1. LWVMI Government Finance Study
Information for Local Leagues
August 2016

2. 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

3. 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

4. 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

5. 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 The following slides will provide more explanation

6. 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

7. 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.

8. School Aid Fund Revenue Sources
League of Women Voters of Michigan
School Aid Fund Revenue Sources
Real Estate Transfer 2%
The FY 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.

9. 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.

10. 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 % %
Revenue Sharing % %
Higher Education % %
School Aid Fund % %
Federal Aid % 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.

11. 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

12. 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

13. 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

14. 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.

15. 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.

16. 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--

17. 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

18. Transportation Funding Per Capita Highway Expenditures, 2013
State Expend Per Capita Rank Pennsylvania $ Wisconsin $ Minnesota $ Ohio $ Illinois $ New York $ Indiana $ Michigan $ United States $584
Questions 10-11

19. League of Women Voters of Michigan
2015 Road Funding Law
League of Women Voters of Michigan
Jan 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 Public Acts , signed November Income tax earmarking: FY $150 million, FY $325 million, FY $600 million and every year thereafter.

20. 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.

21. 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

22. 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 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.

23. 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.

24. 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 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.

25. 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.

26. 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.

27. 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 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.

28. 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