It’s budget time again in Michigan and unfortunately, as in previous years, the state is facing a shortfall of close to $2 billion.
There are several options on the table to remedy this situation, and not just in the short term. One of the solutions gaining traction is to end tax expenditures (also commonly referred to as loopholes or incentives) that no longer serve their purpose as discussed in a new League report.
Some lawmakers are supporting the idea of ending ineffective tax expenditures by linking departmental budget bills to their closure, and there is also public support. A recent poll by Epic MRA found that 72 percent support reducing the amount of tax breaks allowed to various corporations and other special interest groups. There is support for using those funds to ensure that important local and state programs can be funded.
Policymakers and residents of the state are coming to realize that tax revenue has a direct impact on how much can be spent. Constantly cutting and eliminating programs is not a solution — real structural reform must occur.
Each year, the amount that Michigan gives away in the form of credits, exemptions, deferrals, or exclusions continues to grow. From 2005 to 2009 tax expenditures grew over 21 percent while total tax revenue actually declined by 5 percent. We are giving more away than we are taking in.
It is becoming clear that if Michigan is serious about getting its fiscal house in order, and investing in education and training programs that prepare workers for a changing economy, we can no longer afford to give away tens of billions of dollars each year ($35.4 billion in fiscal year 2009, approximately four times the state’s entire general fund) in tax breaks that are out of sync with consumer spending or to businesses that fail to create new jobs.
Evaluating tax expenditures and ending some is an important part of a balanced approach to closing the budget gap.