As Michigan, almost certainly, faces its most serious economic challenge since the Great Depression, it is worth recalling how Michigan has dealt with previous economic downturns.

What follows is a rerun of a post I did in 2012 entitled Jim Blanchard, Jobs and Taxes. It has been lightly edited and the data brought up to date.

As many of you know I worked for Governor Blanchard, I thought then – and even more so now – he was real good for the people of Michigan. His administration was about one thing: jobs. His record is exemplary.

What follows are the facts on the economic results during his eight years in office and the fiscal policies he put in place to grow the Michigan economy.

First, Governor Blanchard inherited a Michigan economy in worse shape – one can make a strong case far worse shape – than Governor Snyder. We have short memories. The story we have told ourselves over and over again that Governor Snyder inherited the worse economy in Michigan since the Great Depression is not true.

Jim Blanchard took office in January 1983. The month before (December, 1982) the state’s unemployment rate was 16.8%. And going up. That month was the peak unemployment rate during the serve downturn of the early Eighties. For all of 1982 the unemployment rate was 15.6%.

Rick Snyder took office in January 2011. The month before (December, 2010) the state’s unemployment rate was 11.2%. And going down. The peak Michigan unemployment rate during the Great Recession was 14.2% in August, 2009. When Governor Snyder took office the Michigan unemployment rate had been falling for 16 consecutive months. For all of 2010 the unemployment rate was 12.7%.

Lets turn our attention to what Governor Blanchard did to grow the Michigan economy and what the results were. First and foremost Jim Blanchard raised taxes. He cut spending as well to deal with a huge budget deficit he inherited along with a horrible economy. Governor Blanchard defied the conventional wisdom of his day – and far more so today – that believed low tax states had the best economies and, even more so, you never raise taxes in an economic downturn.

The income tax went from 4.6% to 6.35%. You read that right: 6.35%. Only one Republican in the state House and Senate – Senator Harry DeMaso – voted for the tax increase. The rest predicted economic ruin. The income tax rate was 6.35% for calendar year 1983 and through August, 1984. When it was reduced to 5.35% through March 1986. When it went back to 4.6% for the remainder of the Blanchard Administration. (The income tax history comes from the Citizens Research Council.)

This was a period not only of higher income tax rates, but the dreaded Single Business Tax – the so-called job killer – was in full force with a rate of 2.35% for the entire Blanchard Administration.

Economic ruin? Hardly!

During the eight years of the Blanchard Administration employment in Michigan went from 3,193,000 in 1982 (the year before he took office) to 3,946,000 in 1990 (the year he left office). An increase of 753,000 jobs. The biggest annual job gains occurred in the three years when the higher income tax rates were in full effect: 1983-5. Job growth in those three years was from 3,193,000 to 3,561,000. An increase of 368,000, an average of almost 123,00 per year. Over the eight years the state’s annual average unemployment rate went from 15.6% in 1982 to 7.7% in 1990.

As the table below makes clear the Blanchard years saw greater growth in payroll jobs than either the Engler years or the Snyder years. Michigan governors who cut taxes as the center piece of their economic growth strategies.

The first Blanchard Administration––when the highest income tax in Michigan history was in effect––had the largest gain in payroll jobs. The annual average payroll job growth in the Blanchard years was 94,000; in the Engler years 45,000, and in the Snyder years 69,000.

So much for you can’t raise taxes and get job and economic growth!

Having said that I don’t believe that the Blanchard tax increases were a major reason for Michigan’s growth in the Eighties. Anymore than I believe the Engler tax cuts were a major reason for Michigan’s economic growth in the Nineties. Or the Snyder business tax cuts had much of anything to do with the growth we experienced in the 2010s.

The evidence is overwhelming that what drives Michigan’s economy is the national economy and, most importantly, the domestic auto industry. State policy is at best a weak lever in driving the economy.

But what the Blanchard years demonstrate is that you can raise taxes and have strong growth. When you both raise taxes and control spending during a severe downturn you can both grow the economy and improve the standard of living and quality of life of all Michiganders by having adequate funds for a decent safety net and public investments in education, quality of place and infrastructure.

