and didn’t know about some of the changes that had taken place over the past 10 years, you wouldn’t know who was on what side,” says James Hines, a professor of economics and public policy at the University of Michigan.

Here in Detroit, the budgetary Mad Hatter is throwing a different sort of tea party, one where Mayor Kwame Kilpatrick is talking about an inherited budget deficit that has more than a few people confused. At the same time, some are expressing fears that Motown’s near future includes a staggering budget crisis.

Detroit’s auditor general, Joe Harris, was surprised last month when Kilpatrick said during a speech that he had inherited a deficit approaching $170 million.

What the mayor calls his “inherited” deficit is really a two-year total, not the one-time hit it sounds like. After Kilpatrick took office in January 2002, his administration faced an actual shortfall of $75 million for the budget year ending that June, according to Finance Director Sean Werdlow.

On top of that, the city was going to take in $94 million less in fiscal 2002-2003, explains Werdlow.

Kilpatrick spliced the two numbers together.

“How is it a deficit when you haven’t even submitted a spending plan?” chides Harris.

But that’s a quibble. And even Harris gives the mayor praise for dealing with the problem without resorting to widespread layoffs.

What’s truly significant, warns Harris, is a budget disaster to come.

Although there are several factors, the primary culprit is an income tax decrease forced on Detroit by the Engler administration and a Republican Legislature. In a return for freezing state revenue-sharing funds (instead of reducing them, as some Republicans urged), Detroit in 1999 agreed to reduce the city’s income tax on residents from 3 percent to 2 percent over a 10-year period. In addition, income tax on nonresident workers is dipping from 1.5 to 1 percent.

The rationale was that lower tax rates would bring both residents and business to the city, resulting in overall revenue gains. It’s basic supply-side economics: Cut taxes to stimulate the economy.

But the promise of growth is just that, while the revenue loss is a certainty: With each incremental reduction, the city takes in $13 million to $14 million less a year. Moreover, the decreases are cumulative; after 10 years, Detroit’s revenue will be $130 million to $140 million less per year.

Harris is still analyzing the impact of this cut coupled with rising city health insurance costs and a pension system no longer reaping the benefits of a booming stock market, but it’s not an exaggeration to call the situation a “crisis.”

Werdlow agrees that a massive budget shortfall looms. Consequently, he says, the city must “completely re-engineer how it delivers services.” The administration is still figuring out exactly what that means, but Werdlow’s basic message is that traditional functions preformed by the city can no longer be guaranteed; everything from privatization of some services to the elimination of others is being considered.

Adding to the dilemma is that even with a Democrat in the governor’s office, Detroit doesn’t have the option of looking to Lansing for a cash fix in the immediate future.

Just the opposite. Werdlow expects state funding for the city will be reduced anywhere from $10 million to $30 million during the coming fiscal year.

State of the state

For a variety of reasons, America’s economic engine has been, to put it euphemistically, “sluggish” for two years. What that means specifically for Michigan was laid out by Gov. Granholm in her first State of the State address last week. It isn’t a pretty picture.

Granholm predicts that $1.7 billion must be cut from the state’s 2003-04 spending plan.

How we got into this fix is clear, she explained: “We cut taxes but not spending, and we continue to spend more than we take in.”

Specifics of Granholm’s response will be revealed in March. But she indicated the budget will be balanced through spending cuts, not tax increases. That approach has cheered fiscal conservatives like the folks at the Mackinac Center for Public Policy.

“Gov. Granholm should be heartily commended for saying loudly and strongly she will not raise taxes,” says Tom Lehman, executive vice president of the Midland think tank, which promotes free-market economic policy.

Lehman contends that the worst thing to do now is raise taxes.

“That would send the signal to businesses not to locate in Michigan,” he says.

Not everyone agrees.

“The most obvious thing to do,” says U-M’s Hines, “is to pursue a combination of spending cuts and tax increases.”

That’s the approach in many states, he says. And the fact that Granholm is promising not to raise taxes means she might have to become a bit “sneaky.” For example, if scheduled tax cuts are delayed, Granholm could reduce the deficit without, strictly speaking, raising taxes.

And, says Hines, things could be worse. At least we’re not California, which must deal with a $34 billion shortfall over the next 17 months. Nationwide, 38 states either cut spending in 2002, are projected to cut spending in 2003, or both, according to the Center on Budget and Policy Priorities. Total budget shortfalls in the states for the coming fiscal year are $70 billion to $85 billion, reports the nonprofit.

Michigan Democratic Senate Leader Buzz Thomas describes the budget crunch as an opportunity to propose “regional fixes” that will make government more efficient. One example he cites is legislation — vetoed by Engler in December but again before lawmakers — that would create a transportation authority for southeast Michigan.

Thomas’s optimism fades, however, when asked about the budgetary course charted by Bush and the GOP Congress. “It makes you shudder,” he says.

Bleeding red ink

As the White House points out, our economic turmoil has multiple causes, including the effects of the Sept. 11 terrorist attacks and the resulting war on terrorism. And even his harshest critics can’t deny that Bush took office just as the incredible boom of the 1990s was ending.

What’s a matter of hot dispute is Bush’s policy of continuing to advocate tax cuts (which provide disproportionate benefit to the very wealthy) while proposing a budget that calls for more than $300 billion in deficit spending next year. And that’s if we don’t go to war.

U.S. Sen. Debbie Stabenow, D-Lansing, fears a return to Reaganomics.

During the supply-side, trickle-down days of the ’80s, she said during a recent congressional debate, “we saw massive increases in national debt” and an “explosion on interest rates.”

The ’90s were a different story.

“In 1997 I was in the House when we balanced the budget for the first time in 30 years. … Now we’re back to policies that look more like the ’80s.”

Forget tax-and-spend liberals. Bill Clinton and the Democratic Leadership Council pushed that breed aside. What we’re seeing revived are the tax cut-and-spend conservatives.

“At some point, you will have to deal with this debt, and to do that you either have to raises taxes or cut spending,” says Hines.

Even in Wonderland, the bill will eventually come due.

Curt Guyette is the Metro Times news editor. E-mail [email protected]