There seems to be some confusion lately about the state’s general fund budget. Have there been cuts? Has revenue gone down? Are $440 million in cuts necessary to balance 2007-2008′s budget? What is the impact of the new $1.5 billion in taxes just passed by the legislature?

The Budget

We’d like to go through the numbers and explain a bit how government budgeting works. Michigan, like most units of government, has several funds. The General Fund, the one that the legislature can spend on pretty much whatever it wants, is the budget that everyone refers to when there is talk of a deficit or the need for tax increases. The General Fund is about $9 billion of the state’s total $40 billion budget. We discussed the total growth of the budget, as well as how government does accounting, in a previous post. Please follow that link and come back after you have read the explanation of the politicians’ definition of a budget cut.

We’ve heard the Governor and many politicians talk about cutting the budget. However, when the numbers are examined, the state’s General Fund has seen an increase in revenue every year of the Governor’s term. However, there has been a reduction in spending, but only to match the government’s revenue. You see, the state government has been good at spending more than it brings in, whether under Democrat or Republican control.

But wait! Governor Granholm boasts about having to cut billions from the state budget. From the Governor’s office: “Since taking office in 2003, Governor Granholm has cut nearly $3 billion in state spending to resolve more than $4 billion in budget shortfalls – more than any other governor in the state’s history.” Really? Here’s a list of the total annual General Fund spending during Governor Ganholm’s tenure:

Fiscal Year - Spending (millions)
02-03 -       $8,830
03-04 -       $8,770
04-05 -       $8,702
05-06 -       $9,106
06-07 -       $8,966

In other words, in absolute numbers, a grand total of $268 million has been cut during the Governor’s tenure. Just for fun, let’s factor in inflation, so that 2002-2003 is our baseline. If that were the case, and spending had gone up just at the rate of inflation, then 2006-2007 spending would have been about $9.938 billion. Subtract actual spending, and the total possible cut the Governor could take credit for is $1.108 billion. You see, the Governor is using politician math where possible spending is taken into account when declaring a deficit or cut, not actual spending.

The New Taxes

According to the non-partisan House Fiscal Agency, the entity that estimates for the State House how much money the state will bring in, 2007-2008 revenue will be about $8.186 billion. Governor Granholm proposes to spend $9.941 billion in 2007-2008. So this is the deficit that she’s referring to when she has said that $1.8 billion in “cuts” have needed to be made to balance the budget. You see, it’s not actual spending that is being cut, it is proposed spending. The new, higher income tax rate, along with the new 6% tax on services, will raise, according to estimates, somewhere between $1.4 and $1.5 billion this fiscal year. That brings our total General Fund Revenue to about $9.6 billion. That’s an increase in spending, from 2006-2007, of 9%. That’s an increase in revenue, if the tax hadn’t passed, of over 17%. In one year! When’s the last time you got a raise of 9% or even 17%?

But there’s more! Governor Granholm, even after the passage of the new taxes, is declaring that $400 million of cuts still need to occur! But, as hopefully you have figured out, the cut is not in spending, but a cut in what she wants to spend!

What do the new taxes mean to the average Michigander? A $1.5 billion increase, divided by approximately 10 million residents of Michigan, equals a $150 tax increase per person. That includes every single man, woman, and child. According to the Census Bureau, there are about 3.7 million households in Michigan, which means that the tax increase is over $400 per household. That’s in addition to the $7,183 annual cost of state government on a per household basis.