The post The Blanchard recipe for economic revival appeared first on Michigan Future Inc..

We have long believed, and the data show, that the states and regions with the most prosperous economies––the broadest middle class––will be those who make pubic investments in the assets needed to prepare, retain and attract talent. That ultimately it is talent concentrations, not low taxes, that matter most to economic prosperity. And it is increasingly clear to us that public investments are part of what is needed to broadly share prosperity.

So yes, to implement our recommendations will almost certainly require state taxes/revenue to be higher than it is today. But we think that what that revenue can purchase has the best chance of obtaining a higher standard of living for all Michiganders.

That said raising taxes is not our goal. It is a means to making the kind of public investments we think are essential to the goal of good-paying careers for all Michiganders. Getting to the goal is what is important. We are open to any and all ideas on how achieve the goal.

What about low taxes as a path to prosperity? As we documented in our State Policies Matter report, Minnesota has the Great Lakes best economic outcomes and the highest taxes in the Great Lakes. Minnesota ranks 46th in the latest Tax Foundation state business tax climate index. Michigan ranks 12th. High taxes have not prevented Minnesota from having the economic outcomes all Michiganders want: third in the proportion of adults who work, 14th in per capita income and eighth in employment earnings per capita. Michigan on those measures ranks 40th, 32nd and 36th. One can make a strong case that the increased public investments those higher taxes enabled is a major reason for Minnesota being the most prosperous Great Lakes state.

Michigan’s experience over the last twenty years provides ample evidence that cutting taxes is not a way to increase state prosperity. In 1993 Michigan taxes (state and local combined) per capita were three percent above the national average and the state’s per capita income was three percent below the national average. In 2004 the state’s taxes per capita had fallen below the national average by three percent but we had fallen even farther behind the nation in per capita income, trailing the nation by six percent. And in 2013 (the last year for which tax data is available) the state was twelve percent below the national average in taxes per capita and twelve percent below the national average in per capita income. (The tax data comes from a 2013 Tax Revenue Comparisons: Michigan and the U.S. Average report by the Citizens Research Council.)

The places with the strongest economies are those that combine high quality education systems and high quality of place that retains and attracts mobile talent. Both education and placemaking require public investments. These types of public investments, paid for by our taxes, is the state policy playbook most likely to return Michigan to high prosperity, creating an economy with lots of good-paying jobs. Add to that making shared prosperity a priority and it gives the state the best chance of getting Michigan on the path to good-paying careers for all.

By adopting policies that transforms education from birth through retirement and investing in it the state can best help all Michiganders have the skills necessary to have good-paying, forty-year careers. By creating regions across the state with the quality of place where talent from across the planet wants to live and work the state can attract high-wage employers and entrepreneurs that start high-wage businesses. And by establishing and investing in policies that help those not in high-wage work work more and earn more we can share prosperity widely. This is the recipe for a 21st Century Michigan where each of us can pay the bills, save for our retirement and the kids’ education and pass on a better opportunity to the next generation.

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When it comes to determining which states are prosperous four year degree attainment is highly predictive of which states have high per capita income. As the table below depicts there are three states in the top 15 in per capita income that are energy-driven. Of the other 12 all are in the top 15 in the proportion of adults with a four year degree or more.

Source: Bureau of Economic Analysis, REIS. American Community Survey, Decennal Census. Accessed February 17, 2017.

Michigan is 32nd in per capita income and 32nd is four year degree attainment. If the state doesn’t substantially increase the proportion of adults with a four year degree or more we almost certainly will be a low-prosperity state long term. End of story!

What about low taxes as a path to prosperity. As we documented in our State Policies Matter report, Minnesota has the Great Lakes best economic outcomes and the highest taxes in the Great Lakes. They are third in the proportion of adults who work, 14th in per capita income and eighth in employment earnings (wages and employer paid benefits) per capita. Michigan on those measures ranks 40th, 32nd and 36th.

