Michigan’s 2024 budget is built on a shaky assumption
If courts rule that Michigan’s income tax cut is permanent, not event-driven, the state’s budget assumptions would be faulty
National Lampoon’s “Christmas Vacation” centers around Clark Griswold’s poor financial decisions.
He banks on getting a large Christmas bonus, so he puts a large deposit down for a lavish in-ground swimming pool for the family. It is money he doesn’t have yet. So when he does not receive a bonus, but a subscription to the jelly-of-the-month club, he faces a financial crisis, due to banking on future revenue that does not come.
This is similar to how Michigan lawmakers are acting with the 2024 budget: They’re spending money they don’t have yet.
Griswold got in trouble for ignoring the fine print, which said that he could get a membership in the club instead of the bonus. He chose to believe his bonus would come in the form of a large check, and he ignored the warning that it might not come.
He should have read the fine print.
When lawmakers produce Michigan’s annual budget, most of the state’s revenue they count on is not currently in state coffers. Instead, they base their work on revenue estimates. In other words, the 2023-24 budget just passed is based on revenue anticipated in 2024. The money is not in-hand yet.
The current budget is based on a presumption by the Whitmer administration that the income tax rollback that occurred this year will end Dec. 31, 2023. In other words, Whitmer and legislative leaders are banking on more revenue coming in from a higher income tax rate the governor hopes will kick in again in 2024.
But this may not be the case.
In 2007, Michigan was facing a government shutdown and spending cuts, so the Legislature and the Granholm administration agreed to hike the income tax from 3.9% to 4.35%. The tax hike was to be temporary, they said.
When it came time to roll back the tax rate in 2011, Gov. Rick Snyder and the Legislature lowered it, but by a mere one-tenth of one percentage point.
Although officials have alleged over the past 16 years that the state cannot afford to reduce the income tax rate as promised, they have shelled out billions to hand-picked large corporations and smaller organizations in the form of corporate welfare and district pork projects.
Imagine working for a company and being told there might be layoffs due to financial issues. The company asks you to temporarily decrease your pay, and as soon as the company is out of the red, it will restore your salary. You reluctantly agree.
Your employer becomes profitable once again, but it does not restore your pay, and its leaders say they cannot afford your full salary. To add insult to injury, your employer shells out substantial bonuses to executives whose pay was never cut during the hardship.
Legislators enacted a 2015 law that said if the change in General Fund revenue exceeds the inflation rate, the state would give a partial income tax rollback. This finally happened in 2022, or 15 years after the initial “temporary” increase. The rate went from 4.25% to 4.05% for 2023 — but not without a fight from Gov. Gretchen Whitmer.
Whitmer attempted some financial maneuvering to prevent taxpayers from getting their rollback. She did so while doling out billions in corporate welfare.
Whitmer failed to stop the 2023 tax cut. Now she’s focused on stopping the tax cut from taking place in 2024 and beyond.
Attorney General Dana Nessel issued an opinion that agreed with Whitmer’s claim that the income tax rollback is only for 2023. She said that the metrics in the law have to be applied every year for the lower rate to apply the next year. The tax cut is event-driven, not permanent, Nessel argued.
This interpretation is disputed by lawmakers who created the law. The governor, though, persists in trying to tax residents at a higher rate.
The language of the law also does not support Whitmer and Nessel’s opinion. Should the courts reject their interpretation of the law, official revenue estimates for 2024 would fall short. Whitmer’s budget is based on revenue projections that include the higher income tax rate returning in 2024.
If the income tax rate continues at 4.05%, lawmakers will be faced with having to make spending cuts or finding new ways to generate more income from taxpayers.
Since COVID-19, state revenue spending has increased from $34.4 billion in fiscal year 2018-19 to $47 billion in 2023-24.
Jamie A. Hope is assistant managing editor of Michigan Capitol Confidential. Email her at firstname.lastname@example.org.
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.