Michigan budget outlook complicates push to repeal 'pension tax'
Lansing — Slowing economic growth, sluggish revenues and prior legislative spending promises will complicate Gov. Gretchen Whitmer's first state budget proposal and related policy pushes, officials acknowledged Friday.
Experts from the state treasury and legislative fiscal agencies discussed looming budget threats as they agreed to increase projected tax revenues $264.7 million this year and $225 million next year.
The bumps will give the Democratic governor and Republican-led Legislature some wiggle room as they craft the next roughly $56 billion state budget. But they will not fund Whitmer’s campaign pledge to boost road repair spending — which will likely require new taxes or bonding — and may not fully pay for bipartisan calls to eliminate the state's so-called pension tax, which could also face opposition in the Michigan Senate.
“As we look out, the numbers approved here are pretty flat,” new Budget Director Chris Kolb told reporters after the biannual consensus revenue estimating conference. “And what we have to do is look at not only what we have, the risk that we’re looking at, and the governor’s priorities. We’re going to really try to address those priorities in the budget.”
The state is expected to collect $10.7 billion in General Fund revenue during the current fiscal year, up $288.6 million from previous estimates but down 2.2 percent from 2018. Officials raised their projections for the General Fund $199 million in 2020. Officials also lowered revenue projections for the School Aid Fund $23.9 million this year while raising estimates $25.9 million for 2020.
The General Fund, the state's main source for discretionary spending, is essentially the same size it was in 2001 when he first served as a state legislator, said Kolb, a Democrat who represented Ann Arbor in the Michigan House 2001 from through 2006.
“We’re at the same level we were basically 20 years ago,” Kolb said, noting that needs and costs have changed over the past two decades. “So we have to come up with a very reasonable, thoughtful plan to spend those dollars very carefully and to work on the governor’s priorities.”
Whitmer is expected to present her first executive budget proposal in March. Kolb declined to say whether it will include any calls for new revenue through taxes, fees or other sources to help fund the governor’s campaign pledge to boost road repair and infrastructure spending by $2 billion annually.
The administration is still fine-tuning and reviewing policy objectives, said new Treasurer Rachael Eubanks, who most recently served on the Michigan Public Service Commission.
“Certainly, our priorities are well known,” she said, noting pledges “to fix the roads, to make sure that we’ve got clean drinking water, to educate the kids and to continue to build a better Michigan.”
Michigan’s Republican-led Legislature made spending promises in recent years that remain on the books as Whitmer prepares to draft her first budget proposal. They include $600 million in General Fund money that will go toward roads by 2021 and nearly $500 million a year to reimburse local governments for lost revenue as the result of industrial personal property tax cuts.
Lawmakers also dedicated most of the state’s unspent revenue late last year, approving a $1.3 billion supplemental spending bill that Gov. Rick Snyder signed four days before leaving office. The term-limited Republican also signed legislation to shift revenue from the School Aid Fund to offset projected gains in online sales tax revenue.
"I guess I probably should have taken my job a month earlier," Kolb joked.
State Rep. Joe Bellino, R-Monroe, this week introduced legislation that would repeal the state’s pension tax, which Whitmer also vowed to ditch during her campaign. Doing so would cost the state an estimated $200 million to $300 million in tax revenue each year.
“Michigan should not be balancing its state government budget on the backs of seniors,” Bellino said in a statement. “They worked hard for decades with the expectation their retirement income would not be taxed, but the rules were changed on them in the middle of the game. This new legislation sets things right by getting rid of the pension tax.”
Snyder and the GOP-led Legislature eliminated a longstanding income tax exemption for pensions as part of a major tax code overhaul in 2011. The law includes a three-tiered system to phase in the pension tax on residents reaching retirement age.
Several House Republicans are interested in revisiting the pension tax, but House Speaker Lee Chatfield, R-Levering, has not yet taken a position on the measure, a spokesman said.
Many House Democrats also favor repealing the pension tax, said Rep. Jon Hoadley, a Kalamazoo Democrat who served on the appropriations committee last term and is expected to again.
“There is potentially room to do that, but I think figuring out how we phase that in is a big question,” Hoadley said of the potential pension tax repeal. “At the same time, when we’re making sure we’re providing relief to seniors who have earned their pensions, I think we should be looking at making sure that corporate America is paying their fair share of taxes.”
The Republican-led Legislature is unlikely to approve any corporate income tax increases, and new Senate Majority Leader Mike Shirkey this week said he opposed a blanket pension tax repeal.
“To me, that was a fairness issue when we did that,” said the Clarklake Republican, referencing the fact that retirement income from non-pension sources such as 401(k) retirement savings accounts were already subject to the income tax.
“I’m obviously not opposed to reviewing and reducing taxes, but we’re going to do it in a fair way,” Shirkey said.
Michigan’s economy is expected to continue growing but at a slower rate than in recent years, economists told budget officials and state lawmakers Friday during the consensus revenue estimating conference.
The state’s prolonged economic recovery is expected to continue but slow in 2019 because of looming jobs cuts at General Motors Co., modest declines in Big Three vehicle sales, a tightening job market and President Donald Trump’s tariff war with China and other countries.
Projections of continued economic growth are “good news” for Michigan, signaling more jobs and opportunities for families, said Senate Appropriations Chairman Jim Stamas, R-Midland.
But “this economic and fiscal forecast illustrates that we must continue making smart budget decisions that meet our challenges and keep our state on solid financial footing,” he said in a statement.