Michigan’s experience over the last twenty years provides ample evidence that cutting taxes is not a way to increase state prosperity. In 1993 Michigan taxes (state and local combined) per capita were three percent above the national average and the state’s per capita income was three percent below the national average. In 2004 the state’s taxes per capita had fallen below the national average by three percent but we had fallen even further behind the nation in per capita income, trailing the nation by six percent. And in 2013 (the last year for which tax data is available) the state was twelve percent below the national average in taxes per capita and twelve percent below the national average in per capita income. (The tax data comes from a  Citizens Research Council report.)

So as our tax burden has gotten lower and lower Michigan has gotten poorer and poorer compared to the nation.

Despite all evidence to the contrary, Michigan continues to have a tax-cut-driven economic development strategy. It hasn’t worked in the past, it almost certainly won’t work in the future. The new reality is that this is a human-capital-driven economy. Employers––particularly high wage employers––are locating where talent is concentrated. Its the asset that matters most to them. That means rather than low taxes, Michigan’s economic success strategy has to be preparing, retaining and attracting talent––particularly those with a four year degree or more.

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Despite the overwhelming evidence that cutting taxes doesn’t grow state economies, it seems like the Michigan legislature is hellbent on replicating the failed Kansas playbook. This time by eliminating the state income tax. Not smart!

Let’s quickly review what has happened in Kansas. This comes from a Bloomberg column by Barry Ritholtz, founder of Ritholtz Wealth Management. He writes:

In May 2012, he (Brownback) signed the bill into law. It initially lowered the top personal tax rate to 4.9 percent (it’s now 4.6 percent) from 6.45 percent, but most importantly, it eliminated income tax on profits for owners of limited liability companies, subchapter S corporations and sole proprietorships.

Give Brownback credit for passing the exact legislation he had promised.

The results, however, haven’t been very encouraging. Indeed, since the tax cuts were passed, almost nothing has gone as promised in Kansas. Revenue plunged and the state resorted to pulling money out of its rainy-day fund to plug the holes. A number of critical services, including for road maintenance and schools, were cut. The business climate has been poor, and the economy has lagged behind neighboring states as well as the rest of the country.

… The math is simple: Tax cuts tend to reduce revenue, in Kansas’ case much more than expected. To change people’s behavior requires more substantial incentives than changing things by a few percentage points. The reduced revenue led to spending cuts that lowered quality of life. In response, rising numbers of people and companies have left the state.

Ritzholtz details the economic underperformance of Kansas since the tax cuts:

• Kansas’ gross state product fell behind the six-state region and the nation for the third straight year. (Kansas’ gross state product grew at a faster rate when compared to the region and the nation in three of the five years before Brownback took office in 2011).
• Private industry wages in Kansas grew at a slower pace last year than they did in the region and the U.S. — as they did during the past five years.
• The number of private business establishments in Kansas trailed both the region and the nation for the last year, again continuing a five-year trend

Why did the experiment fail? As Ritzholtz explains: “Alas, reality trumps theory. As we have seen almost every time this thesis has been put into practice, it fails. The tax cuts don’t magically kick the economy into higher gear and the government ends up short of money. Remember former President George W. Bush and his tax cuts? Same deal. … The bottom line: The results from the economic laboratory known as Kansas are in. Supply side theory — and Kansans — lost.” (Emphasis added.)

At the same time that Kansas was slashing taxes, California and Minnesota were raising theirs. In both cases, mainly higher income taxes on households with the highest incomes. What the tax cutters repeatedly tell us is the worse thing you can do to a state economy. Think again!

California arguably has had the best recovery of any state since the end of the Great Recession. The Washington Post reported:

California’s economy grew by 4.1 percent in 2015, according to new numbers from the Bureau of Economic Analysis, tying it with Oregon for the fastest state growth of the year. That was up from 3.1 percent growth for the Golden State in 2014, which was near the top of the national pack.

The Kansas economy, on the other hand, grew 0.2 percent in 2015. That’s down from 1.2 percent in 2014, and below neighboring states such as Nebraska (2.1 percent) and Missouri (1.2 percent). Kansas ended the year with two consecutive quarters of negative growth — a shrinking economy. By a common definition of the term, the state entered 2016 in recession.

