June’s Revenue Index level was 1.63, meaning an increase in sales tax revenues from June of last year. But it’s important to remember that last year’s index was -12.7, which was a whopping decrease from 2008.

Sales tax revenue is one of the best current indicators of economic activity. While the government releases GDP numbers and other stats, they are generally several months old. Sales tax data is a better snapshot of the economy now.

This chart will be updated monthly as the Senate Fiscal Agency releases monthly revenue reports.

From the Detroit News: Landscapers find workers choosing jobless pay

But B&L Landscaping in Oak Park finds the labor pool is noticeably weaker and less motivated, director Richard Angell said, even though the company still gets 80 to 100 applicants per week.

“We’re just getting people coming in, filling out paperwork, hoping they won’t get hired,” Angell said. “… We’re having a hard time finding quality applicants.”

This statement from the report sums it up well: “Revenue from Michigan’s General Fund and School Aid Fund earmarked taxes totaled $474.3 million in February, down 28.8% from last year’s level . . . February tax collections were approximately $132.3 million below the level expected. . .”

Year over year revenues are down 28%. This is stunning. A couple of points stand out as potentially contradictory. First, state income tax and business tax revenues are down 8.6% and 67.4%, respectively, on a year over year basis. That’s a pretty dramatic drop, particularly for the business taxes. Frankly, that could be considered a collapse in revenues.

But, at the same time, strangely, sales tax revenues are up on a year over year basis. February saw a 5.2% increase over last year. How can these figures be reconciled? On the one hand, personal incomes are down and business incomes are way down, and on the other, sales are up?

There is some chatter lately that these sales tax increases over the last two months have more to do with income tax return money flowing back to taxpayers. For instance, in the state’s revenue report, it is shown that the state issued $731 million in tax refunds last month, a 20% increase over February 2009. Federal statistics are showing a similar patter where taxpayers are filing taxes earlier than usual to collect refunds.

So, it might make sense after all that people are collecting large refunds and then spending much of that money, thus resulting in a boost in sales tax revenues. But this is hardly a true economic recovery, it’s just another temporary residual blip based on factors that actually point to further economic decline.

Another case in point from today’s news: Kent county home foreclosures up 42% in February from January. Hardly a sign of recovery.

Here’s one quote from the Free Press:

Granholm said one reason for the additional money is that commercial property values have unexpectedly risen in some areas, particularly Southeast Michigan. That’s resulted in an additional $100 million for the School Aid Fund.

Really?

According to the just-released state revenue report for November, that isn’t the case at all.

State Education Property Tax revenue was up 14.4% from November 2008, but with October 2009 receipts below the year-ago level, the increase reflects differences in the timing of payments. If October and November State Education Property Tax receipts are combined, 2009 collections are down 7.3% from the year-ago level.

In other words, Granholm is full of it.

Due to the near-complete collapse of state revenues, the cuts have (finally) been forthcoming. Public schools received per-pupil cuts of approximately $300 for the current fiscal year. State agencies have been ordered by the governor to cut 10% of their budgets. The cycle of layoffs and reduced revenues continues.

The result? Governor Granholm and the MEA have begun hyperventilating. This week they staged a massive lobbying effort to get legislators to increase taxes. Apparently they don’t require Economics 101 in teacher colleges.

On the city level, Grand Rapids has seen a similar decline in income tax revenues and property tax revenues will probably see declines due to historic drops in resale values of homes and commercial property. Immediately upon announcing the layoffs of 125 city employees, Mayor Heartwell called for a ballot question to raise taxes in the city. He claims there hasn’t been a tax increase in 15 years. Apparently the constant reduction of the personal income tax exemption, the added property tax bill “service fee,” and the increase in trash collection property tax don’t count as tax increases in the mayor’s book.

Oh, and don’t forget that The Rapid is coming back, probably in early 2010 to ask, again, for a tax increase to build the redundant and wasteful “Silver Line” bus service, to clog up Division during rush hour.

But the fiscal problems are just beginning, and there is very little sign that anyone is proposing real solutions. The “easy” way out, increasing taxes, will only work so much. They will run in to the law of diminishing returns. The speaker of the state house, Democrat Andy Dillon, apparently grew some huevos and bucked his MEA masters by proposing the pooling of all public school health plans into one statewide health plan. The MEA, fearing the loss of their money-laundering cash cow health plan MESSA, promptly went ape-sh*t. This illustrates the difficulty of real, substantive change at the state level. So many special interests peddling their influence (in the form of money) makes it nearly impossible to propose an innovative solution to the state’s structural budget problems.

Of course, then there are the unsustainable defined-benefit Ponzi public pension plans. They will fail. It’s just a matter of time. Even politicians can’t repeal the laws of compounding numbers. But I’m sure they will try.

