Despite economic growth, Michigan budget to face steep challenges

debt

A new report shows over $2 billion in potential General Fund revenue will be diverted or dedicated to other promised programs by 2023. Add an economy that will inevitably cool, and Michigan will soon be facing serious budget challenges.  

Lupher

Eric Lupher is president of the Citizens Research Council of Michigan, a nonprofit public affairs research organization

With his signature in mid-July, Governor Snyder put to bed the state budget for fiscal year 2018. Eight years removed from the end of the Great Recession and benefitting from an expanding state economy and projected solid revenue growth, this year’s budget process was a pretty typical affair.

The $56.5 billion total spending plan, which takes effect October 1, includes $10.0 billion in appropriations from the state’s discretionary General Fund checkbook, about the same amount authorized in the current year. While budget deliberations this year centered around maintaining current spending levels or marginally increasing funding in specific areas (e.g., all levels of education), a new report by our group, the Citizens Research Council of Michigan, shows that a number of decisions made by previous legislatures will muddy the waters, making the challenge of balancing the state budget much more difficult in future years.

Despite projections for continued economic growth, the General Fund is not expected to grow over the next three years relative to inflation because of a few major revenue diversions, including some that have yet to come online.

Although the Corporate Income Tax has served as the primary business tax for more than half a decade, many businesses continue to file under its predecessor, the Michigan Business Tax, so they can claim tax credits enacted during Michigan’s single state recession. Those credits reduce potential revenues by around $600 million annually, and will continue to drain discretionary resources for years to come.

The 2015 transportation investment package will eventually provide an additional $1.2 billion for road and bridge funding with approximately half coming from additional taxes (increased fuel taxes and vehicle registration taxes) and the other half from income tax revenues that would otherwise flow into the General Fund. The General Fund contribution will start in FY2019 at $150 million and ramp up to $600 million in FY2021.

funding chart

Additionally, the transportation package included expansions to the Homestead Property Tax Credit for low-income households as an offset to the fuel and vehicle tax increases. These tax credits are expected to draw an additional $200 million from the General Fund annually beginning in FY2019. All told, the transportation package will reduce money flowing into the General Fund by $350 million in FY2019 and $800 million by FY2021.

Another noteworthy revenue diversion comes from the 2014 plan to expand exemptions on business personal property. The state agreed to reimburse local governments and school budgets for the revenue loss associated with exemptions for industrial and commercial personal property. To make local government and school budgets whole from the state exemptions, a portion of the state Use Tax will be used as a dollar-for-dollar replacement, costing the General Fund $500 million annually by FY2023.

In addition to these and some other smaller revenue issues, a smattering of upcoming spending increases will put more pressure on the budget as state costs for the Healthy Michigan Plan and the Michigan Indigent Defense Commission will begin to come due. All told, our new report estimates that more than $2 billion in potential General Fund revenue will be diverted or dedicated to these programs by FY2023, which accounts for 20 percent of the state’s General Fund budget.

Compounding factors could make the state’s budget even more difficult to balance in future years. Congress may look to cut federal spending, which could impact dozens of state-administered programs, particularly Supplemental Nutrition Assistance Program (formerly known as food stamps) and Medicaid, and could reduce the federal money coming to Michigan by billions of dollars, forcing choices if that spending needed to be replaced.

Past experience shows that if and when the state’s economy cools, revenues from the income tax, which is responsible for two-thirds of all General Fund revenue, could decrease by up to 25 percent. Remember, Michigan is over eight years into the current economic expansion; the average length of previous ones was just under five years.

Revenue rules further compound problems by limiting the flexibility the legislature has to respond to revenue declines. Many revenue sources are directed to specific funds (for example, more than 70 percent of the sales tax is directed to the School Aid Fund), and where the money goes is set in statute or sometimes even the state Constitution.

In addition, increases to the individual exemption for the Personal Income Tax and a cap on the growth of Income Tax revenues constrains the growth of General Fund’s largest source.

The end result is that beginning with the FY2019 budget and well into the next decade, General Fund programs are likely to be facing increasing competition for a smaller pool of resources. The legislature will have to make decisions about what programs can afford to take cuts, and how to distribute them across the General Fund in order to maintain a balanced budget.

