Tax changes drive Michigan’s downward revenue projections

Michigan trimmed its revenue estimates Friday to account for tax changes that carry a multi-billion-dollar price tag.

The new projections could require roughly $600 million in reduced spending over what Gov. Gretchen Whitmer proposed earlier this year in the fiscal 2024 budget that would take effect Oct. 1.

It relies on available revenue from what previously had been estimated as a $9.2 billion surplus. That figure falls to about $7.5 billion based on the revised revenue estimates, state officials said.

With a healthy surplus built over several years, the state adopted a series of tax relief measures. Those actions along with robust growth in fiscal 2022 that triggered an automatic tax cut are driving the lower projections as they are now incorporated into revenue estimates.

“We’ve really got to look at the big picture,” state Treasurer Rachel Eubanks, a member of the revenue estimating conference, said during a media briefing. “You’ve got to look at these policy changes and revenues together to accurately tell the full picture of what we are seeing today. If you take out that tax relief and just look at the economy, our revenues are consistent with expectations.”

Individual income tax rates will fall to 4.05% for fiscal 2023 from 4.25% under the trigger, reducing collections this year by $428 million and by $219 million in 2024. The state released the 2022 Annual Comprehensive Financial Report accompanied by a legal opinion from Attorney General Dana Nessel that the formula was met.

Other cuts will trim $600 million off corporate collections this year, in 2025, and in 2026, while a change in the earned income tax credit will trim $768 million in 2024 and $384 million in 2025, and relief on retirement taxes will cost the state $281 million next year and $350 million in 2025.  

All combined the changes will take away $1 billion of revenues this year, $1.9 billion in fiscal 2024, and $1.4 billion in 2025. At the same time, revenue changes based on economic factors are anticipated to grow slightly this year and next.

Revenues for the coming fiscal year otherwise are mostly holding steady and remain above pre-COVID-19 pandemic levels.

The revenue estimating conference Friday revised the level of general funds expected for the current fiscal year that runs through September down to $13.8 billion, a 9.4% decline from 2022 and a $990 million cut from the January consensus.

School aid funding was held steady at $17.7 billion, bringing state revenue projections for the current fiscal year to $31.5 billion, a drop of $883.4 million from the January estimates.

Fiscal 2024 general fund revenues were trimmed to $13.2 billion, a $1.9 billion drop from the January estimate, while school aid was raised by $42 million to $17.9 billion for a combined total of $31.1 billion, a $1.8 billion drop from January.

Fiscal 2025 general fund revenues were trimmed to $13.9 billion, a $1.6 billion drop from January while school aid rises by $8.3 million to $18.3 billion for a combined total of $32.2 billion, down $1.6 billion from January.

State officials looking further out on the horizon project growth of 2% in 2026 and 2.7% in 2027.

The state’s consensus estimating conference adopted the forecast Friday after hearing from economic experts and officials from the state Treasury Department and House and Senate fiscal agencies.

“It’s really important that we all understand that these reductions that we are seeing in the forecast are based on public policy changes that are meaningful and purposeful,” state Budget Director Christopher Harkins said. We are ready to “take these numbers and to produce a balanced budget for fiscal 2024.”

Whitmer’s proposed budget would need some trimming — possibly in the range of $600 million — as it didn’t anticipate the income tax cut trigger, Harkins said.  

Risks to projects abound.

“There are many clouds over the economic outlook for both the national economy and the Michigan economy,” Eric Bussis, from the state Department of Treasury, told the group. “We see economic growth beginning to slow through the rest of 2023 and into 2024. We expect that slowdown to hit many sectors of the economy. The big story continues to be inflation.”

Bussis said he remains cautiously optimistic the slowdown won’t hit the state as hard as prior recessions, with pent up demand for autos a driving part of that optimism that is also reflected in analysis provided by the University of Michigan’s Research Seminar in Quantitative Economics.

Fiscal 2023 collections are tracking slightly below January, with withholding, sales, and use tax on track. Revenue from individual income tax payments, excluding withholding, fell short of target by more than $450 million but revenue collections were boosted by corporate income tax collections exceeding targets by more than $100 million.

Other risks to the forecasts center on the status of various projects that receive state tax breaks.

Whitmer’s proposed fiscal 2024 budget would pour more spending into education, infrastructure and economic development, offer tax relief, and make new rainy-day fund deposits. The record $79 billion budget  would spend most of the state’s $9 billion surplus, leaving a $250 million balance in the combined general and school aid funds at the end of fiscal year.

The state’s flush revenues, structural balance, and healthy reserves helped draw a Fitch Ratings upgrade to AA-plus from AA last June. In a supplemental appropriation to the current budget, the state would deposit an additional $200 million into its budget stabilization fund, bringing it to a peak level of nearly $2 billion by the end of fiscal 2024, or 13% of general fund revenues.

S&P Global Ratings rates Michigan AA with a stable outlook. Moody’s Investors Service rates Michigan Aa1 with a stable outlook.

Whitmer was reelected in a November election that flipped control of the state legislature to the Democrats. The Michigan House passed an $80 billion budget last week that differs on some fronts. Minority Republicans slammed it for new spending.

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