LWVMI Government Finance Study Information for Local Leagues August 2016

League of Women Voters of Michigan Purpose of Study Update current LWVMI position—Taxation and Budgeting Three components of new study: Understand state revenue sources Examine state expenditures Look at state/local fiscal relationships LWVMI Taxation and Budgeting position was adopted 1963; updated 1971, 1980; Section IV added 1995

League of Women Voters of Michigan LWVMI Taxation and Budgeting Position Parts of current position to be retained State-local tax structure: adequate, equitable, flexible, moderately progressive Rely on three broad based taxes—sales, income, property; rely more on income Statewide use of scientific and uniform assessment methods and procedures; reappraise property exemptions periodically State sales tax should exempt food and drugs Graduated income tax rate Other revenue sources: nuisance taxes, user fees Endorse tax base sharing

Taxation and Budgeting Position (cont.) League of Women Voters of Michigan Taxation and Budgeting Position (cont.) Broad, fundamental taxing powers for legislature Legislature should delegate to local units alternatives to property tax State-collected revenues should be distributed on basis of need, minimum level of local support, and cost of needed services

Michigan’s $53.7 Billion Budget League of Women Voters of Michigan Michigan’s $53.7 Billion Budget Funds state programs and services; adopted annually by legislature, signed by governor Must be balanced each year Three major sources of revenue: Sales tax Income tax Federal funds Three divisions of total: General Fund State School Aid Fund Restricted monies $53.7 Billion is the budget for 2015-16. The following slides will provide more explanation

Michigan’s Major Revenue Sources League of Women Voters of Michigan Michigan’s Major Revenue Sources These are the major revenue sources for the state budget. The state of Michigan levies a total of 38 taxes for its own use. This chart shows the broad sources of revenue. The portion designated “CIT/Ins/MBT” comes from the Corporate Income Tax (instituted in 20ll), tax on insurance, and some transitional revenue from the former Michigan Business Tax (phased out, starting in 2012). The “other” includes revenues from an assortment of taxes such as liquor and cigarette taxes, fuel taxes, unemployment insurance tax, mineral severance tax, education property tax etc. FY 2016 Total Revenue Estimated at $53.7 Billion

General Fund Expenditures as % of Total League of Women Voters of Michigan General Fund Expenditures as % of Total The pie chart shows the divisions of the state budget, including the GF/GP (General Fund/General Purpose) Budget. The “other state restricted funds” includes transportation funds. Medicaid makes up the largest share of the Federal Funds. The chart on the right shows the General Fund unrestricted expenditures. This represents only 19 percent of the total budget and it is the only portion of the total state budget where the legislature makes decisions about spending. The Health and Human Services portion includes the state match on Medicaid. The “other GF/GP” portion represents many of the services of state government: Secretary of State, Treasury, Natural Resources, Agriculture, State Police etc.

School Aid Fund Revenue Sources League of Women Voters of Michigan School Aid Fund Revenue Sources Real Estate Transfer 2% The FY 2015-16 Total School Aid Fund (SAF) budget was $12,131.6 Million. The sales tax portion includes 100% of the proceeds from the 2% sales tax rate plus 60% of the gross proceeds from the 4% rate and 23.8% of gross collections (before refunds) of the personal income tax. The 2% of the use tax rate is also earmarked in the constitution for the SAF. The State Education Tax is the 6 mill statewide property tax designated for the SAF. All of the profits from the lottery are earmarked in the constitution for the SAF. In FY2015, the lottery contributed $795 million to SAF. Sixty-one percent of the lottery proceeds are used for prizes, 29% for the lottery, 7% for retail contracts. Portions of the tobacco taxes are earmarked for the SAF. The “other” category includes designated revenues from the casino tax and the industrial facilities tax.

Michigan’s Current State Budget League of Women Voters of Michigan Michigan’s Current State Budget Adjusted gross means total state appropriations from all fund sources, but excludes funds appropriated through interdepartmental grants. The Health and Human Services category includes community and mental health and Medicaid. Public Safety would be corrections, criminal justice etc. Education includes K-12, community colleges, universities. Government Services would be Secretary of State, Treasury, revenue sharing to local governments etc. Jobs would be economic development programs. Reserves includes the money put in the Budget Stabilization Fund for economic downturns.

