February 24, 2011

Lessons Learned from Bill Collectors

Chad was getting worn out.

Working 40 hours/week was more than he wanted to handle, so he cut back to just 30 days/week. It cut his income by 25%, but he was OK with that because his priorities were elsewhere.

But then, the letters and phone calls started. He wasn't able to meet his financial commitments. The bill collectors were all over him.

First it was his insurance carrier, then his cellphone company, then his mortgage holder. They all wanted him to pay them what he had promised to pay. Chad told them all the same thing: "My income has gone down, and I simply don't have the money to pay you. You will have to accept less from me" with the tacit assumption that they would continue to provide him with the same services.

When the collection agents probed a little, they discovered that Chad had voluntarily cut his income. He chose to have less income, so they weren't in a mood to adjust his bills. In fact, they became more insistent.

What Chad really wanted was to renege on agreements he had made. The result was inevitable: his homeowners and car insurance was cancelled, his cellphone was turned off (but he kept running up a bill), and he found a foreclosure notice taped to his front door.

When his insurance was cancelled, his car loan and mortgage were automatically in default. Even though his cell service was cancelled, he faced either continued accrued service charges or a $250 early cancellation fee. The complications from his decision to reduce his income escalated.

Chad found that other businesses wouldn't extend him credit because he had developed a reputation of someone who didn't keep his financial commitments. His creditors took him to court. He faced a choice: restore his income to its previous level, or file for bankruptcy.

Chad could have been the model for Gov. Rick Snyder's approach to state government: voluntarily cut your income, plead poverty, and tell your folks you were reneging on commitments made to them.

"Voluntarily cutting state income?" you ask. Yes, and I'm not just talking about Gov. Snyder's $1.5 billion proposed gift to Michigan businesses. It goes back more than a decade.

Michigan's current financial crisis is solely not the result of the international recession, or even the collapse of the domestic auto industry. The "perfect storm" of economic chaos gutted income tax, sales tax and business tax revenues.

But state tax policies enacted during the Engler administration made it far worse. As a state we tried to cut our way to prosperity. We bought into the argument that cutting taxes was the pain-free path to wealth.

According to the non-partisan Senate Fiscal Agency, the state has been on a tax-cutting binge for a decade.

"What?" you say. "I don't believe taxes are lower than they were under John Engler."
But it's true. The rates may not be lower, but the effective rate (what we actually pay) is down 25%. (They measure effective taxes as the percentage of personal income paid in taxes.) In 2000, you would have paid about $95 for every $1,000 of income. A decade later, it was about $70 for every $1,000.

Much of the reduction has been through "tax expenditures" (tax breaks for various interest groups).

If Michigan's EFFECTIVE TAX rate had held constant from the Engler years, the state would be collecting an additional $8 billion.

Rather than recognize that more than a decade of tax-cutting hasn't brought prosperity to Michigan, the Snyder administration proposes to
1) Cut taxes even more for businesses, and
2) Plead poverty and renege on longstanding financial commitments made to seniors, local governments, public employees, children and college students.

When Gov. Snyder says "we no longer can afford" things like revenue sharing, what he is really saying is "we have decided that we'd rather continue to cut taxes than meet our commitments. When we made those promises, we had our fingers crossed."

I don't propose fully restoring Michigan's tax rates to collect the full $8 billion, although that kind of money would allow the state to again "walk the walk" on things like education. What I do propose is

  • Expand the sales tax to cover all end-user services, and cut the rate to 5.5%
  • Raise the ridiculously low tax on beer
  • Extend the sales tax to vending machine sales
  • Do a complete review of tax expenditures, repealing those which don't work or are outdated
And then we can keep out commitments. Our economic future depends on it. What business is going want to move into a state that unilaterally decides it no longer is willing to keep commitments? The business lobbyists are fond of saying that businesses want predictability and certainty. The message from the Snyder administration is just the opposite. Because, as my fictional friend Chad found out, voluntarily reducing your income and then pleading poverty isn't a smart strategy. You can try your hand at balancing the budget by checking out this game from The Center for Michigan

1 comment:

  1. I recommend $1.00 a gallon gas tax. I like drinking beer at home...alone.