How Michigan's Government is Financed

Instructor: Christine Serva

Christine has an M.A. in American Studies. She is an instructional designer, educator, and writer with a particular interest in the social sciences and American studies.

Where do the state and local governments of Michigan get their money? In this lesson, you'll learn how Michigan's government is funded and what happens when a local government or school district faces a financial crisis.

The State Budget

Every month you probably have a series of bills you have to pay: rent or mortgage, food, gas or public transportation, health insurance, and so on. Hopefully, you also have some sources of income to help pay for these expenses, such as a job, income from a partner or family member, child support, or perhaps unemployment if you don't have a job right now.

State governments also plan their budgets around expected income and expenses as well as the needs of residents. In this lesson, we'll look at how different levels of Michigan's government are financed and where the money goes. We'll also briefly look at what happens when a financial crisis hits local governments and school districts.

Who Funds Michigan's Government

The money coming in to the government is referred to as its revenue, or income. So where does this revenue originate? Here are the four biggies:

  • Business taxes
  • Individual income tax
  • Sales and use taxes
  • State property taxes

In addition, the federal government also allocates dollars to the state. These are referred to as federal funds, while the money collected by the state is referred to as state funds.

General Fund and School Aid Fund

When you pay taxes to the state of Michigan, your money generally has three ultimate destinations: state government, local government, and public schools. Federal money also goes to each of these.

You may hear the term general fund used when talking about state finances. This refers to the majority of the state budget and does not include any special purpose funds. This is the primary fund for nearly everything the government does. Michigan's School Aid Fund, on the other hand, is used specifically for school districts, higher education, and retirement money for school employees.

In addition to individual income tax and sales and use taxes, the School Aid Fund also receives revenue from the lottery and casinos as well as taxes on cigarette, real estate transfers, and liquor.

Use of Michigan's Funds

What do state and local governments do with the money? According to Governor Snyder's Citizens' Guide to Michigan's Financial Health (2011), these are the main categories where your money ends up:

  • Community health (Medicaid, local public health, and mental health services)
  • Human services (cash assistance, food stamps, child foster care, and disability insurance)
  • Corrections and law enforcement
  • Infrastructure (roads and bridges)
  • Resource protection
  • Education
  • Planning, zoning, and economic development

Government Borrowing

If you know your household income isn't going to cover your expenses for the month, you might find that you turn to borrowing money or using a credit card. The government sometimes runs into a similar problem where it cannot afford to pay its expenses and at the end of the year, it comes up short.

This means that, at times, the government has borrowed at the beginning of the fiscal year and then paid back these loans with interest by the end of the fiscal year. This is particularly the case when there are very large expenditures that a government needs to make, like creating new infrastructure or buildings. Reductions in taxes - through government policy or the lowered income of residents - can also contribute to this problem.

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