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Economic and Fiscal
Overview: the Good, the Bad
and the Ugly
Lansing Torch Club
April 2012
Department Of Treasury
Responsibilities

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2
Collect $25 billion in taxes from 6 million taxpayers
Manage state’s common cash and $55 billion in
pension funds
Issue bonds for state and school districts
Monitor finances of more than 2,000 local govts.
Manage student loan programs incl. MET and MESP
Oversee state property tax system
Serve as economic and tax advisor to governor
1,700 Employees
The Ugly



3
Worst recession since 1930s
Michigan employment declines for 10 straight
years
Stock market drops 55%
Number of Quarters for GDP to
Return to Peak and Decline
4
Recession
# of Quarters
Decline in Real GDP
2008-09
13
-5.1%
2000-01
1
-0.3%
1990-91
5
-1.4%
1981-82
7
-2.2%
1980
4
-2.7%
1974-75
8
-0.6%
1969-70
3
-0.6
1937-38
NA
-18.2%
1929-33
NA
-26.7%
Millions of Units
Sales and Big 3 Market Share Collapses
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
17.017.417.2 16.816.616.916.916.5
16.1
15.215.6
13.1
11.6
10.4
14.515.1
13.7
12.7
1997 1999 2001 2003 2005 2007 2009 2011 2013
U.S. Light Vehicle Sales
5
Source: Automotive News.
Big 3 Share
Consensus
Est.
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
Michigan Vehicle Employment
Transportation Equipment Employment Increases
(Thousands)
6
Source: Bureau of Labor Statistics.
Michigan Payroll Employment and
Vehicle Production
6 Month Moving Average – Year over Year Percent Change
60.0%
2.0%
40.0%
0.0%
20.0%
-2.0%
0.0%
-4.0%
-20.0%
-6.0%
-40.0%
-8.0%
-60.0%
-10.0%
Jan99
7
4.0%
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
6 Month Vehicle Prod
Source: Bureau of Labor Statistics & Michigan Department of Treasury
Jan06
Jan07
Jan08
6 Month Payroll
Jan09
Jan10
Jan11
Employment Growth
Vehicle Production
80.0%
Michigan Taxes Decline as
a Percent of Personal Income
Michigan State Tax Revenue as a Percent of Personal Income
8
Note: FY 2010 tax estimate based on May 2010 Consensus.
FY 2010 personal income based on ORTA and consensus estimates May 2010.
FY ‘10 GF-GP Revenue at FY ‘88 Level
Down 32% Since 2000
Billions of Dollars
1988
$6.7B
9
Note: GF-GP figures are presented on a Consensus basis. 2010 estimated.
2000
$9.8B
2010
$6.7B
FY ’10 Inflation Adjusted
GF-GP Lowest Since 1965
Billions of 2010$
1999
$14.3B
1965
$6.5B
10
Note: GF-GP figures are presented on a Consensus basis and adjusted for inflation to 2010 dollars using
the state and local government price deflator. FY 2010 is the May 2010 Consensus estimate.
2010
$6.7B
SAF Revenue Below FY 2005
Level
11
Consensus Estimate
FY ’11 Inflation Adjusted SAF
Lowest Since Proposal A Adopted
Billions of 2011$
2011
$10.8B
1995
$11.6B
Consensus Est.
12
Note: SAF figures are presented on a Consensus basis and adjusted for inflation to 2011 dollars using
the state and local government price deflator. FY 2010 & FY 2011 are the May 2010 Consensus estimates.
Value of State Pension Funds
(billions)
13
Period
Value
Dec. 2000
$51.5
Dec. 2002
$40.7
Dec. 2007
$61.8
Dec.2008
$44.5
Dec. 2011
$48.1
Actions to Balance Budget
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14

Cut spending- far more than any other state
Raised taxes-$1.3 billion
Reduced public employee benefits
Reduced state employment by 10,000
Closed 8 prisons
Expanded business tax incentives
Federal Aid up sharply
Left $1.3 billion surplus
Federal Aid to Michigan
(millions)
15
Year
Amount
% of Budget
2002-03
$12,227
30.9%
2007-08
$14,669
33.6%
2010-11
$21,314
44.3%
2012-03
$19,973
41.6%
The Good


