Two themes have dominated political discourse in Michigan for what seems like forever: The economy is going down and state government has fewer and fewer dollars to buy goods and services.
What happens, though, when the story changes … when the news gets better? Lansing and the rest of Michigan soon may know, thanks to a reviving economy driving up state tax receipts.
More people are working and making more money. That’s clear from state income tax withholdings, which are up 7.5 percent this year — triple the growth rate state economists expected for the period.
If current trends hold — and there are no certainties when it comes to projecting the future of the global economy — Michigan could end up with $500 million more in revenue in 2011 than was expected at the first of the year. That could translate into less painful state budget cuts.
“We haven’t seen growth rates like the ones at the end of the chart (at left) in a while — granted they are off a very depressed base,” wrote Jeff Guilfoyle, president of the nonpartisan Citizens Research Council of Michigan.
The lines keep going up, though, as March was a very good month for Michigan. Tax collections were $254 million higher than had been projected as recently as January, reported the Senate Fiscal Agency. About $179 million of that increase will flow into the state’s long-troubled general fund.
A key driver was the income tax: “Net income tax revenue totaled $35.5 million in March 2011, compared with a negative $2.6 million in March 2010,” SFA reported.
And with Gov. Rick Snyder and Republican leaders in the Legislature agreed on a tax plan that will hold the income tax rate at 4.35 percent for fiscal 2012 (rather than dropping to 4.25 percent in October as part of a multi-year reduction schedule), lawmakers may ride a strengthening economy to a much-stronger bank account. Arguments in Lansing over what to cut may pivot quickly into ones on what to fund.
“If state revenues come in higher than expected, those funds should be used to reverse the disinvestment that has been occurring over the last 10 years,” said Karen Holcomb-Merrill, policy director for the Michigan League for Human Services, an advocacy group. “The first priority for the League would be funding to maintain the Earned Income Tax Credit, which goes to working families in our state and helps local businesses. … Additional revenues should not be an excuse for more tax cuts.”
Mike Boulus, who leads the coalition of Michigan’s public universities, says new dollars should help reverse continued reductions in higher education aid: “Michigan today is no more than a junior partner in support of higher education. If we are going to meet the future job requirement the work force demands, this state must step up and become more of an equal partner. Michigan’s public universities are crown jewels. They need to be supported rather than starved by this state.”
At the Capitol, House Speaker Jase Bolger (R-Marshall) takes a different view.
“Any discussion of improving revenue trends is a positive thing, but revenue amounts from those discussions are pure speculation at this point,” stated Bolger spokesman Ari Adler Wednesday. “… If the hypothetical improvement does occur, the speaker does not believe we should run around spending money like there’s no tomorrow — because there is a tomorrow. Unless and until we make solid changes to address the state’s structural budget deficit, we will never get Michigan back on firm financial footing. Those who are suggesting we can rescue the schools, for example, by simply cutting other budget areas, are not being realistic until they can show us exactly where those cuts would be and that they have the political willpower to do them.”
As shown in the CRC chart above, Michigan experienced two big dips in income tax collections: one a decade ago as the state’s auto-based economy began unraveling; and then again in 2008-09 as the national recession delivered a hammer-blow to the state’s fortunes. Now the state is climbing out of what had become an extremely deep hole. In fact, in less than a decade, per-capita income went from 18th in the nation to 38th, before beginning to improve again.
“April is the really important month,” explained House Fiscal Agency head Mitch Bean. That’s when the state sees hundreds of millions of dollars flow in and out of state coffers via income tax payments and income tax refunds. Bean noted that the 7.5 increase in withholding receipts was concentrated in just the last few months, in line with improving employment rolls: “For non-farm employment, Michigan had the fifth-highest job gain for January and the eighth-highest gain for February (compared to the same months in 2010).”
At 4.35 percent, Michigan’s income tax rate is third-lowest of the eight states that levy a flat income tax, according to this chart from the National Tax Foundation. Six states do not have a personal income tax, while the rest of the states and District of Columbia use multi-rate, or graduated, income tax systems.
Gov. Rick Snyder’s original FY12 budget counted on $7.3 billion for the general fund and $11.2 billion for the School Aid Fund. The healthier Michigan’s tax collections are in the current FY11 budget, the larger amount the state will be able to carry forward into FY12, either to spend or reserve in its “rainy day” fund. And the trends reflected in these figures should also presage more optimistic figures for FY12 itself — if the economy keeps improving.
5 Comments
So being the year 2011 those in office should know by now what policies work and what policies do not work,
The funds must be sued to restore funding for revenue sharing, higher education and health care for the poor, elderly and disabled. Local governments have been screwed for a decade by lawmakers breaking the state’s promise to fund essential local services. Locals need the funds to create the types of places where today’s prospering industries and their workers want to be. Michigan public universities are now funded at the LOWEST rates in the nation among the states. Unless and until we produce more college graduates who want to live in thriving Michigan urban areas (see restore revenue sharing cuts), Michigan will continue to lose our graduates to others states that are making these investments. The state’s Medicaid caseload has nearly doubled in the past 12 years, largely the result of hundreds of thousands of Michigan workers losing jobs that had health insurance benefits. Unless and until we provide access to adequate health care for all Michigan citizens, health care costs will continue to skyrocket, and all of us fortunate enough to have insurance will pay more to cover the costs of caring for those with no insurance.
The question state lawmakers and executive must confront is this: What happens when the root cause problem actually requires MORE money? Or, put another way, when cutting further exacerbates the problem? This is the dilemma of the School Aid Fund and the retirement (MPSERS) obligation. As covered in fine editorials on these pages before, this is a time bomb. Never before have the number of salaries contributing to the fund been this low, the retirees been this high, and unfunded liability been this massive – $12 billion worth. This is a problem owned by the state, with constitutional implications. These exploding costs are completely eroding K-12 budgets to a far greater degree than health care costs.
@ Brendan: If we had not decided to raid the k-12 fund for higher education, we could have dedicated hundreds of millions to addressing this matter. It’s interesting to note that we are $9 billion below the Headlee cap. In other words, if we were paying the same percentage of our current income at the same level as we were in 2000, we would have no budget problems, and we could be paying down any debts (they arose starting in 2000, the same time we started cutting state business and income taxes), and be doing what is needed to attract the best and brightest into education and government.
Spending is not out of control….state spending from state resources has increased by only 0.1 percent in the last eight years. We are determined to turn out state into Mississippi: Low tax, low income, high poverty rate and an unemployment rate consistently above the national average.
@ David, Yes, we are in agreement. I was responding to Bolger’s comments in the original piece. My point is that narrative would have you believe a “tough choice” is synonomous with a cut. But in the case of the unfunded liability, the tough choice needed might be the exact opposite. You don’t eliminate debt any quicker by spending it down at a slower pace – which is what is happening now, and will happen even more, given current and proposed trajectory.