State Expects to Take $2.4 Billion More; Media Cries 'Deficit!'

Reductions in the rate of increase are not 'cuts'

Based on recent media headlines, readers and viewers could be excused for believing the state of Michigan’s budget is in crisis mode.

It’s not. Over the next two fiscal years, Michigan’s state government expects to collect almost $2.4 billion more from sales, income, business and property tax payments than it gets now. While the increases are slightly less than earlier estimates suggested they might be, even in Lansing a nearly $2.4 billion cumulative raise over two years is considered real money.

Yet “budget crisis” is exactly how most media outlets characterized the recent changes in revenue estimates produced by the state Department of Treasury and the House and Senate fiscal agencies. Here’s what people should know:

Is the state losing money?

No. According to a revenue consensus produced this week by the Michigan Treasury and the Legislature's fiscal agencies, the state is projected to collect $740 million more in the next fiscal year (which starts Oct. 1, 2016) than it will get this year. Even larger revenue increases are projected for the following year.

How can there be a “deficit” if they’re getting more money?

There is no deficit.

Twice a year (and sometimes more frequently) the budget agencies crunch their numbers into a consensus revenue estimate for the current and coming years. The last estimate came out in January and projected the state’s two largest accounts, the General Fund and the School Aid Fund, would receive $22.7 billion from taxpayers in the 2017 fiscal year (which begins Oct. 1). This week’s May consensus lowered that amount to $22.5 billion, which is still nearly $740 million more than this year's revenue.

For FY 2018, the consensus estimate produced in January was $23.43 billion. That was changed in May to $23.37 billion, an amount that still represents a $1.6 billion “raise” from this year. The cumulative increases over both years come to nearly $2.4 billion more for Lansing to spend or return in tax cuts.

The bottom line is that officials now expect a reduction in the rate of increase, not a “cut.”

It should also be noted that estimates only look at the state’s two largest accounts, the General and School Aid funds. Gas and vehicle registration (license plate) taxes — both of which were recently increased — are earmarked to different accounts. The projections also exclude money from other sources such as hundreds of millions each year from a 1998 tobacco lawsuit settlement, and billions more from the federal government.

Why was the earlier January revenue projection higher?

According to David Zin, an economist for the Senate Fiscal Agency, there was a big reduction in how much the state expects to collect from a 6 percent corporate income tax this year. In January, it looked like this tax would bring in 3.6 percent more, but by May the numbers had changed and indicated a 17.8 percent decline in FY 2016. Total revenue from the business tax is far less than from state income, sales and property taxes, and Zin said the revenue it generates has historically been volatile.

The projected decline is for this year, not the next two years, but that also affects how amounts for future years are calculated, which is why the FY 2017 and FY 2018 projections changed.

Will the state keep getting more money in the future?

Eventually, the nation will experience an economic slowdown, and state revenues will stagnate or even decline. This is why the state has a Rainy Day Fund that held $500 million as of last fall. Current plans call for adding $270 million this year and $112 million next year.

But the latest estimates still show that state revenues will continue to increase.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.