But we should turn to the local level, where real people can have the most chance of affecting change. We can, as a city, choose to continue down the ultimately disastrous path of “the easy way out,” or we can have real, substantive change in how city government does business.

A quick overview of what’s going on at the local level: As state revenue declines, so does the state subsidy to cities called revenue sharing. Revenue sharing has been on the decline for several years. City leaders keep pointing to how much has been “lost,” but their complaints fall on deaf ears – or at least ears that understand that cities fall further back in line from other special interest groups.

As revenue sharing declines, so have city income tax receipts. The city’s income tax revenue is down 14% (apparently year on year).

Not only has revenue been on the decline, the gigantic hydrogen bomb of the city’s pension system is preparing to detonate. The city’s 2010 fiscal plan (published before the layoffs were announced this week), is available here. One paragraph should stand out and set off all the alarm bells in the city:

In FY2007 our two pension retirement trusts were 110% and 120% funded.  Both employer and employee contribution levels were at or near the lowest possible levels.  This advantage was eliminated by the breathtaking decline of the financial markets over the past 18 months.  We now know that our retirement funds are significantly underfunded. This means that both employee and employer contributions must move dramatically higher.  Proposed changes to actuarial assumptions and plan provisions will freeze employee contributions at the bottom of the contribution range and provide additional time for the City to adjust to higher employer contributions.  Nonetheless, the employer share will go from 7.7% in to 9.29% in FY2010, and 13.62% in FY2011 for the General Pension and from an FY2010 rate of 0% to an estimated 23% in FY2011 for the Police/Fire Pension.  These percentages assume that we will be able to implement critical smoothing techniques that will mitigate the intense upward pressure on required contributions. The increase in employer funding requirements contributed to the FY2010 GOF operating deficit of $2.9 million.  Unless we see a significant increase in the market value of retirement plan assets over the next couple of years, the estimated pension contribution will continue to rise. (emphasis mine)

Translation: 2010 layoffs are just the beginning. Fiscal Year 2010 includes a pension contribution (as a percentage of salaries) for the police and fire employees of 0%. Yes, 0%. This will go from 0% to 23% (of salaries) in one year. A search of the fiscal plan shows that total personnel costs for police and fire are about $67 million. Let’s back out about 40% of that (just a wild guess) to come to actual base salary cost. We come up with about $40 million. Now,  re-read the above paragraph. The city is going from contributing $0 in the current fiscal year to the police and fire pension plan to (my estimate) of 23% of salaries in 2011 – or about $10 million. The increase in contributions for the other defined-benefit pension participants on the city’s payroll will increase from 9.29% this year to 13.62% next year. This is unsustainable.

The mayor’s solution? Raise taxes.

Lest I be declared someone who only points out problems and no solutions, here are a few suggestions:

1. Lay off all non-essential employees. This includes the “equal opportunity” department of five people.
2. Outsource information technology (IT) services.
3. Eliminate the Office of Children, Youth, and Families.
4. Convert all employees, now, to a defined-contribution retirement plan. NOW.
5. Eliminate the Downtown Development Authority. This entity sucks up about $17 million of local property tax revenue that would normally go to the city’s general operating fund. The DDA also currently owns the Van Andel Arena. Sell the arena, pay off the outstanding bonds, and use the excess to pay off some of the DeVos Place bonds. The DDA currently operates as a taxpayer-funded subsidy to developers, giving away free money to those who ask.
6. Implement a fire department response fee. Most (if not all) homeowners insurance plans offer coverage if you’re charged for fire department response.
7. Eliminate the city’s trash collection services. There is a special property tax levied for this. There are plenty of private trash haulers. Once the trash collection services are eliminated, go to voters and ask them if it’s ok to convert the current trash levy on property tax to a general fund levy so that it can be spent on other city services (including police).
8. Contact every citizen and ask them what their priorities are. Do you prefer Police and smooth roads, or do you prefer an equal opportunity department and subsidies for developers?

If serious, dramatic changes are not implemented, the city will go bankrupt. This has started to happen in other states. There is no chance in h*ll that the economy is going to return to anywhere near where it was at the peak of the last cycle in 2007 – at least not any time soon.

Tough choices need to be made now – if our politicians can stomach it.

• Raise the minimum wage from $7.40 an hour to $10 an hour and remove exceptions in the law that allow employers to pay less than minimum wage to some workers.
• Cut utility rates by 20 percent.
• Require all employers to provide health coverage or pay a fine.
• Increase unemployment benefits by $100 a week, extend benefits by six months and make all workers eligible for unemployment. The maximum unemployment benefit is now $387 a week.
• Impose a one-year moratorium on home foreclosures.

