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Published: Monday, 3/1/2010

Taxing solutions

FARMERS a century ago may not have been as sophisticated as they are today, but they knew this much: No matter how lean things got in the winter, you didn't eat the things you needed to plant in the spring. Otherwise, you had no hope of a prosperous future. That's a lesson the Michigan Legislature could take to heart.

Once again, the state is facing a massive budget deficit - now estimated at $2 billion or more - for the next fiscal year. The choices are stark: either raise new revenue or make massive cuts to primary, secondary, and post-secondary education. Cutting education would probably be a fatal blow to Michigan's long-term ability to compete for the new-economy jobs the state so desperately needs.

Gov. Jennifer Granholm, in her last year in office, hasn't always been a decisive leader. But she is proposing a solution that is about as good as can be hoped for. She is asking the Legislature to lower the state sales tax rate from the current 6 percent to 5.5 percent, but extend the tax to cover most services other than medical care and education.

This change is long overdue. Michigan, like most other states, has gradually become more of a service than a manufacturing economy.

Today, if you buy a fuel pump for your car, you pay sales tax on it. But if you pay a mechanic to install it, there is no tax. That makes no sense.

To prevent legislative mischief, the governor's proposal would require that the new money be used first to make up expected shortfalls in education funding, and when that is done, to eliminate a hated surcharge slapped on the Michigan Business Tax three years ago - ironically, by an irresponsible Legislature that was trying to avoid a service tax.

Republicans are not enthusiastic about the service tax idea, but have failed to come up with any alternative other than draconian cuts that might permanently cripple the state's ability to offer a competitive workforce. Liberals complain that the only fair way to raise revenue is through a graduated income tax, but that would require a state constitutional amendment.

Nobody expects the next few years to be easy for Michigan, Ohio, or indeed the nation. As New York Times columnist Thomas Friedman has observed, we need to pay for "more new schools and infrastructure than ever, while accepting more entitlement cuts than ever, when public trust in government is lower than ever."

The trick is to get through this rough patch by positioning Michigan and Ohio to rebound in the future. Cutting education funding would be exactly the wrong way for Lansing to start.

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