16
National economy recovering at modest pace
Michigan recovery stronger than most states
Ten Quarters in a Row of
GDP Growth Observed
Real GDP Growth
3.0%
Growth
6.9%
5.4%
3.5%
2.7%
1.4%
3.2%
2.1%
2.0%
4.1%
3.6%
3.5%
3.0%
2.9%
2.9%
3.1%
2.1%
1.7%
1.6%
0.1%
3.0%
1.4%
0.1%
3.9%
3.8%
3.8%
3.2% 2.9%
2.3%
1.7%
2.5%
2.3%
0.9%
-1.3% -1.1%
3.0%
1.8%
1.3%
0.4%
-0.7%
-1.3%
-1.8%
-3.7%
-6.7%
-8.9%
2001
Q1
17
2002
Q1
2003
Q1
2004
Q1
2005
Q1
2006 Q1
2007 Q1
2008 Q1
2009 Q1
2010 Q1
2011 Q1
Figures are annualized percent change from preceding quarter in 2005 chained dollars.
Source: Bureau of Economic Analysis. Forecast quarters in red are the September 2010 Global Insight forecast.
U.S. Has Gained Nearly 3.6 Million
Jobs Since February 2010
458
277
192
127
84
13
-35
-55 -39
-130
-72
-83
-185-178
-233-231
-267
-434
-509
-221
-231
-236
-300
-386
251
246
220
171 152
93 110
275
223 240
157
120
112
202
849685
54
-29
-49
-59
-192
-502
-619
-660
-726
-802-820-796
Nov 07 Feb 08 May 08 Aug 08 Nov 08 Feb 09 May 09 Aug 09 Nov 09 Feb-10May-10Aug-10Nov-10Feb-1111-May 11Aug.
18
Source: U.S. Bureau of Labor Statistics, U.S. Department of Labor; 4/1/2012
11- 12-Feb.
Nov.
Corporate Profits Up Sharply in
2009 and 2010
2011 Q3: $1970.1
(Billions of Dollars)
$2,000
$1,500
$1,000
$500
$0
1980Q1
19
1985Q1
Source: Bureau of Economic Analysis
1990Q1
1995Q1
2000Q1
2005Q1
2010Q1
Michigan’s 10-year recession Comes to
an End
Michigan Wage and Salary Employment Year-Over-Year Change
88.0
(In Thousands)
62.0
48.0
27.0 32.0
-16.9 -9.3
-76.8 -71.1
-112.7
-11.0
-63.3 -58.7
-105.7
-285.6
91- 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
00
Avg.
20
Cons. Forecast
Note: Bureau of Labor Statistics. 2012-2014 estimates are from the January 2012 Consensus Forecast.
Millions of Units
Vehicle Sales Up, Big 3 Market Share Stabilizes
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
17.017.417.2 16.816.616.916.916.5
16.1
15.215.6
13.1
11.6
10.4
14.515.1
13.7
12.7
1997 1999 2001 2003 2005 2007 2009 2011 2013
U.S. Light Vehicle Sales
21
Source: Automotive News.
Big 3 Share
Consensus
Est.
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
Michigan Unemployment Rate,
Monthly, 2008-2011
Unemployment Rate
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
8.5%
2008
22
2009
2010
2011
2012
State Budget
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23
The Good, the Bad, and the Ugly
State Budget Balances, FY 2011FY2013
(millions)
FY 2011
FY 2012
FY 2013
GF/GP
$568.3
$627.9
$656.9
SAF
$722.6
$119.3
$303.0
Total
$1,290.6
$747.2
$959.9
Bus. Tax Cut
$0
-$552.0
-$309.0
Michigan Expenditure Growth
Lowest Among States
GF Expenditures
% Growth
Growth
2001 to 2009
Rank
25
Total Exp. Less Federal Aid
% Growth
Growth
2001 to 2009
Rank
Illinois
10%
47
14%
49
Indiana
40%
19
34%
42
Michigan
-13%
50
0%
50
Ohio
29%
35
29%
45
Wisconsin
15%
43
25%
46
Missouri
9%
48
47%
48
U.S. Avg.
30%
47%
Source: Office of Revenue and Tax Analysis, Michigan Dept. of Treasury, 07/27/10, based on
NASBO State Expenditure Surveys 2001 and 2009.
Michigan State Government
10,700 Fewer Employees than 2000
Number
Fiscal
State
Year Governor Employees
26
Non-Corrections
State
Corrections
Employees
Employees
1973 Milliken 52,673
1978 Milliken 64,456
1989 Blanchard 64,560
2000 Engler
61,493
2010 Granholm 50,615
50,316
59,990
52,038
43,841
35,672
2,357
4,466
12,522
17,652
14,943
2011 Snyder 47,607
% Change 1978-2011-26%
% Change 2000-2011-23%
33,141
-45%
-24%
14,466
235%
-18%
Source: Michigan Department of Treasury
Government Not Large
Compared to Other States
State and Local
Govt. Employees
Per 10,000
of Population
Rank
Indiana
Ohio
Minnesota
Illinois
Wisconsin
Michigan
554
538
536
504
504
475
27
32
34
42
42
48
U.S. Average
549
State
27
Source: Bureau of the Census, 2008 State and Local Government Employment Survey
The Bad
Taxes raised on the poor and seniors and
education budgets cut to pay for business tax
cuts
28
Summary of Tax Reform




