Michigan Increases State Income Tax
Detroit--The Michigan legislature last week approved a temporary 22-percent increase in the state's income tax, ending the immediate threat of deep cuts in state aid to public schools and colleges.
Spurred by pressure from Gov. William Milliken, lawmakers passed a six-month tax boost that is expected to yield $300 million for the financially depressed state.
The action should stave off budget cutbacks that would have crippled the operation of public schools and higher education and drastically curtailed other state services. Governor Milliken had warned that rejection of the tax hike would force him to cut nearly $200 million from the current year's appropriation for elementary, secondary, and higher education.
"We're quite pleased that the state plans to live up to its obligations," said Arthur Jefferson, superintendent of the 207,000- student Detroit school district, which would have lost $5 million if the tax-increase measure had failed. "We would have been in serious trouble had more cuts been ordered."
Despite the income-tax hike, Michigan's public schools may still be in trouble later this year. Only hours after the tax increase was passed by the legislature, Michigan's credit rating was lowered by Moody's Inves-tors Service, a Wall Street credit-rating firm.
Of the 42 states the firm rates, Michigan now holds the lowest rating, and is the only one in the "Baa 1" category.
The downgrading of credit could make it impossible for the state to borrow $500 million in September, after the temporary tax increase expires, to make aid payments to schools, colleges, and universities.
The poor credit rating might also hamper school districts' efforts to sell long-term bonds.
State officials planned to fly to New York last weekend to appeal Moody's decision, which was termed "devastating" by the state budget director, Gerald Miller.
The income-tax increase also may not avert the threatened delay in state aid to school districts in June. Mr. Miller said increased revenues from the tax hike will not be collected until July, forcing the state to hold back $184 million in next month's scheduled state-aid payments to schools.
"The June delay is going to be troublesome," Mr. Miller said. "Even if we make a partial aid payment by the end of June, it may be very small."
Officials of several Michigan school districts--including Detroit, the largest--have said a delay in June aid payments could force them to miss payroll obligations.