It’s frankly a bit stunning and just goes to show the complete and total ignorance of basic economics apparently held by the state’s Democratic Party leadership. The Republicans in the state have actually taken a bit of initiative to propose budget cuts to close the widening state budget deficit, but Republicans long ago gave up the ghost on having any credibility when it comes to walking the walk.

Anyways, perhaps the Democrats have not gotten the memo that the overwhelming evidence shows that a higher minimum wage increases unemployment (or decreases employment). Perhaps 15.2% isn’t high enough for them. Why does the minimum wage increase unemployment? Because it prices those out of the market with the least skills. Look at it from an employer’s perspective. If you were to hire someone at $10 an hour, would you hire a teenager or someone with little to no skills, or would you hire someone with some skills or prior experience? Of course you would hire the person with prior experience. The higher the minimum wage goes, the less likely that employers will hire people with lower skill sets. This is why, due to our complete and utter failure of public school systems in urban areas in this state, unemployment among teens, African-Americans, and unskilled laborers is close to all-time highs. A higher minimum wage will simply exacerbate this problem. It ends up harming people, not helping them.

Requiring all employers to provide health insurance or pay a fine is another killer of jobs, primarily jobs provided by small businesses. I know someone who recently started a small business and it has done extremely well. He has hired about ten people, all part time. These are ten people who are happy to have any job at all. If he had to pay for health care for these employees, he would probably have to lay about half of them off, depending on the cost. It would degrade the service he provides by being required to provide the same service with fewer people, and it would surely drive up prices.

Oh, and instituting a one year moratorium on home foreclosures would further encourage the moral hazard of walking away from one’s home. Heck, I would even consider walking away if I got a year of free rent. House prices in the Grand Rapids area have already dropped 25-30% in the last couple of years. Anyone who has purchased in the last five or so years is probably underwater. It makes simple business sense to stop paying the mortgage, save the payment for a year in a savings account, and walk away with thousands of dollars in savings.

Way to go Democrats! There’s nothing like pouring gasoline on a fire to try and put it out!

The revenue collected from Michigan’s General Fund and School Aid Fund earmarked taxes totaled $1.3 billion in May, which was down 13.4% from last year’s level.  This marked the  fourth consecutive month  that tax collections have declined in excess of 10.0%.  While  collections for almost all of the major taxes experienced declines in May from their year-ago levels, the most significant declines were experienced by the sales, use, and income taxes.   Compared with the Senate Fiscal Agency’s monthly breakdown of the revised consensus estimates for FY 2008-09, May collections fell below the monthly estimate by $62.0 million and this shortfall was due primarily to weaker-than-expected sales and use tax collections.

When the Senate Fiscal Agency met in mid-May, they estimated the revenues for the remainder of the fiscal year. Despite the fact that they updated their estimates at that time, actual revenues for May declined by $62 million. In other words, in the matter of a few weeks, their estimates were already off. The budget is deteriorating that quickly.

More:

Sales tax revenue totaled $406.6 million in May, which was down a sharp 22.2% from the year-ago  level.   A consistent historical monthly series for the sales tax is available back to FY 1984-85 and the decline in May marks the largest percentage decline  in monthly sales tax collections during this 24-year period.

. . .

Tobacco tax revenue totaled $84.0 million in May, which was down 5.9% from last year’s level.  Most of  this decline is likely due to the large increase in the Federal tobacco tax that went into effect on April 1.  The Federal tax increase is having a negative impact on Michigan’s $2-per-pack cigarette tax because it boosted the price of cigarettes and therefore is having a negative impact on cigarette sales and Michigan’s tax receipts.

That last quote is vitally important. It perfectly exemplifies the power of taxation. It’s common sense, but the politicians in Lansing don’t seem to get it. The more you tax something, the less of that “something” you’re going to get. Clearly, the more cigarettes are taxed, the fewer cigarettes that will be sold. The same goes for businesses. The more you tax businesses, the fewer businesses there will be, and hence the fewer jobs there will be. Gosh, it’s pretty simple, but our tax-hiking pals in Lansing and elsewhere don’t seem to get it.

Finally, the $406 million of sales tax revenue in May was the lowest monthly level of sales tax collection I could find, going back at least until 2005. Michigan is hurting, folks, and it’s only going to get worse, as exemplified by the state’s skyrocketing 14.1% unemployment rate.

Read a little about how California’s government is collapsing because of that state’s inability to enact any rational level of reform: California Collapsing.

While tax collections in February were expected to fall below last year’s level, due primarily to the impact of the economic recession, the decline was much worse than expected . . . In addition, tax collections fell short of the estimate for February by almost $100.0 million.  Combined with the equally weak level of collections in January, tax collections so far in FY 2008-09 are about $200.0 million below the January 2009 consensus revenue estimate.

