‘Good news’ on state revenues, but budget strains loom

Jonathan Oosting
Detroit News Lansing Bureau

Lansing – Gov. Rick Snyder and Michigan legislators will have extra “one-time nickels” to work with in crafting new spending plans, incoming state Budget Director Al Pscholka said Wednesday, but he warned that looming spending pressures should give them pause.

A new report suggests Michigan tax revenues for this year and last may top earlier estimates by as much as $560 million, but the outlook is less rosy for 2018.

“It’s good news. I don’t mean to throw water on it,” Pscholka told The Detroit News. “We’re on a very positive path, and the economy is growing. It’s just we’ve got to look out into the future the next couple years as well.”

Pscholka noted that past legislatures approved several spending plans set to kick in after 2018.

State commitments for 2019 include a $150 million shift from the general fund to road construction and maintenance, a homestead property tax expansion that could cost $200 million a year and the continued phase-out of most personal property taxes.

“(2018) looks pretty good, but (2019) is where the balance sheet gets a little funny,” said Pscholka, a former state legislator who chaired the House Appropriations Committee the past two years.

Michigan revenues for fiscal year 2016 topped earlier estimates by $328.5 million, according to a Tuesday report from the House Fiscal Agency, which also raised its current-year revenue projections by $231.2 million.

The Senate Fiscal Agency released slightly more conservative figures last month. It showed $302 million in extra collections for fiscal year 2016 and increased its 2017 revenue estimates by $168.5 million.

Both agencies lowered their projections for fiscal year 2018, however, reducing estimates by $76.1 million and $93.2 million, respectively.

The Snyder administration will release its own numbers Thursday as part of a consensus revenue estimating conference, where officials will agree on projections that will be used to set initial spending targets in the next state budget.

“I think we’re all probably around the same ballpark,” said Pscholka, appointed by Snyder last week to replace outgoing Budget Director John Roberts, who is leaving for a job with Blue Cross Blue Shield of Michigan.

Revenue estimates

Revenue came in ahead of projections last year, in part, because the state paid out fewer refunds than expected under the old Michigan Business Tax. Outstanding tax credits, primarily offered to automakers during the Great Recession to keep them from fleeing the state, are projected to cost the state about $9 billion through 2032.

State bean counters have had difficulty predicting when companies will cash in the certified credits, and Michigan’s new Corporate Income Tax has also proven somewhat volatile since it was approved as part of a major tax code rewrite in 2011.

Michigan collected $929.8 million in corporate income taxes last year but paid out $878.9 million in business tax refunds, according to the House Fiscal Agency. The $50.9 million net gain was actually more than anticipated.

The House Fiscal Agency raised revenue projections for the current fiscal year in part because of expectations that sales tax and income tax witholdings could climb, said senior economist Jim Stansell.

“I think gas prices are going to start to rise again, and I think we’re going to see some pickup in sales tax collection as a result,” Stansell said. “Sales tax collections have been underperforming in recent years, but I think we’re going to see some of it coming back.”

One-time spending

Both Pscholka and fiscal agency officials are warning that much of the extra revenue the state pulled in last year was the result of one-time tax phenomena that may not occur again. In other words, legislators will have some extra money for the next budget but shouldn’t get used to having it around.

“I would offer a cautionary tale to any freshmen,” Pscholka said, referencing new lawmakers who took office this week. “Yes there are good numbers, it shows Michigan’s been heading in the right direction, but we need to treat one-time revenues as one time, and make sure you have a bigger vision and a bigger picture.”

The state could deposit some of the one-time money into its Rainy Day Fund or pay down debts, Pscholka said. He also suggested legislators could make needed investments in perhaps prisons or two psychiatric hospitals in Caro and Northville.

Thursday’s consensus revenue estimating conference will come one day after the Republican-led Legislature opened its new two-year session with talk of major tax cuts.

House GOP members on Wednesday introduced a plan that would cut the state’s 4.25 percent income tax to 3.9 percent in 2018 and then roll it back by 0.1 percentage point each year until it is gone.

A more aggressive plan from Sen. Jack Brandenburg, R-Harrison Township, would eliminate the income tax over five years, a move that could cost the state $9 billion annually when fully implemented.

“We need to be careful,” Pscholka said of the tax plans. “There needs to either be some sort of replacement revenue or identified cuts in services. We’ve done a great job over the last six years making sure we have a structurally balanced budget, and we want to continue that.”