Michigan at the Millennium: A Benchmark and Analysis of Its Fiscal and Economic Structure.

Michigan at the Millennium: A Benchmark and Analysis of Its Fiscal and Economic Structure. Edited by CHARLES L. BALLARD, PAUL N. COURANT, DOUGLAS C. DRAKE, RONALD C. FISHER, and ELISABETH R. GERBER. East Lansing: Michigan State University Press, 2003, pp. 966.

This lengthy volume is, in effect, the background papers for a tax study commission without the impaneling of the commission. It is inspired by a compilation edited by Harvey E. Brazer (1982), which in turn followed Brazer (1958). The scope of the book can be seen in the appended list of chapter titles. It is a reference book and can be read selectively. There is an editors' preface and virtually all the chapters have an introduction or conclusion with a summary of the key points. There is, alas, no index.

Let us begin with the easiest question: Is this of value to those within the state of Michigan who seek information on their state's economy and its fiscal institutions? Absolutely. The volume covers a broad range of topics, has quality authors of the individual chapters, and the editors have given it a solid structure. If I were teaching public finance in Michigan, or if I were a policy analyst, advocate, or administrator in the state, I would want this volume on my shelf.

The second easy question: Should there be such a volume in my own state? Yes. And here is the model you can show to potential contributors of either funding or content. A number of states have excellent collections of background papers as part of a tax study commission or similar review process, but few have followed Michigan's lead and updated the exercise every twenty years.

The remaining, and harder, question is: How useful is this Michigan-specific volume to the readership of the National Tax Journal who neither reside in Michigan nor are proposing a similar project in their own state? My answer is that selected chapters or pages will be of value to many of us. The rest of this review gives examples of "outsider value" in three broad categories: topics where Michigan policy is important nationally as a case study; chapters that serve as models for how a particular topic could be addressed in any state; and portions of chapters that stand alone as primers introducing a particular topic.

The most notable topic where Michigan's fiscal policy is of interest to outsiders is its radical shift in the mid-1990s toward funding schools with state, instead of local, resources. Most of us know the story, but may have not seen the kind of careful analysis included in this book (in the preface and Chapters 12, 15, 25, and 28). In 1993, tired of the burdens of heavy reliance on local property taxes, the Michigan legislature abruptly abolished the use of local property taxes for school operating expenditures. Before the end of the year, they had scrambled to enact a new foundation grant system and present an either-or choice between two funding alternatives. In 1994, state voters selected "Proposal A," which placed additional limitations on local property taxes and relied heavily on new state sales taxes to fund increased state aid to local school districts. The Michigan state government share of school revenues jumped from 32 percent in 1994 to 79 percent in 1995 (p. 305). The composition of state and local taxes went from 41 percent property taxes and 16 percent sales taxes in 1993 to 29 percent property and 27 percent sales in 1996 (p. 521). Cullen and Loeb (Ch. 15) document the considerable equalization in revenues across Michigan school districts that resulted and explain the trade-offs involved. Feldman, Courant, and Drake (Ch. 28) explain the complicated cross-household, cross-property class, and cross-jurisdiction patterns of non-uniformity that result from the property tax restrictions in Proposal A and their interaction with preexisting features of the Michigan property tax.

The second "policy example for the nation" is Michigan's so-called single business tax, which is a value-added tax. Hines (Ch. 29) contrasts Michigan's actual experience to the theoretical advantages of a value-added tax over a corporate income tax--greater revenue stability and investment incentive. He documents that the advantage of cyclical revenue stability has been achieved in practice. Hines' analysis of the hoped-for incentive to increase business investment provides a cautionary lesson for other states. Even with a value-added tax, it is necessary to use a formula to apportion the activities of multi-state firms. Michigan politicians did not like the result that an apportioned value-added tax offers a subtraction from the tax base for investments in other states. Attempts to target the incentive to in-Michigan investments created constitutional problems, which led to further changes, causing departures from the advantages of a "pure" value-added tax.

There are many chapters that serve as models for how a topic could be addressed in any state, but I will give just two examples. I recently wrote a report on Illinois' individual income and general sales taxes, and wish I had first read Menchik's (Ch. 26) and Slemrod's (Ch. 27) analyses of these taxes in Michigan. Menchik's treatment of the impact of federal deductibility on state income tax burdens and Slemrod's presentation of the sales tax treatment of business-to-business sales are particularly valuable.

