LANSING (AP) -- Michigan Gov. Jennifer Granholm on Thursday unveiled a budget proposal that included extending the tax to services while eliminating a business tax surcharge over the next two years.
The proposals were included in a $47.1 billion budget plan that calls for no cuts in spending to public education, local governments or universities and community colleges. It would trim the state work force and require state workers and teachers to pay more toward their pension and health care costs when it takes effect Oct. 1.
The business tax cuts and changes in personnel costs got a warm reception from many business groups and Republicans. But the Democratic governor will face a tough task getting the sales tax extended to services, even with lowering the tax rate.
"We are very disappointed that, with Michigan leading the nation in unemployment, the governor refuses to bring the cost of state government in line with taxpayer ability to pay," said Jim Holcomb, Michigan Chamber of Commerce general counsel. "Instead she offers an agenda that includes a $554 million sales tax increase on working families during a recession."
Granholm said the state cannot continue to cut funding for public schools as it did this year. Without the extra money, she said school districts could see a $225-per-pupil cut in funding next year in addition to the $165 cut they took for each student this year.
"We still have to invest in the things that businesses want in order for them to grow," she said. "That means education. Education directly relates to job creation."
Under Granholm's proposal, the sales tax wouldn't apply to health care and social assistance, education, new construction, real estate and insurance commissions and services directly connected to business operations. It would be extended to services on Dec. 1.
Granholm also proposed cuts, including requiring teachers and state employees to pay 3 percent toward their pensions and new employees to pay 20 percent of their health care premiums. She offered incentives for 7,000 state workers and 39,000 senior teachers to retire.
Those are among changes Granholm said would save about $450 million and stabilize the state's pension system.
The budget assumes Michigan will get $722 million in federal recovery assistance, about $500 million of which still needs to be approved by Congress. The popular Michigan Promise Grant scholarship, eliminated in the current budget, would be resurrected as a $4,000 refundable tax credit to students who complete their degree and work for a year in Michigan.
The budget also calls for closing up to five prisons or camps, giving inmates sentencing credit for good behavior and charging physicians a fee that would raise $133 million while increasing their reimbursement rates for seeing Medicaid patients by 80 percent.
Republican Sen. Alan Cropsey, of DeWitt, questioned how many prisons the state could realistically close. The Prosecuting Attorneys Association of Michigan opposes letting prisoners get reduced sentences for good behavior, saying it's a step away from the truth-in-sentencing laws that let crime victims know inmates will remain in prison for at least their minimum sentences.
GOP Sen. Roger Kahn, a cardiologist from Saginaw, noted that a physician tax proposal failed last year. He said he doubted it would be more successful with lawmakers this year.
The overall budget recommendation of $47.1 billion is 8.3 percent higher than the current budget. But spending on public schools and in the general fund is up just 3.9 percent, to around $21.8 million. Most of the rest of the increase comes from more federal dollars flowing into the state for programs such as health care for the poor.
Granholm said the state has to make structural changes to add more revenue to deal with a $2 billion drop in its general fund over the past two years.
"We haven't seen this level of (general fund) revenue for 46 years" after adjusting for inflation, she said. She added that Michigan has 10,300 fewer employees than in 2001 and has cut billions out of the budget, including $1.2 billion in the current year.
Extending the sales tax to services would give schools a more stable funding source and allow the state to cut the 22 percent surcharge on the Michigan Business Tax in half next year and eliminate it by 2012. The state also would reduce the gross receipts tax rate in 2012 and 2013, adding up to a savings of $2.6 billion for businesses over the next four years.
Senate Majority Leader Mike Bishop, R-Rochester, would prefer dealing with the $1.2 billion general fund shortfall and $423 million school aid deficit with cuts to Medicaid and public employees' pay rather than a tax increase.
"I just don't think her proposal hit the mark," he said. "This dumps solidly on individuals out there. It gives minimal relief to the business tax."
But state Rep. Shanelle Jackson, D-Detroit, said Granholm's proposals didn't go far enough.
"I want more revenue," she told Granholm, noting that voters in her district tell her they're willing to pay a little more if their neighbors can get better job training, education and something to eat in return.
Sharon Parks, president and CEO of the Michigan League for Human Services, said the budget was a step in the right direction but fell short of what's needed.
"We're not sure it goes far enough to provide services that Michigan families need in these very tough economic times," she said in a statement.
Granholm wants to raise $13 million for the state's popular Pure Michigan tourism promotion program by adding a new $2 fee on rental cars. She also would keep state police troopers at their current staffing levels and add $2.5 million to this year's budget to reduce forensic case backlogs.
The governor called for moving to a two-year budget process and cutting the pay of lawmakers and the governor for every day the budget isn't passed after July 1. She also called for having all tax exemptions expire after two years if they're not renewed by lawmakers and the governor. Michigan currently hands out $36.4 million in annual tax breaks.
The budget reflects an estimated $475 million reduction in money for Michigan roads and bridges, mostly because the state will lose federal transportation dollars because it won't raise enough from its fuel taxes to match the federal grants.