When a wildfire began spreading across Michigan’s Lake Superior State Forest last month, it not only alarmed nearby residents and the state’s many outdoor enthusiasts.

The fire, which eventually cost $6 million to combat, also raised concern among state officials responsible for putting it out. Not only did these officials know that drought conditions had made the Upper Peninsula ripe for a major fire, they also knew that repeated funding cuts to the Michigan Department of Natural Resources had left that agency severely understaffed, under-funded, and less prepared to deal with a major conflagration.

Today, 18,000 charred acres of Upper Peninsula wild land later, the Sleeper Lake fire, the third-largest in Michigan’s history, is almost out. That’s at least partly because the Michigan Department of Natural Resources drafted firefighters and resources from neighboring states to lend a hand.

Michigan DNR spokesperson Mary Dettloff told the Great Lakes Bulletin News Service that, even with repeated, sizeable cuts in personnel and enforcement, her agency has run a deficit for three straight years, forcing it to depend on state forest timber sale revenues, which have dwindled. As a result, she said, the DNR has only 81 fire fighters on its payroll this year—an all-time low.

"Almost every year we’ve had to go to the Legislature with our hat in our hand to ask for supplemental funding for fire suppression," said Ms. Dettloff. "A study conducted a few years ago says the minimum we should have is 100 firefighters."

Lawmakers have been at an impasse about how to properly fund most areas of state government—even seemingly non-controversial ones like fighting forest fires—for more than a year. Today, as stormy negotiations continue over what the State of Michigan should pay for and how to pay for it, Oct. 1, the beginning of the state’s budget year, is approaching rapidly. And a $1.8 billion projected budget deficit remains.

Meanwhile, economists and many lawmakers, including some conservatives, agree that, even if Michigan’s economy picks up, the deficit will continue to increase, even with further budget cuts, unless the state somehow raises new revenue. Economists say the situation is a classic example of a "structural deficit."

Surveying the Damage
A look at recent state budget figures reveals that DNR firefighters are hardly the only ones hurt by the state’s growing list of funding cuts.

Lansing has cut funding to local governments by $600 million annually, leaving many communities with budget crunches of their own as they try to finance police and fire protection and repair worn streets, sewers, and other infrastructure.

Cuts to Michigan’s public universities over the past few years add up to the entirety of state funding for Michigan’s six smallest universities, forcing schools to hike tuition by as much as 20 percent.

Even though Michigan now has fewer state employees than it did in 1973, the state can no longer handle the soaring cost of healthcare and other benefits it promised them.

And while a plan by the Michigan Department of Community Health to cut Medicaid by 6 percent for the last four months of fiscal year 2007 failed in the Legislature, it and other essential programs, including public education, remain on the chopping block.

Even with those and other cuts, at the current rate the annual gap between revenues and spending pressures will rise to $10 billion dollars within 10 years, according to recent projections from the Citizens Research Council of Michigan.

"We will not grow our way out of it," explained Charles Ballard, a professor of economics at Michigan State University.

Heating Up
But while many policymakers, economists, and most Democratic lawmakers argue that a tax increase is the only way out of the mounting budget deficit, many fiscal conservatives adamantly oppose any tax increase.

The debate is now so bitter that former state Representative Leon Drolet, a Republican, organized the Michigan Taxpayers Alliance to file recall petitions against nearly a dozen legislators from both parties who might vote to raise taxes. Some on the list seem uncowed by the tactic, however.

State Representative Richard Ball, a Laingsburg Republican, said that he was targeted because he was one of the first members of his party to publicly state that Michigan might have to raise revenues to effectively fill the budget deficit.

"The state Constitution says we will have a balanced budget on Oct. 1, and there isn’t really any other alternative," said Representative Ball.

Another Republican state senator, Jerry Van Woerkom of Muskegon, made the recall list because he hasn’t yet stated his position on a tax increase, according to his legislative aide, Jeff Cobb. Mr. Cobb said that the senator would make a decision once he evaluates how well cuts and reforms have addressed the budget deficit; he also shrugged off the recall threat.

"Recall should be for malfeasance or some really reprehensible act," he said. "We’re talking about finding the right solution to balance the budget."

