Wednesday, January 24, 2007

More On Michigan Service Tax Proposal


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Michigan Service Tax Concerns

Michigan Service Tax

The day after newspapers' headlines announced the consideration by the State of Michigan for a new tax on services, Pfizer, a huge pharmaceutical firm, announced that it was closing its Michigan research facility in Ann Arbor. 2,400 employees would be either laid off or moved to other Pfizer locations outside of Michigan.

This was stunningly bad news on the heels of massive job losses in the automotive industry. The tax base was taking yet another hit.

I had written to the Citizens Research Council of Michigan that had been involved in the budget crisis analysis and had been part of the process that came up with the notion of the service tax.
A simpler and more manageable approach would be a one-time, two-year increase in the sales and income taxes by one percentage point each. The sales tax increase could be effective by July 1 and the income tax increase effective January 1, 2008. While these might not be popular, they could be implemented with no additional staffing or changes in business burdens.

This two-year period would give the State sufficient time to develop and implement a restructuring plan similar to the efforts by General Motors and Ford Motor Company. The State cannot afford to be a generous "sugar daddy" under current conditions; especially when it does nothing except redistribute incomes while incomes in total are declining.
I'm not a fan of increased taxes, but the economic downward spiral has left the state budget in disarray... primarily because the state government has not been willing to take the measures to "resize" in the way that businesses have had to.

I received a reasonable and measured response:
There is no question that, if a sales tax on services were adopted, certain firms would experience an increase in administrative costs associated with reporting and collecting such a tax. Many businesses that primarily sell services, however, also sell goods, so their increased costs would be negligible because they are already set up to collect a sales tax. The state would also experience marginal increases in administration, but it would be a tiny fraction of the revenue involved.

There is no such thing as a perfect tax system and any tax will create economic problems. The best a state can do is to attempt to maintain a tax system that treats all sectors of the economy equitably, so that each sector pulls its weight in supporting public services.

With respect to your specific proposal regarding temporary increases in the sales tax and the income tax, I have a couple of comments. First, the Michigan Constitution would have to be amended for the current sales tax on tangible personal property to be increased. It is capped at a 6 percent rate and it could not be increased until the voters approved such an increase and voter approval of tax increases has been rare. Even Proposal A in 1994, which produced the current 6 percent rate, brought about a large decrease in the property tax in exchange.
I'm not so sure that adding a new tax system would have "negligible" impact on business, but given that the state has certain limits with regard to raising taxes on sales and property, I can only say this:
It's time for the state to do the same with less or simply do less. Increasing taxes will only exacerbate a bad economic situation for residents and businesses. Options will vary depending on the expenditures. They include:
  1. reducing operating and staffing budgets
  2. eliminating operating and staffing budgets
  3. eliminating new projects
  4. extending timelines for existing projects (such as road construction)
  5. privatizing some functions where feasible
The usual response is "we can't" and the appropriate response is "you must."
The state cannot continue to pretend that there is this vast reservoir of potential tax revenue in a state where businesses are retrenching or relocating elsewhere, where unemployment levels are high while employment opportunities are dwindling, and where housing values are falling rapidly and many owners are facing the loss of their homes.

My oldest son commented that if you put Michigan's conditions into one of those "Sim" games, you get a collapse. Hopefully, the reality won't end up being that dire.

It is time for the state to recognize that "business as usual" in no longer feasible.

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There is always an easy solution to every human problem—neat, plausible, and wrong.
Henry Louis Mencken (1880–1956)
“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
... and one could add "not all human problems really are."
It was beautiful and simple, as truly great swindles are.
- O. Henry
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Tracking Interest Rates

Tracking Interest Rates


SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)