Reduce business taxes by $1.7 billion by replacing
MBT with 6% CIT, and make up lost revenue by
raising personal income taxes.
The number of businesses paying state business
tax reduced by 70%.
Taxes increases fall mainly on seniors, and low
and middle-income families.
The stated purpose is to improve the Michigan
business climate and simplify the tax system.
Unnecessary Budget Changes
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30
Cuts in K-12 and higher education budgets
Cuts in revenue sharing
Reduction in EITC from 20% to 6%
Some personal income tax increases
A Better Approach



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Extend 6% corporate income tax to business
income with a possible exemption of $250,000raises $550-$700 million
Retain a 0.1% gross receipts tax on all businessraises $250 million
Impose a tax on selected services such as
sports tickets and service contracts
Provide a $20,000 pension exemption for
individual returns and $40,000 for joint returns,
or at minimum phase out exemption
Proposed Changes (cont.)
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
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
Leave the income tax at 4.35%- saves average
taxpayer less than $1 a week- raises $165 million
Retain or possibly reduce EITC to 10 or 15% for two
years
Use revenue in excess of estimates to restore
revenue sharing cuts or cut in EITC- revenues likely
to be at least $200 million higher in both FY 2011
and FY 2012
Add one tax credit for all charitable contributions$150/$300
Federal Budget Issues

33
The truth about the Federal budget
Federal Revenues and
Expenditures as % of GDP, 19712012
30.0%
25.0%
20.0%
Revenues (Avg.)
15.0%
Expend. (Avg.)
Revenues
10.0%
Expend.
5.0%
2010
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
0.0%
Federal Spending Increases During
Recessions
35
Years
Expenditure Increase
1971-1973
16.7%
1974-1976
38.0%
1980-1982
26.2%
1990-1992
10.2%
2000-2002
12.4%
2008-2010
15.9%
Federal Government Spending – FY
2010
36
Source: Office of Management & Budget
Federal Budget:
FY 2010 and FY 2020 Projection
billions of dollars
Spending Item:
Mandatory
Social Security
Medicare
Medicaid
Other Health
Income Security
Federal Retirement
Veterans Programs
Other Mandatory Programs
Offsetting Receipts
37
Discretionary
Defense
Other NonDefense
Interest on Debt
Total
Source: Congressional Budget Office
FY 2010
$701
$519
$273
$18
$435
$140
$58
($38)
($179)
$692
$666
$202
$3,487
FY 2020
$1,191
$929
$542
$149
$293
$192
$83
$68
($306)
$880
$742
$778
$5,541
Total Tax Revenue as % of GDP,
selected OECD Countries, 2009
38
Rank
Country
% of GDP
1
Denmark
48.2%
2
Sweden
46.4%
3
Italy
43.5%
4
Belgium
43.2%
5
Finland
43.1%
20
Canada
31.1%
31
United States
24.0%
32
Chile
18.2%
33
Mexico
17.5%
Is it Possible to Cut $1 Trillion from
Federal Budget in One Year?









