LANSING, Mich – The state Legislature agreed early Monday to raise the income tax and expand the sales tax to services in a historic deal with the governor that quickly ended a partial state government shutdown.
For just over four hours early Monday, fewer state police were on Michigan highways, campgrounds were closed, road construction projects and lottery sales were stopped, and more service interruptions were on the horizon for later in the day until the final pieces were sent to Democratic Gov. Jennifer Granholm.
Applause broke out in Granholm's office at the Capitol as soon as the final vote was announced at 4:18 a.m. The deal prompted Granholm to call off the partial shutdown of government that began at 12:01 a.m.
"This budget agreement is the right solution for Michigan," Granholm said in a statement. "We prevented massive cuts to public education, health care and public safety while also making extensive government reforms and passing new revenue. With the state back on solid financial footing, we can turn our focus to the critical task of jump-starting our economy and creating new jobs."
Granholm signed a 30-day extension of Michigan's budget that technically expired at midnight. The continuation budget keeps government running.
The Legislature agreed to raise Michigan's income tax rate from 3.9 percent to 4.35 percent and expand the 6 percent sales tax to some services. Granholm signed both measures. Structural changes to state government — including the management of teacher and other public employee benefits — also are part of the package.
The tax increases should erase most of a projected $1.75 billion deficit in Michigan's next budget. The final budget for the new fiscal year will include $440 million in spending cuts, including no inflationary funding increase for public universities and community colleges, Granholm said.
The Republican-led Senate finished passing the package at the end of a draining, marathon session that covered parts of three days. Members of the Democratic-controlled House stopped voting and left the chamber before 4 a.m. since the only key vote related to the deal remained in the Senate.
"Nobody wanted a shutdown. I think that is true across the board," said Liz Boyd, a spokeswoman for Granholm.
Michigan already has the nation's highest unemployment rate — 7.4 percent in August — and just went through a two-day strike involving the United Auto Workers and General Motors Corp. Disrupting services from state parks to road construction risked further upsetting an already unsettled public.
But Boyd said the months-long debate over Michigan's new budget is about defining the state's future and making sure enough money was available to support education, public safety and health care.
Senate Majority Leader Mike Bishop, R-Rochester, said he was disappointed that taxes are going up but added that Republicans successfully pushed for spending cuts and government restructuring changes.
"It's been a long, long couple of days," he said. "We're coming out of this having been through a lot and I think we're better for it."
Without a budget deal in place, 35,000 of the state's roughly 53,000 workers would have been barred from going to work Monday morning and all state services except those needed to protect health and safety would've halted.
Employee paychecks would have been reduced to reflect any hours missed because of a shutdown, but Granholm asked them all to report to work as usual Monday. The state last withheld some employee paychecks in 1959, when a cash-starved state budget resulted in what became known as the Payless Payday crisis.
"It's always tough in a recession to look at doing a revenue increase," said House Speaker Andy Dillon, D-Redford. "But I think it was clearly unavoidable. We also need reforms, and we are getting substantial reforms as part of this agreement."
Some of the toughest votes were for tax increases, especially in the Republican-led Senate.
The Senate split 19-19 twice, forcing Lt. Gov. John Cherry to cast the tie-breaking vote in favor of the income tax bill and expanded sales tax to cover some services.
Four Republican senators voted for the higher income tax — Patricia Birkholz of Saugatuck, Tom George of Portage, Ron Jelinek of Three Oaks and Gerald Van Woerkom of Norton Shores. Democrats Glenn Anderson of Westland and Dennis Olshove of Warren voted against the income tax increase.
Three Republicans senators — Jelinek, Valde Garcia of Howell and Wayne Kuipers of Holland — voted to expand the sales tax to services. Anderson was the lone Democrat opposing the sales tax expansion.
The House passed the income tax measure 57-52. Democrats hold a 58-52 edge in the House, but three Democrats — Martin Griffin and Michael Simpson of the Jackson area and Lisa Wojno of Warren — voted against it. Two Republicans, Chris Ward of Brighton and Ed Gaffney of Grosse Pointe Farms, voted in favor of the proposal.
No House Republicans voted for the bill placing the 6 percent sales tax on services — a proposal stiffly opposed by the business community. All Democrats did, except for Reps. Marc Corriveau of Northville and Kate Ebli of Monroe, who voted no.
The sales tax would not apply to tickets to sporting and entertainment events or accounting services. But businesses and consumers would pay the tax on ski tickets, administrative and investment services, consultants, warehousing and storage, interior design, commercial landscaping and janitorial services, among other services.
Raising the state's income tax to 4.35 percent will raise an additional $765 million for the state. The income tax bill is written so the rate will gradually drop back to 3.9 percent between 2011 and 2015.
Extending the sales tax to some services starting Dec. 1 will bring in an estimated $614 million for the 10 months remaining in the fiscal year at that point, or about $750 million annually, state Treasurer Robert Kleine said.
Rep. Craig DeRoche of Novi, the top Republican in the House, said he didn't want a government shutdown or higher taxes.
"I think it sets back Michigan's economy," he said.
The House and Senate also approved a controversial measure that would change the way some teacher and state worker health benefits are determined — a tough vote for many Democrats and some Republicans because it will affect an insurance affiliate of the Michigan Education Association, the state's largest teachers' union.
Political posturing over votes, with an eye toward the 2008 and 2010 elections, slowed down the process of getting a deal in place. Some vulnerable Democrats had resisted voting for a tax increase, while some Republicans worried they could face recalls if they supported a tax increase.