Gov. Gretchen Whitmer will soon unveil her Fiscal Year 2023 budget request to kick off what will be a very important round of budget deliberations with the Republican-led legislature.

Bob Schneider

Bob Schneider is senior research associate at the Citizens Research Council. (Courtesy photo)

The revenue picture for Michigan is about as bright as it’s ever been. The state is currently expected to carry a surplus of over $7 billion into Fiscal Year 2023 from the state’s General Fund and School Aid Fund. That surplus, however, is one-time funding which will need to be used for one-time purposes.

However, beyond the projected surplus, revised state revenue forecasts suggest there’s room to tap another $1 billion from the General Fund and at least another $1 billion from the School Aid Fund for ongoing priorities. These are the resources that open up real opportunities for the state to address critical ongoing priorities.

In an election year, tax cuts obviously will be popular, and both Democrats and Republicans have been quick to put forward tax relief proposals. Gov. Whitmer has proposed boosting the state’s Earned Income Tax Credit (EITC) for low-income working households. For their part, legislative Republicans have proposed to not only raise the EITC but also to reduce both the corporate and personal income tax rates and further exempt business personal property from local taxation. And it seems all sides have interest in pulling back on changes to the treatment of retirement income enacted during the Snyder administration.

It’s important for policymakers to keep two things in mind as they review tax relief options. First, just like state spending, sustainable tax relief needs to fit within available tax revenue in future years. The non-partisan Senate Fiscal Agency estimates that current Senate legislation that would reduce the state income tax from 4.25 percent to 3.9 percent will cost the General Fund $1 billion annually. A proposal to reduce the corporate income tax rate from 6 percent to 3.9 percent costs the General Fund more than $460 million annually. Expanding the EITC from 6 percent to 20 percent of the existing federal credit reduces annual General Fund revenue by around $250 million.

These three proposals alone would cut annual revenue collections by $1.7 billion. That’s $700 million more than could be supported by available ongoing General Fund revenue.

Maintaining a sustainable budget that avoids future “cliffs” is just as important when considering tax relief as it is when evaluating new spending proposals.

Second, and even more importantly, policymakers need to recall the deep budget hole from which Michigan has been recovering. Michigan revenue growth has been stronger for the last 10 years, but revenue trends were horrible for the first decade of the new century. Even before the Great Recession took hold, Michigan was losing jobs and related incomes continuously between 2000 to 2010, driving down General Fund revenue from $10.7 billion to just $7.7 billion; a 28 percent decline over this period. That decade-long “single state recession” capped by the national Great Recession forced the state to make some very difficult budget choices.

Despite 10 years of revenue rebound, those decisions are still reflected in the state’s ongoing budget. A few examples are worth noting:

  • State funding per student to Michigan’s 15 public universities is still down by more than 10 percent in actual dollars from its level 20 years ago. Adjusted for inflation, state support per student is down by 41 percent from Fiscal Year 2001.
  • State revenue sharing payments to cities, villages, and townships remain more than $140 million below the peak level reached in Fiscal Year 2001 and fall almost $700 million below the level prescribed in a statutory formula established in 1998.
  • State funding of behavioral health and substance abuse services for persons not eligible for the Medicaid program was cut by about 20 percent in the years following the Great Recession. While Michigan’s Medicaid expansion has helped provide Medicaid-funded services to many more people, funding for those outside that program is still down significantly.

It is said that those who ignore history are doomed to repeat it. Policymakers should look back to Michigan’s recent budget history and use this opportunity to address some of the tough budget choices made during the last two decades.

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