And then there is Minnesota. It, as we detailed in our State Policies Matter report, has, by far, the strongest economy and the highest taxes in the Great Lakes. The lowest unemployment rate, the highest proportion of adults working, the highest per capita income and lowest poverty rate.

Michigan policymakers should have learned by now that cutting taxes is not effective in growing state economies from our own experience as well. We have been trying this playbook since the late 1990s. The result: Michigan for the first time ever is a low prosperity state with a strong Detroit Three. The last time the Detroit Three was thriving in 2000 Michigan had a per capita income at the national average. Today, having gone from a high tax state to a low tax state (see this Citizens Research Council report), Michigan is eleven percent below the national average. And there are roughly 400,000 fewer jobs in Michigan today than in 2000.

So no the states with the lowest taxes don’t have the best economies. And definitely states without income taxes are not the most prosperous.

What correlates far better with high state prosperity is talent. The states with the highest education attainment.

As we have written frequently (see this 2010 post, this from 2014, and this from 2016) what matters is what you get from higher taxes. Yes there are benefits you get from taxes. The places with the strongest economies are those that combine high quality education systems and high quality of place that retains and attracts mobile talent. (And are also welcoming to all.) Both education and placemaking require public investments. These kind of public investments, paid for by our taxes, is the state policy playbook most likely to return Michigan to high prosperity, not more of the failed Michigan and Kansas tax cut after tax cut recipe.

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The Citizens Research Council recently released a report entitled “2013 Tax Revenue Comparisons: Michigan and the U.S. Average”. Using US Census data the report shows that Michigan is now a low tax state. In 2013 (latest available data) Michigan ranked 35th in state and local tax revenue per capita. The state ranked 36th in state and local tax revenue as a portion of personal income. The report found that:

From 1993 to 2013, Michigan’s state and local tax revenues per $1,000 of personal income fell by approximately 14 percent. Michigan’s ranking against other states decreased by 21 places.

Michigan per capita tax revenues increased from $3,213 to $3,750 in the past 20 years, whereas the U.S. average amount in the same time has increased by $1,751. This increase in per capita revenues left Michigan state and local government tax revenues at 82 percent of the national average.

Michigan in 1993 ranked 14th in per capita taxes, 2.7 percent above the national average. And 13th in taxes as a portion of personal income, 5.6 percent above the national average. In 2013 we were 18.6 percent below the national average in taxes per capita and 8.5 percent below the national average in taxes as a portion of personal income.

If the tax cuts are the key to better economic outcomes advocates are right you would except Michigan to be far more prosperous today than in 2013. Michigan has succeeded in moving from a high tax to low tax state. But Michigan also went from being a relatively high prosperity state to a relatively low prosperity state. In 1993 the state was 20th in per capita income, just about at the national average. In 2013 we were 36th in per capita income, 12 percent below the national average.

(And no low taxes haven’t magically worked since 2013. The BEA preliminary per capita income data for 2015 ranks Michigan 33rd, 11 percent below the national average. This with a booming Detroit Three.)

So much for lower taxes leading to higher prosperity!

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For most readers it will be new news. Certainly a far different story than you are getting from politicans or the press. The basic story is a decade or more of tax cuts – most of them tax expenditures. State taxes are estimated in 2011 to be more that $7 billion dollars below the Headlee ceiling. In 2000 we were at the ceiling. That is because Michigan has a tax system that does not grow as fast as the Michigan economy. To make matters worse, there are something like a billion dollars in additional tax cuts that are scheduled to take effect between now and 2014.

The conventional wisdom is that tax increases are one of the leading causes of Michigan’s lost decade. Nothing could be further from the truth. The reality is – even with the 2007 tax increase – Michigan’s economic decline has been accompanied by state tax cuts.

At the local level, the story has been different. Chiefly because of rising property values for most of the last decade, tax receipts as a proportion of personnel income have increased. Obviously this differs greatly from community to community. But those days are over as property values and property taxes are  now in decline.

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