Changes in State Funding FY 2001 – FY 2015 League of Women Voters of Michigan Changes in State Funding FY 2001 – FY 2015 Program % Change % Change Adjusted for Inflation Health & Human Services 16.1% 10.7% Corrections 21.0% - 9.8% Revenue Sharing -21.0% -41.1% Higher Education -31.0% - 48.5% School Aid Fund 10.6% -17.6% Federal Aid 101.4% 50.0% Question 1--This chart shows the changes in funding for selected general fund expenditures. The decreases in funding for Revenue Sharing and Higher Education are especially notable. It also shows the increase in federal aid.

Recent Changes in State Tax Policies League of Women Voters of Michigan Recent Changes in State Tax Policies Eliminated many personal income tax deductions Instituted tax on pensions Reduced corporate income tax Eliminated personal property tax on businesses Increased transportation taxes, fees; earmarked future General Fund monies for transportation

Tax Relief for Low-Income and Seniors League of Women Voters of Michigan Tax Relief for Low-Income and Seniors Homestead Property Tax Credit For seniors and veterans; tax credits on rental property; home heating credit Earned Income Tax Credit For working families, individuals. Question 2 and 3

League of Women Voters of Michigan Sales Tax 6% rate; constitutional amendment needed to change rate Legislature can expand base to include services A tax on services could generate more revenue, reflecting the growing service economy. Only 4 states tax most of the 164 potential service categories. Michigan and many other states have tried unsuccessfully to tax services Question 4—A FY13 report estimated that Michigan’s exemption on services cost the state $10.4 Billion annually. The four states that tax most services are Hawaii, South Dakota, New Mexico and West Virginia. Michigan taxes 27 services—telecommunications, hotels and motels etc. Michigan approved a measure in 2007 to tax certain services. It was repealed the day it took effect

League of Women Voters of Michigan “Nuisance Taxes” Tax Last increase 2004 Tobacco products 1983 Liquor mark-up 1980 Beer, wine, mixed spirits Question 5—See the Outline of Michigan Taxes, Citizen’s Research Council of Michigan, 2016, for more details on these taxes.

League of Women Voters of Michigan Business Taxes Michigan’s Corporate Income Tax--2011 6% on corporate income 1.25% on insurance premiums 0.29% franchise tax on financial institutions Applies to entities doing business in Michigan--gross receipts more than $350,000 Net business taxes were 15% of total state revenue in 1991; 4.8% in 2013; 1% in 2015 Questions 6 and 7--This slide refers to specific business taxes—businesses do pay sales and property taxes. The decline in percentages of total state revenue show the changes in state tax policy with the adoption of the Corporate Income Tax in 2011.

League of Women Voters of Michigan Federal Funds Federal funds make up 43% of the total revenue Designated for specific purposes by state or federal law or by state constitution for education, transportation, Medicaid, etc. Question 8--

League of Women Voters of Michigan Fees, fines, permits Increasingly important revenue source for state, local governments Can disproportionately impact low-income residents Michigan Supreme Court (1998, Bot v. City of Lansing)--criteria for fee vs. tax Must serve a regulatory purpose, not revenue-raising Must be proportionate to necessary cost of services or commodity; imposed on those benefitting Voluntary Question 9--National Conference of State Legislators says that user fees provide, on average, about 17% of state revenue

Transportation Funding Per Capita Highway Expenditures, 2013 State Expend Per Capita Rank Pennsylvania $558 19 Wisconsin $535 23 Minnesota $524 25 Ohio $512 26 Illinois $443 37 New York $432 39 Indiana $430 40 Michigan $305 50 United States $584 Questions 10-11

League of Women Voters of Michigan 2015 Road Funding Law League of Women Voters of Michigan Jan. 2017--Taxes on gasoline, diesel fuel— up from 15 and 19 cents to 26.3 cents 2017--Registration fees up by 20%--higher fees for heavier vehicles, plug-ins and hybrids 2017--Expand Homestead Property Tax Credit to offset higher transportation taxes. 2018--Portion of state income tax revenue earmarked for Michigan Transportation Fund 2022--Gasoline and diesel fuel taxes indexed to inflation Questions 10-11--Public Acts 174-180, signed November 2015. Income tax earmarking: FY2018-19--$150 million, FY 2019-20--$325 million, FY 2020-21--$600 million and every year thereafter.