Many Ideas, Little Action
Past tax increase proposals have fared poorly. In March, the Legislature crushed Governor Granholm’s plan to raise up to $2 billion annually through a 2 percent tax on all services except health and education. Services now account for more than half of all private-sector economic activity, so many economists see good reason to tax things like massages, haircuts, golf fees, and sports tickets.

"Today, if you buy a hammer, you pay the six-percent sales tax. But if you go to a tanning salon, you pay no tax," observed Dr. Ballard, who advocates taxing a wide array of goods and services at 5 percent.

"There is no doubt in my mind that it would raise revenue and do so more efficiently than income taxes," said Michael LaFaive, director of fiscal policy for the Mackinac Center for Public Policy, a conservative, Midland-based think tank. But Mr. LaFaive said that a tax increase is unnecessary and bad for the state’s economy.

His objection may be moot: It is too late to levy a tax on services for the next full fiscal year. A number of legislators from both parties supported placing a proposal to boost the sales tax by one point on the November ballot, but they missed the September 6 deadline. Still on the table is Governor Granholm’s proposal to hike the state income tax, a move that Senate Majority Leader Mike Bishop and his Republican colleagues oppose.

"I believe firmly, after 11 years in leadership as a fiscal conservative, that you cannot tax your way back to recovery or prosperity," explained Senator Nancy Cassis, a Republican of Novi, who chairs the Senate Finance Committee. "I think our low income tax rate is one of our best features of this state in an otherwise very dismal economic situation."

Some History, and a Non-Radical Idea
In 1999, Senator Cassis, then chair of the House Tax Policy Committee, helped enact tax cuts that then-governor John Engler, also a Republican, pushed during a time of relative economic prosperity and healthy budget surpluses. But as Michigan’s economy faltered and the new tax cuts gradually rolled back the state income tax from 4.4 percent to 3. 9 percent, the state’s budget sunk into serious deficit.

Most Democrats, including State Senator Gilda Jacobs of Huntington Woods, say the economic damage the state has endured since then—both in terms of the state’s budget and Michigan’s overall economy—belie Republican claims that more tax cuts are the key to prosperity.

"Republicans have all along felt that tax cuts would stimulate the economy, but if that was true, we would have the best economy in the world," said Senator Jacobs, who sits on the Senate Finance Committee with Senator Cassis. "I don’t think [the Engler cuts] made a difference in people’s lifestyles, but it made a huge difference in terms of our economy."

The Citizens Research Council of Michigan estimates that raising the income back to pre-1999 levels would add $850 million a year to state coffers. Professor Ballard’s calculations suggest the revenue gain could be even larger: "You could solve more than half of the next fiscal year’s budget problem with getting the income tax back to where it was before," he said.

Representative Ball does see room for returning the income tax to pre-1999 levels: "I personally favor a short-term income tax (boost) because it’s neat and clean. It would be putting the income tax back where it was eight to 10 years ago."

Professor Ballard added that the state’s spate of tax cuts since then gave Michigan one of the most regressive taxation systems in the country. He and many other economists and policymakers are pushing for a graduated income tax, which, they say, could help close the gap between wealthy residents with little need for public services and the growing number of Michiganders with sharply falling incomes, who now need everything from job retraining to medical services.

The change, however, would require a constitutional amendment. Mr. LaFaive and Senator Cassis oppose the idea, while Senator Ball said his position would depend on how the tax was graduated and what exemptions it included.

Currently, Michigan taxes families living below the official poverty level. A graduated income tax that exempted the first $20,000 of earnings would not only alleviate some of the burden on poor families, but also keep better pace with the state's ever-mounting spending pressures, according to Tom Clay, emeritus director of state affairs at the Citizens Research Council of Michigan.

Economists say the notion is hardly radical. Of the 43 states with an income tax, only six, including Michigan, have a flat tax. The rest, including many so-called "red" states, impose graduated income taxes. Michigan’s 3.9 percent flat rate, for example, remains well below Utah’s top rate of 7 percent.

"Utah," Professor Ballard noted, "is not exactly a hotbed of left-wing radicalism."

Stephanie Rudolph, who served as a Michigan Land Use Institute intern in 2003, is back again this fall as an Institute fellow. She is researching and reporting on Michigan’s ongoing fiscal crisis and attempts by state government to fix the problem. Reach her at stephanie@mlui.org. Click here for more articles from the Institute series, Busted, which examines Michigan’s fiscal crisis.