Healthcare, corrections and higher education spending make up the largest share of the General Fund budget; funding to each would likely be rolled back if cuts were made. This would mean limiting Medicaid benefits or enrollees and higher tuitions at state universities, along with cuts to dozens of smaller programs that rely on General Fund dollars.

Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan.

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Comments

Laurel Raisanen
Tue, 08/01/2017 - 10:48am

How much revenue will the new state income tax capture (just passed and signed into law) be lost? Brownfield tax captures?

Kevin Grand
Tue, 08/01/2017 - 12:42pm

"Revenue rules further compound problems by limiting the flexibility the legislature has to respond to revenue declines. Many revenue sources are directed to specific funds (for example, more than 70 percent of the sales tax is directed to the School Aid Fund), and where the money goes is set in statute or sometimes even the state Constitution."

This argument is a red herring, and Mr. Lupher knows this full well.

Anything put into statute by the Michigan Legislature can just as easily be undone by the Michigan Legislature.

Instead ginning up interest over who deserves more money, the solution to this problem is simple; mandate that any appropriations by the Michigan Legislature specifically cite the relevant section of the Michigan Constitution that authorizes it.

No authorization, no appropriation.

If you're going to make a career out of writing laws in Michigan, the least that you can do is crack over one of those copies of the Michigan Constitution sitting in a box at the corner of your Lansing office gathering dust, and read what is inside of it.

Jesse
Tue, 08/01/2017 - 4:07pm

Spend, spend, spend.....is there ever a real cut...meaning something other than a simple reduction in growth of spending? Gov't never needs to cut because they always can go back to the taxpayer well ....and just take some more of our wealth...anytime they please....How many times have we told them what we wanted ....and then the legislature just goes ahead with another tax? Gov't spending is the problem....Social engineering in education is another....isn't it time to stop throwing good money after bad? It's the politicians and their political parties that cause these economic messes.

Michigan Observer
Tue, 08/01/2017 - 4:37pm

Mr. Lupher says , "Despite projections for continued economic growth, the General Fund is not expected to grow over the next three years relative to inflation because of a few major revenue diversions, including some that have yet to come online." It would have been preferable to say how much the General Fund was expected to grow over the next three years in dollar and percentage terms, and then listed and totaled the new obligations.

And he should have noted that the Michigan Business Tax credits have been an ongoing expense for current budgets. And he says of the increased exemptions from the Personal Property Tax, that "To make local government and school budgets whole from the state exemptions, a portion of the state Use Tax will be used as a dollar-for-dollar replacement, costing the General Fund $500 million annually by FY2023." As I (perhaps mistakenly) recall, those exemptions were to be financed from the expiration of some tax credits. He goes on to say, "All told, our new report estimates that more than $2 billion in potential General Fund revenue will be diverted or dedicated to these programs by FY2023, which accounts for 20 percent of the state’s General Fund budget." It should be noted that this is using a different time frame than the projection from the House and Senate's Fiscal agencies, which forecast revenues through fiscal year 2021. Assuming reasonable growth over the next five years, 20 percent more revenue is not out of the ball park. He is correct when he says that several factors could adversely affect revenue over the next several years. After all, we live in an uncertain world.

Kevin Grand is absolutely on the money when he pointed out that Mr. Lupher was being somewhat disingenuous when he said, "Revenue rules further compound problems by limiting the flexibility the legislature has to respond to revenue declines. Many revenue sources are directed to specific funds (for example, more than 70 percent of the sales tax is directed to the School Aid Fund), and where the money goes is set in statute or sometimes even the state Constitution." The state legislature can change any statutes it likes. It is true that there are constitutional limitations on the use of funds from certain revenue sources. Mr. Lupher should have specified what funds are under which restrictions.

Mr. Lupher states the obvious when he says, " The legislature will have to make decisions about what programs can afford to take cuts, and how to distribute them across the General Fund in order to maintain a balanced budget." Well, yes, that is the state legislature's function, isn't it?

The entire article, and perhaps the report (which I have downloaded, but not read) is a promotional piece advocating higher taxes.

Joe
Sat, 08/05/2017 - 10:35pm

Stop arresting people for nonviolent drug crimes involving pot and cocaine and focus on heroin and meth. Then legalize and tax them.