League of Women Voters of Michigan State Budget Process Governor’s budget introduced Budget bills sent to appropriations subcommittees in both houses After approval in one house, bills move to other house—same process Early Feb. . Apr.-May Question 14-15—The State Budget Office has more detailed information on the budget process. http://www.michigan.gov/budget

League of Women Voters of Michigan Budget Process—cont. Late May Early June Late June October 1 Budget targets agreed to; bills pass 2nd house Bills sent to conference committee Final budget passage; Gov. signs—can line-item veto Beginning of new fiscal year

Concerns--State Budget Process League of Women Voters of Michigan Concerns--State Budget Process Legislative committees playing less of an oversight role Governor’s budget: less detailed; departmental budgets grouped together Diminished role of citizens’ committees Fewer opportunities for public comment Adding an appropriation to controversial legislation—can’t be subject to a referendum Questions 13-15--These are some of the concerns raised by observers of the legislative process. For example, an appropriation was added to the bill that eliminates straight party voting, meaning that it can’t be subject to a citizen’s petition drive to place a referendum on the ballot.

League of Women Voters of Michigan Tax expenditures Includes tax exemptions, credits, deductions, exclusions, deferrals, preferential taxes $14 billion in FY2000, $27 billion in FY2016 Can benefit targeted taxpayers Difficult to quantify or eliminate Question 17—Tax expenditures are government spending programs administered through the tax code. They can be an incentive to change social or economic behavior. Examples of tax expenditures include: the Homestead Exemption for Farm Property, Brownfield Redevelopment Credit, a Small Brewers’ Tax Credit, a Broadband Investment Credit, and the MEGA Battery Credit. The Michigan Economic Growth Authority (MEGA) provides numerous credits but the battery credit is the largest.

Issues Facing Local Governments League of Women Voters of Michigan Issues Facing Local Governments 1,773 units of Michigan local government—vary greatly in size, service delivery Primary revenue source—property tax. Taxable value of property varies greatly. Limited options for locals to raise revenue. Tax limitations (Headlee, etc.) State statutory revenue sharing--vulnerable to economic cycles and legislative priorities. Questions 19-20--The legislature appropriates funds each year for statutory revenue sharing. In an economic downturn, that is one of the budget items that can be cut.

League of Women Voters of Michigan State Revenue Sharing Two types: Constitutional: 15% of sales tax (4% rate) goes to cities, villages, townships (CVTs). Remaining 2% sales tax rate goes to State School Aid Fund. Statutory: Distributed by law, paid to eligible CVTs and counties. Money comes from 21.3% of 4% rate of sales tax. Questions 19-20—The constitutional revenue sharing is distributed on a per capita basis, based on census data. The statutory revenue sharing is distributed by formula and the legislature decides, based on the availability of money. The constitutional revenue sharing is also subject to the state of the economy—in an economic downturn, the sales tax revenue is reduced and so is the money available for the constitutional revenue sharing.

Total Revenue Sharing Payments to Cities, Villages, and Townships League of Women Voters of Michigan Total Revenue Sharing Payments to Cities, Villages, and Townships Questions 19-20—This chart from the Michigan Department of Treasury shows the pattern of revenue sharing allocations in recent years.

Property Taxes and Local Governments League of Women Voters of Michigan Property Taxes and Local Governments Primary revenue source for cities, townships, villages, counties Other sources: state and federal governments, fees and fines, local taxes Constitutional limitations on property tax Headlee, tax allocation) Numerous credits and exemptions for certain property taxpayers; also to encourage economic development Questions 21-22--Exemptions for property owned by nonprofit religious, charitable or educational organizations. There are limited options for local governments in raising revenues. Only certain cities levy an income tax and local units are prohibited from levying a sales tax.

LWVMI Government Finance Study Committee Members League of Women Voters of Michigan LWVMI Government Finance Study Committee Members Susan Smith, chair Betsy Cushman Patience Drake Rosenbaum Connie Frey Judy Karandjeff Beth Moore Martha Sloan