Interest on the Debt- $264B
Social Security- $727B
Veterans Support- $63B
Military & Civ. Retirement- $141B
Medicare- $572B
Medicaid- $273B
Defense- $710B
Income Support- $343B
Rest of Budget- $563B
Possible Budget Cuts

Medicare & Medicaid (10%)- $85B
Defense- $100B
Income Support (10%)- $34B
Rest of Budget (25%)- $140B

Total- $359B (9.8%)

$1 Trillion cut would require 50% reduction in
these programs



Higher Income Groups Capture
Most Income Gains
Average After-Tax Income by Income Group
1979-2007 (in 2007 dollars)
Income Category
41
Percent
Change
1979-2007
Dollar
Change
1979-2007
1979
2007
Lowest fifth
Second fifth
Middle fifth
Fourth fifth
Top fifth
$15,300
$31,000
$44,100
$57,700
$101,700
$17,700
$38,000
$55,300
$77,700
$198,300
16%
23%
25%
35%
95%
$2,400
$7,000
$11,200
$20,000
$96,600
Top 1 Percent
$346,600
$1,319,700
281%
$973,100
Index of Income Inequality,
Selected Nations, (2000-2008)
42
Country
Rank
Index
Namibia
1
70.7
South Africa
2
65.0
Brazil
10
56.7
Hong Kong
17
53.3
Singapore
30
48.1
Mexico
32
47.9
China
36
45.0
United States
44
45.0
Iran
47
44.5
Russia
56
41.5
Index of Income Inequality,
Selected Nations (cont.)
43
Country
Rank
Index
Japan
74
38.1
United Kingdom
92
34
France
98
32.7
Canada
100
32.0
European Union
106
31.0
Germany
123
27.0
Norway
131
25.0
Denmark
132
24.0
Slovenia
133
24.0
Sweden
134
23.0
Average Annual Family
Income, 2009
44
Percentile
Average Income
Top .01
$27.3M
Top-.01-1%
$3.2M
Top 1%
$1.1M
Top1-10%
$164.6T
Bottom 90%
$31.2T
Average
$52.0T
Income Inequality
Louis Brandeis: "We can
either have democracy in this
country or we can have great
wealth concentrated in the
hands of a few, but we can't
have both."
History of Recessions
# of Business
Cycles
Average
Duration
Average
Expansion
1854-1919
16
22 months
27 months
1919-1945
6
18 months
35 months
1945-2001
10
10 months
57 months
Addendum:
Duration
Peak
Unemployment
GDP Decline
Great Depression
43 months
35.3% (1933)
-26.7%
18 months
10.1%
-5.0%
Great Recession
46
Key Income Tax Changes





Eliminate or reduce pension exemption
Eliminate most credits- city income tax, contributions
to universities and charities
Freeze tax rate at 4.35% until 1/1/2013 and then
lower to 4.25% (rate was scheduled to decline to
3.9% by 2015).
Exemption for interest, dividends, and capital gains
repealed for people age 65 and 66; currently
$10,218/$20,437 less pension exemption.
Repeal $600 child care credit.
Key Income Tax Changes (cont.)


Homestead property tax credit reducedincome phase out now $41,000/$50,000
(from $73,650/$82,650); senior rebate
reduced from 100% to 60% at incomes over
$20,000; TV cap of $135,000
EITC reduced from 20% to 6%.
Pension Exemption Changes



Exemption eliminated for persons age 59 or
less- at age 67 will receive $20,000/$40,000
exemption which covers both Soc. Sec. and
pension.
People 60-66 in 2012 will receive
$20,000/$40,000 exemption plus Soc. Sec.
exemption.
People 67 and older in 2012 will not be affected.
Private pension exemption is $45,842/$91,680
and public pensions are exempt.