Slemrod's introduction to "the pros and cons of the retail sales tax" stands out for the fresh way he presents the topic. Disturbing though it is to have one of my core beliefs called a "folk theorem," he is, of course, correct in assigning that label to the idea that a tax should have as broad a base as possible and a uniformly low rate. Business purchases in the sales tax base give the lie to the first half of the proposition; optimal tax theory counters the latter.

Throughout this volume, there are many other gems, or passages that could be used out of the Michigan context as introductions to, or primers on, a particular topic. See, for example, Bartik, Eisinger and Erickcek on "rationale and goals for economic development policies" and "approaches to evaluation" (Ch. 14); Cullen and Loeb on "background on school finance equalization" or "background on school choice" (Ch. 15); Boyer on "efficient road pricing" (Ch. 16); Fisher and Guilfoyle on "optimal government structure theory" (Ch. 31); and Martin on "optimal taxation" or, particularly worthy of adding to the reading list for a public finance class, his entire section on "sin taxes" (Ch. 32).

The editors and the chapter authors of Michigan at the Millennium have produced a volume that is authoritative, thoughtful, and useful. In doing so, they have meaningfully extended the legacy of Harvey Brazer.

APPENDIX--Chapter Titles and Authors

1. "An Overview of Michigan's Fiscal and Economic History," Douglas C. Drake.

2. "Overview of the Michigan Economy," Joan P. Crary, George A. Fulton, and Saul H. Hymans.

3. "Population Trends in Michigan," Kenneth J. Darga.

4. "The Evolution of the Michigan Labor Market from 1970 to 2001," George E. Johnson.

5. "Land Use in Michigan," Gary J. Sands.

6. "Michigan's Stake in International Trade and Investment," Alan V. Deardorff.

7. "High Technology in Michigan's Economy," Abel Feinstein, George A. Fulton, and Donald R. Grimes.

8. "Automotive and Other Manufacturing Industries in Michigan: Output, Employment, Earnings, and Collective Bargaining, 1980-2001," Richard N. Block and Dale L Belman.

9. "Health Care in Michigan," John H. Goddeeris.

10. "Michigan's Agricultural, Forestry, and Mining Industries," Arlen Leholm, Raymond Vlasin, and John Ferris.

11. "Economic Performance of Michigan Cities and Metropolitan Areas," David Crary, George A. Erickcek, and Allen C. Goodman.

12. "Overview of State Government Expenditures in Michigan," Gary S. Olson.

13. "An Overview of Local Government Expenditures in Michigan: Patterns and Trends," Earl M. Ryan and Eric W. Lupher.

14. "Economic Development Policy in Michigan," Timothy J. Bartik, Peter Eisinger, and George Erickcek.

15. "K-12 Education in Michigan," Julie Berry Cullen and Susanna Loeb.

16. "Michigan's Transportation System and Transportation Policy," Kenneth D. Boyer.

17. "Michigan's Welfare System," Kristin S. Seefeldt, Sheldon Danziger, and Sandra K. Danziger.

18. "The Less-Skilled Labor Market in Michigan," Rebecca M. Blank.

19. "Income Replacement and Reemployment Programs in Michigan," Stephen A. Woodbury.

20. "Public Pensions and Pension Policy in Michigan," Leslie E. Papke.

21. "Environment and Natural Resources in Michigan," Gloria E. Helfand and John R. Wolfe.

22. "Travel, Tourism, and Recreation in Michigan," Donald F. Holecek.

23. "Restructuring and Deregulation of the Electric Power Sector in Michigan," Michelle F. Wilsey.

24. "Issues in Crime and Criminal Justice in Michigan," Sheila Royo Maxwell, David E. Martin, and Christopher D. Maxwell.

25. "Overview of Michigan's Revenue System," Charles L. Ballard.

26. "Michigan's Personal Income Tax," Paul L. Menchik.

27. "Michigan's Sales and Use Taxes: Portrait and Analysis," Joel Slemrod.

28. "The Property Tax in Michigan," Naomi E. Feldman, Paul N. Courant, and Douglas C. Drake.

29. "Michigan's Flirtation with the Single Business Tax," James R. Hines, Jr.

30. "Borrowing by Michigan Governments," Jay B. Rising and A. Thomas Clay.

31. "Fiscal Relations among the Federal Government, State Government, and Local Governments in Michigan," Ronald C. Fisher and Jeffrey P. Guilfoyle.