Reinventing Michigan: as the nation began descending into economic crisis in early 2008, no state was falling faster or further than Michigan.

• Author: Weiss, Suzanne
• Position: MICHIGAN - Cover story

For Michigan, the once-mighty industrial giant--home of the Big 3 automakers, and a leading producer of everything from kitchen appliances to machinery to sporting goods--the Great Recession accelerated a downward spiral that had been under way for nearly a decade.

Suddenly, all of the problems that Michigan was coping with--numerous plant closings, rising unemployment, declining population, shrinking per-capita income, widening state budget deficits and dangerously high unfunded liabilities--got a whole lot worse.

The state had already lost nearly 450,000 jobs since 2000, and once the national recession hit, that number nearly doubled to a staggering 862,000. By 2009, the unemployment rate stood at 14 percent, the highest in the nation; per-capita income had dropped to 87 percent of the national average; and Michigan was the only state to have experienced several consecutive years of net population loss.

"We were in a very deep hole, no question about it," says Representative Al Pscholka (R), House majority leader.

The extent to which the state has managed to pull itself out of that hole over the past four years--"The Michigan Comeback," as political and business leaders like to call it--has drawn considerable attention.

Rebounding

The state's manufacturing sector has rebounded, thanks largely to the federal bailout of General Motors and Chrysler and the remarkable turnaround of Ford Motor Co. Beginning in 2011, Michigan's economy has ranked among the fastest-growing in the nation from year to year, according to the U.S. Bureau of Economic Analysis.

The unemployment rate has steadily decreased, going as low as 8.4 percent in spring 2013 and currently holding at just under 9 percent. Per-capita income is now growing at 3.5 percent, close to the national average, and Michigan has experienced modest population increases each of the past three years. Housing sales and building permits are up, and agricultural exports have increased 16 percent since 2012. The state's credit rating was upgraded to AA last year, the first time it has rated above AA- since 2007.

Pscholka says that much of the credit for the state's economic recovery goes to tax restructuring and other initiatives set in motion in 2011, when Republicans captured the governorship and both houses of the Legislature.

"We've set Michigan on an upward trajectory," says Senate Majority Leader Randy Richardville (R). "We've emphasized making the business climate better here in Michigan, starting with the elimination of a corporate tax that was a major impediment to economic growth."

Not Out of the Woods

But those claims are hotly contested by Democratic legislators and others who say that, first, Michigan isn't out of the woods yet. And, second, that the Republican initiatives don't provide the fundamentals for a stronger economy.

"Yes, we've seen some economic growth and a reduction in unemployment, but that's really a reflection of the national recovery," says Representative Tim Greimel (D), House minority leader. "And most of the job growth has been in the auto industry, which was the result of the federal bailout and has nothing to do with Republican policies."

Greimel and others point out that many of the new jobs being created in Michigan--at the rate of about 65,000 a year--pay lower wages than jobs lost during the 2000s. "And the fact is that our unemployment rate remains third-highest in the nation, which is what it was when the Republicans took over," he says.

Charles Ballard, a Michigan State University economics professor who conducts the annual State of the State Survey, agrees with Greimel about the impact of the federal bailout. "It is, by far, the most important policy of the last five years. Without it, an additional one million jobs would have been lost here in Michigan and in Ohio, and we would have been dealing not with a recession but something more like the Great Depression. It would have been a catastrophe."

Partisan Battles

Greimel characterizes the Republican tax restructuring initiatives approved in the 2011 and 2012 sessions as "a retread of trickle-down economics." Democrats supported "overall reduction of business tax liability--we have no problem with that," he says. "But to pay for it by taking money out of the pockets of middle-class families, seniors and the working poor is simply unjust."

The centerpiece of the Republican plan was the replacement of the complex and deeply unpopular Michigan Business Tax with a flat 6 percent corporate income tax, which is expected to reduce corporations' tax liability by roughly $1.8 billion a year.

The Legislature gave Michigan businesses an additional $590 million annual tax break by approving a 10-year phase-out of the state's personal property tax, which is levied against industrial and commercial equipment and constitutes a major source of revenue for cities with a large industrial base.

At the same time, Republicans pushed through a package of tax-code changes that Greimel and others say will result in roughly half of all Michiganders paying more in individual income taxes.

They include imposing a new tax on the pensions of retired public employees; reducing the number of households that qualify for property-tax rebates; eliminating the annual $600 per-child tax deduction and tax credits for charitable donations; and reducing the state Earned Income Tax Credit from 20 percent to 6 percent of the federal credit.

House Speaker Jase Bolger (R) disputes claims that the tax code changes will adversely...