The State Budget and Owosso

As Michigan crawls its way out of the recession, the State faces difficult budget decisions. Owosso too is trying to find its way forward economically, and how the details of the State's budget are worked out could make our community a partner in--or a victim of--the State's recovery plan. Governor Rick Snyder proposes a major overhaul of fiscal planning at the State level, and several weeks ago introduced his new budget. Job growth is his primary goal, and to achieve this objective he proposes major cuts and restructuring of taxes on businesses. He also proposes significant reductions in several areas of State expenditures. According to the official budget document (click here), "the financial models of our state and local governments are unsustainable. Service duplication, debt, public employee compensation and unfunded retirement obligations are impacting the long-term fiscal health of state and local governments. Governor Snyder believes Michigan and its public institutions must correct course, stop spending money they don’t have, and implement pragmatic solutions to the economic and fiscal problems that exist." How will this budget effect Owosso?

Revenue Sharing. First and foremost to the City of Owosso, the Governor proposes a reduction in statutory revenue sharing. If approved by the Legislature, this will result in about a $461,000 cut in the City's revenues (which were budgetted at $6.7 million for this year). Untouched, because it is written into the State Constitution, is over $1 million in state aid the City receives. Revenue sharing was implemented to compensate local governments for not imposing local sales taxes. In other states, many cities have their own sales tax or receive a set percentage of sales tax revenues. In Michigan, statutory revenue sharing favors older cities with higher populations of lower-income residents.

For Owosso to weather the (estimated) seven percent (7.0%) cut in its revenues, it will likely be necessary to reduce labor costs, either through the elimination of positions or the reduction in pay and benefits. Governor Snyder's budget message suggests that the benefits municipal workers, as a whole statewide, receive are out of line with the private sector. While City spending on infrastructure improvements like sidewalks are sometimes identified as a source for budget cuts, these have generally paid for through state or federal grants, or specific local assessments. The City's unrestricted revenues are mostly dedicated to labor costs. There is little else to cut in the City's budget.

The Governor has proposed to restore in the State budget about two-thirds of the statutory revenue sharing, but distribute the funds through a new incentive program that would reward cities and townships for "best practices" which may include funding for regional cooperation. The specific details of this program have not yet been announced, nor is it clear whether local governments will be rewarded for existing, or future, best practices. The details of this program will determine how big a financial hit the City of Owosso takes. If we are recognized for existing regional cooperation (e.g. water), or given the opportunity to combine services (e.g. public safety), then perhaps we will thrive under this new program. If the program is designed primarily for urban and suburban communities that occupy one metropolitan area, then Owosso may not recover much or any of its lost revenue sharing dollars. Given the goal of job creation in the State, I would favor incentives that reward local governments that participate in robust economic development efforts (for instance, the City has committed at least $15,000 annually to the Shiawassee Economic Development Partnership for several years).

Job Growth through Tax Cuts is the primary goal of the budget, and the Governor proposes to do away with the complicated Michigan Business Tax (MBT) and replace it with a flat six percent tax on corporations. Those businesses organized as partnerships and other limited owner structures will be exempt from most State taxes. This promises to be a boon to small and new businesses, and the Governor believes that "economic gardening" will result in broad and deep job growth. He also proposes to do away with targeted tax credits that are given to specific companies in exchange for commitments to create new jobs. This past approach of "picking winners and losers" benefitted our area with several expansions of manufacturing plants and other businesses that bring in dollars to our community. It is unclear whether these new jobs would have been created locally without these tax incentives, and it is unclear whether the proposed tax reforms will attract or spur equal or greater job growth. What is clear is that the changes would favor many locally-owned businesses and improve the economics for the creation of new jobs. To fully capture the benefits of the tax changes, we (the City and its many partners) will need to emphasize assistance to entrepreneurs and small businesses.

Loss of Development Incentives. In the debates about taxes and spending, much less attention has been given to the potential loss of specific tax credits that have been key to new growth in Owosso. We have been fortunate in recent years to have several new projects built in Owosso, including the Comstock Inn, Woodward Station, and the under-construction Lebowsky Center. All of these projects have been made possible by the Brownfield Tax Credit, which the Governor's budget proposes to eliminate. Going forward, redevelopment of the downtown will depend on not only the Brownfield Tax Credit, but also the State's Historic District Tax Credit. Owosso went through considerable effort last year to put into place a historic district in its downtown, and in response we have already seen several property owners move forward with new storefronts or major reconstructions. Much of this private investment is made possible by the presence of the tax credits, which provide equity investment and improve the opportunities for financing (which has become quite difficult in the last few years). Loss of these development incentives would hurt Owosso's efforts to spur economic development.

The argument against "picking winners and losers" does not apply to these two tax credits, as they are available to any business who develops in certain areas. The Brownfield Tax Credit was put in place to encourage revitalization of downtowns and urban areas, many of which were contaminated in the past and for which there are extensive clean-up costs (this was especially true at the site of the Comstock Inn). Without this tax credit, there would be more empty, blighted lots in Owosso and throughout the state. Without this credit, state policy would push new development out into "green" fields with attendant environmental impacts. The Historic Tax Credit is even more limited in its area of application, but helps developers offset the higher costs of restoring older buildings. Both tax credits are major tools in helping cities like Owosso rebuild its tax base. If we lose revenue sharing dollars from the State, it becomes even more important to increase our tax base through redevelopment.

Summary. The Governor has called for "shared sacrifice" to put Michigan's fiscal house in order, and it would be unrealistic and unfair for Owosso not to do its part (there are also other impacts of the budget on education, health care, and other sectors of our community). And the Governor has the right primary goal in encouraging job growth. If successful, the changes in taxes and spending will restore Michigan's economy and that will do more for Owosso than any particular job program or new development. However, it is important that State adopt a plan that makes Owosso a partner in economic recovery. I believe our greatest contributions can come through creating a vibrant community that provides a platform for entrepreneurs. This platform would consist of a support system for small businesses and manufacturers, a growing downtown, and a community with a high quality of life. Owosso is building this platform for growth, and it seems appropriate to ask our Governor, and our legislative representatives, to adopt a budget--and accompanying policies--that allows us to be partners in, and not victims of, the State's recovery plans.