updated 10/1/2007 9:54:59 AM ET 2007-10-01T13:54:59

The state Legislature agreed early Monday to raise the income tax and expand the sales tax to services in a deal with the governor that quickly ended a partial state government shutdown.

For a little more than four hours, fewer state police patrolled Michigan highways, campgrounds were closed and road construction projects and lottery sales were stopped. More service interruptions were planned for later in the day until the final pieces of the deal were sent to Democratic Gov. Jennifer Granholm.

Applause broke out in Granholm's office when the final vote was announced at 4:18 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, which expired at midnight. The continuation budget keeps government running.

Erasing $1.75 billion deficit
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 deal came after a marathon legislative session that covered parts of three days.

"Nobody wanted a shutdown. I think that is true across the board," said Liz Boyd, a spokeswoman for Granholm.

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 public health and safety would have been halted.

Some of the toughest votes were for tax increases, especially in the Republican-led Senate.

Tie-breaking vote
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 to cover some services.

The Democrat-led House passed the income tax measure 57-52.

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.

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