Budget talks continue behind closed doors; income tax looked at

21 March -- The top-level negotiations among the Granholm administration and Democratic and Republican legislative leaders continued today, but news was thin on the ground. Press reports indicate that the largest sticking point so far was the Republican caucus' insistence that no revenue measures be considered for balancing the FY07 budget, and keeping the problem of the current fiscal year separate from plans for next year (fiscal 2008).

Gov. Granholm had originally planned to present another Executive Order (as required by law) to the House and Senate Appropriations committees tomorrow (Thursday), but the committees did not seem to be scheduling times to receive it. The Governor is required to issue an Executive Order to close a budget deficit if revenues fall below expected levels; this order must be approved by the appropriations committees of both chambers. The order Gov. Granholm issued in January, which depended on a new 2% services tax to help close the budget gap, was rejected by the Republican-controlled Senate committee. Most observers are speculating that the Governor will wait until a deal is worked out in the current negotiations before issuing a new EO.

Lastly, there are some indications that Democrats, at least in the House, are interested in looking at changes to the income tax as an alternative to the Governor's services tax. In House Tax Policy committee hearings today - which were intended to focus on possible replacements for the expiring Single Business Tax - Coleman Young II (D-Detroit) asked a Treasury Dept. official if an increase in the income tax could serve as an alternate to the services tax (response: it depends on the Legislature's willingness to raise rates adequately). At the same time, House Appropriations Committee chair George Cushingberry (D-Detroit) - a major advocate of raising new revenues - introduced a bill to increase the state income tax rate from 3.9% to 4.6% for five years (HB 4500, click here for details).

While a change in the income tax does have certain advantages (less complicated, less likely to hit low income families), it would not change funding for school aid. The share of income tax revenues earmarked for school aid is set by a formula that adjusts for the tax rate, so that the fall in the School Aid Fund's share of revenues offsets the increase in the tax rate (see our article here). Higher revenues to the General Fund could open up the possibility of larger transfers to school aid, however; these transfers have withered in recent years.