Lansing — Michigan’s economic recovery is good for the bottom line of businesses but is turning out to be bad for the state’s budget.
Businesses are cashing tax credits this fiscal year at a higher rate than expected, causing the nonpartisan House Fiscal Agency to project Wednesday a $454.4 million budget shortfall — four months into a new fiscal year.
The House’s economists blamed the projected deficit, in part, on an unexpected influx of $200 million in tax credits that profitable businesses have applied against their tax bills.
“(Business tax credits) are coming in higher than projected,” said Mary Ann Cleary, director of the House Fiscal Agency. “And it was always a concern that this would happen.”
The Senate Fiscal Agency earlier pegged the state’s general fund deficit at $162.2 million. Economists from both agencies and the state Treasury Department will meet Friday to hash out a consensus revenue estimate.
Gov. Rick Snyder’s Treasury Department also is projecting a shortfall but won’t release its revised revenue estimate until Friday morning.
“Our estimates are also big numbers,” said Kurt Weiss, spokesman for state Budget Director John Roberts. “The majority of it, or bulk of it, is the (tax) credits.”
New data shows the state’s liability on tax credits owed to businesses has worsened under Gov. Rick Snyder, even after he took office in 2011 saying they were too expensive and partly to blame for the state’s roller-coaster budget troubles under former Gov. Jennifer Granholm.
Since Snyder took office, the value of corporate tax credits has grown $1.6 billion, leaving Michigan taxpayers on the hook for $3.2 billion in refunds to businesses, the Senate Fiscal Agency said in a December report.
The increase is because the Michigan Economic Development Corporation has lowered job creation thresholds for certain companies to receive tax credits awarded under the former Michigan Business Tax, Cleary said.
In some cases, Cleary said, the MEDC has increased the tax credits awarded to companies that meet certain job-creation goals.
Businesses can redeem the outstanding tax credits at any time between this year and 2032, making it difficult to predict when the state’s budget will take a hit, Weiss said.
“We need to do a better job of when it comes to visibility of these credits,” he said.
State Rep. Brandon Dillon, D-Grand Rapids, said the growth in the state’s tax credit liability runs counter to Snyder’s first-year agenda to rid the state of tax code hand-outs.
“The governor’s whole economic philosophy was to phase out these tax credits and instead we’re seeing more of them,” Dillon said. “I’m sure the administration has known this was a problem coming.”
In an effort to tamp down calls for an individual income tax cut by fellow Republicans, Snyder warned of potential budget troubles after his second inauguration on New Year’s Day.
“We could see some budget challenges over this next year,” Snyder told reporters. “Those old tax credits … that’s going to make it more difficult to simply do tax reductions.”
Cleary said income tax revenues also are coming in about $300 million lower than projected for the fiscal year that began Oct. 1.
All told, Cleary said, general fund revenue is off by about $600 million, but the projected deficit is $454.4 million after the state accounts for the use of $150 million in leftover funds from the fiscal year that ended Sept. 30, 2014.
The Legislature budgeted for $550 million in business tax credits from the former Michigan Business Tax, which some corporations still use after Snyder eliminated the tax in favor of a 6 percent corporate income tax with no credits and loopholes.
The House Fiscal Agency now projects businesses will seek about $750 million in refunds, Cleary said.
In the 2013 fiscal year, Cleary said, businesses claimed $75 million in credits, mostly for development of high-tech batteries and tax breaks awarded by the Michigan Economic Growth Authority, or MEGA.
“There was concern at that time that there’s going to be an over correction,” Cleary said.
The projected deficit is in the state’s general fund and does not affect the School Aid Fund. The House Fiscal Agency projects the School Aid Fund will have $284.4 million surplus when the state’s 2015 fiscal year ends Sept. 30.
Snyder will detail how he intends to deal with the current budget shortfall when he presents his 2016 fiscal year budget to lawmakers in early February, Weiss said.