Michigan reaches budget deal averting shutdown

DETROIT (Reuters) - Michigan lawmakers reached abreakthrough compromise on Monday morning that avoided athreatened shutdown of most government offices with a budgetdeal raising the state income tax and extending the sales taxto some services.

Gov. Jennifer Granholm, who had ordered a governmentshutdown in the absence of a deal to plug the state's $1.75billion budget deficit, said she would sign the measures passedby the divided legislature after a marathon weekend session,along with a 30-day continuation budget.

Under the fiscal 2008 budget deal, Michigan lawmakers votedto raise the state's income tax rate to 4.35 percent from 3.9percent and to apply the 6 percent sales tax to services suchas interior design and landscaping.

The Republican-controlled Senate and Democratic-controlledHouse were expected to take up a proposed $440 million inbudget cuts and have agreed to a series of government reforms,Granholm's office said in a statement.

"This budget agreement is the right solution for Michigan,"the governor said in the statement. "We prevented massive cutsto public education, health care and public safety while alsomaking extensive government reforms and passing new revenue."

Granholm called 35,000 state employees, who had receivedtemporary layoff notices, back to work early on Monday, thefirst day of the state's new fiscal year.

Michigan's unemployment rate was 7.4 percent in August, thehighest in the nation. Home foreclosures in Detroit, thestate's largest city, were running at five times the nationalaverage.

Standard & Poor's Ratings Services said while the timingand extent of Michigan's economic recovery remained uncertain,tax reform, the quick end of the recent auto workers strike andthe assumption that $435 million in cuts will occur in thebudget, "would represent three significant stabilizing eventsfor a credit that has been in gradual decline."

All three Wall Street rating agencies have downgradedMichigan's general obligation bond rating this year, citing thestate's deteriorated financial condition.

(Additional reporting by Karen Pierog in Chicago)