Interestingly, tax collections in the current fiscal year (which began in October 2008) were doing fairly well, until now. Last month, however, state tax revenue was down 31% from last year’s February level. Sales tax revenue, a good proxy for economic strength, was down 17% year-on-year in February, while real estate transfer tax revenue was down 41%. Stunning. This indicates (along with Michigan’s highest-in-the-nation unemployment rate of 11.6%) that the economic downturn is actually accelerating. 

This sets the stage for several possible outcomes. Although the structural budget problems aren’t as bad in Michigan as in California, we are heading in California’s direction in terms of budget meltdown, if the current trends continue. The politicians are in a tight spot here. They will almost certainly have to propose additional tax increases as well as budget cuts. The question becomes how does the Republican-majority State Senate react? They caved to last year’s massive tax hike – will they do it again? How do they sell a tax increase when over 1 in 10 Michiganders doesn’t have a job? When the Detroit Three continue to contract and lay people off in massive numbers? When house prices continue to decline, making it more and more attractive to simply walk away from mortgages?

Gimme more. Gimme more. Gimme gimme gimme more.

Today it was announced that Michigan’s unemployment rate hit 11.6%. What is governor Granholm’s reaction? She announces her support for an increase in gas taxes! Great idea! She has already succeeded in increasing the income tax by 12% and increasing business taxes by 22%. That seems to be working out really well. Not.

Her insatiable appetite for more of your money won’t be quenched until no one in Michigan is left with a job.

“In five years, you’re going to be blown away by the strength and diversity of Michigan’s transformed economy.” – Governor Granholm, State of the State address, January 25, 2006 (unemployment rate was 6.2%).

A chemistry professor at a large college had some exchange students in the class. One day while the class was in the lab the Professor noticed one young man (exchange student) who kept rubbing his back, and stretching as if his back hurt. The professor asked the young man what was the matter. The student told him he had a bullet lodged in his back. He had been shot while fighting communists in his native country who were trying to overthrow his country’s government and install a new communist government.

In the midst of his story he looked at the professor and asked a strange question. He asked, ‘Do you know how to catch wild pigs?’ The professor thought it was a joke and asked for the punch line. The young man said this was no joke. ‘You catch wild pigs by finding a suitable place in the woods and putting corn on the ground. The pigs find it and begin to come every day to eat the free corn. When they are used to coming every day, you put a fence down one side of the place where they are used to coming. When they get used to the fence, they begin to eat the corn again and you put up another side of the fence. They get used to that and start to eat again.

You continue until you have all four sides of the fence up with a gate in the last side. The pigs, who are used to the free corn, start to come through the gate to eat; you slam the gate on them and catch the whole herd. Suddenly the wild pigs have lost their freedom. They run around and around inside the fence, but they are caught.

Soon they go back to eating the free corn. They are so used to it that they have forgotten how to forage in the woods for themselves, so they accept their captivity.

The young man then told the professor that is exactly what he sees happening to America. The government keeps pushing us toward socialism and keeps spreading the free corn out in the form of programs such as supplemental income, tax credit for unearned income, tobacco subsidies, dairy subsidies, payments not to plant crops (CRP), welfare, medicine, drugs, etc. While we continually lose our freedoms — just a little at a time.

It’s a good story by itself, explaining how government breeds dependence. But another thought popped into my mind as I thought about this story. What happens we you take away the corn? 

We’re in the midst of the largest expansion of federal spending in the history of this nation, with over $8.5 trillion of federal government outlays and guarantees, just in the last four months. We have a national debt that has doubled under the Bush administration, to over $10.5 trillion. We have future unfunded liabilities, just at the federal level, of over $40 trillion. We have state and local governments that put taxpayers on the hook with unsustainable defined benefit pension plans that are just now beginning to collapse. 

The point is this: The American people have been fattened up by corn over the last several decades, with an acceleration over the last two decades of Federal Reserve-induced malinvestment orgies. First in technology, then in real estate. These malinvestment orgies led to expanded government spending and government promises, making more and more people dependent on government money (corn), one way or another. However, the math doesn’t work in the long term. Something has to, and will, give.

We are seeing the first stages in a potential catastrophic collapse. We are in the midst of deflation. The Federal Reserve and politicians in Washington will do anything they can to prevent deflation. So they have cranked up the printing presses and are expanding the money supply at a truly unprecedented rate. We have collapsing banks, collapsing industry, a collapsing economy, a collapse in debt, and a collapse in consumption. Eventually, people (and, more importantly, foreign governments) will stop buying US Government bonds as they see that annual deficits of $2 trillion are unsustainable. Then what?

“Stimulus” plans will fail. Hoover/FDR stimulus plans in the 1930s only extended the length and depth of the depression. The Bush/Obama stimulus plans will do the same.

Folks, the government corn will run out when we all realize that nothing can be done to stop the natural correction of the economy.