Engler, key lawmakers reach budget pact
Friday, June 28, 2002By Peter Luke
Lansing Bureau
LANSING -- Scheduled cuts in the Michigan's Single Business Tax would be stalled and cigarette taxes would jump 50 cents a pack under a bipartisan budget agreement reached by Gov. John Engler and legislative leaders.
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The pact, agreed upon in Engler's Capitol office late Thursday, could be voted on in the House as early as Tuesday, and in the Senate the week after.
If the tax package passes, proposed reductions in aid to cities, local fire departments and arts organizations would be avoided.
The state budget is an estimated $800 million in the red for fiscal years 2002 and 2003. The new revenue would also partially address a projected $1.4 billion deficit in fiscal 2004.
"It's a bipartisan agreement. There will be Republican and Democratic votes to finish up the remaining parts of the budget," said state Budget Director Don Gilmer.
There had been political stalemate over the budget as Democrats had refused to provide votes for the Engler-backed 50-cent cigarette tax increase unless scheduled business tax cuts were stalled.
Under the plan, Michigan would have the second-highest state cigarette tax in the country, at $1.25 per pack, behind New York's $1.50.
Thirty cents of the increase would pay for general state spending. The remainder would be permanently earmarked for K-12 education to help avert school spending cuts in fiscal 2004.
Business taxes would be frozen under the plan in 2003 and 2004 because state law requires that the 23-year phaseout of the Single Business Tax be halted if the balance in the state's rainy day fund falls below $250 million.
The cigarette tax hike would raise about $250 million, and the interruption in the business tax would result in an additional $69 million.
Sen. John Cherry of Clio, the Democratic leader in the Senate, said pausing the business tax cut was important for a budget solution. Otherwise, the new cigarette tax revenue would merely be filling a budget hole created by continued business tax reductions.
"We didn't want cigarette smokers to pay for someone else's tax cut," Cherry said.
Business groups are divided over the budget package. The Michigan Chamber of Commerce objects to both the cigarette tax increase and an interruption in the business tax cut. Richard Studley, the chamber's lead lobbyist, said Michigan has a spending problem, not a tax revenue problem.
But Chuck Hadden, lobbyist for the Michigan Manufacturers Association, said his members, who pay the bulk of the SBT, would accept a temporary delay in the tax cut if it avoids painful budget cuts to urban areas where those member businesses are located.
Gilmer said there is a core group of Republicans and Democrats in the House and Senate that will back the plan, but that passage isn't a given.
"You have to have the political will to do it. It's going to be hard," he said.
Rep. Samuel Thomas of Detroit, the Democratic leader in the House, said through his spokesman that he hadn't agreed to anything yet, but that he's "encouraged."
House Speaker Rick Johnson, R-LeRoy, had earlier objected to any pause in the business tax cut. But he said he agrees with a provision in the agreement that exempts 13,000 small businesses from the tax. That's accomplished by boosting the gross receipts threshold in the tax from $250,000 to $350,000.
The agreement also shelves steep cuts in revenue sharing, particularly to those cities with ordinances that require contractors to pay a so-called "living wage" to their employees. It also avoids 50-percent reductions in arts grants and in aid to local fire departments for the protection of state property.
Gilmer said the agreement provides a partial solution to what is a serious budget problem facing Michigan's next governor. With about six months left in office, Engler has pledged not to leave the kind of fiscal mess he said he inherited in 1991.
Cherry said that mess will still be there despite Thursday's agreement.
"I don't think this absolves anyone of responsibility," he said.