Michigan's budget surplus surges to $6B this year, but future growth expected to slow

Beth LeBlanc
The Detroit News

Lansing — Michigan's budget surplus has grown to $6 billion for the current fiscal year, fanning the flames of the heated debate over how to best return the money to taxpayers even as leaders warn the state faces an unknown economic future. 

For the current fiscal year alone, revenue is expected to be up 8.5% for a total of $31.5 billion in the state general fund and school aid fund — that's a $2.5 billion increase from the most recent January estimates, state leaders said during Friday's Consensus Revenue Estimating Conference. 

But expert after expert predicted growth in revenue would slow with outside pressures such as inflation, supply chain woes and consumer behavior could accelerate or decelerate that rate of growth. 

"We're trying to pinpoint a turnaround point" in terms of a return to pre-pandemic economic and consumer behavior factors that have been driving the increases in tax revenue, said state Treasurer Rachael Eubanks. The state should maintain a "fair sense of caution," she said. 

Rachael Eubanks, Michigan state treasurer

With the estimates agreed upon Friday, Michigan's revenue for the current fiscal year is up about $6 billion — $4 billion of the total in General Fund money and nearly $2 billion in the School Aid Fund, said Budget Director Chris Harkins. That figure does not include $3 billion included in Gov. Gretchen Whitmer's current fiscal year 2023 executive budget  recommendation — a plan that still needs to be negotiated with the Republican-controlled Legislature.

Harkins noted the state economy remained in a bit of a pandemic "bubble" as the state waits for consumer behaviors and economic factors — such as inflation and unemployment — to return to levels consistent with pre-pandemic conditions. Once that happens, the state expects revenue to become more stable. 

"We’re not quite sure if we’re out of it," Harkins said of the COVID "bubble."  "We’re not sure how long we'll be in it.”

The expected increase in revenue solidified Friday is in part responsible for driving the dueling plans for tax relief announced by Gov. Gretchen Whitmer and the GOP-led Legislature Thursday. Whitmer floated a $500 tax rebate for Michigan families, while the Legislature approved a wide ranging $2.6 billion tax relief plan hitting on income tax rate decreases, child tax credits, cuts to retirement taxes, increases to the Earned Income Tax Credit and some property tax credits.

The Democratic governor indicated to reporters Friday that she was likely to veto the Legislature's plan, according to comments recorded by WWMT News.  

State Sen. Curtis Hertel, D-East Lansing, estimated the cost of Whitmer's rebate plan would be about $2 billion, which he argued the state could weather more securely than the long-term tax code changes Republican lawmakers are championing. 

"What I saw is a strong argument that we can do immediate help for families in this year," Hertel said. "I think long-term anything that's structural, there are a lot of questions. All of the economists seem to agree that we are not actually heading in a direction ... where we know what the future looks like."

Sen. Jim Stamas, the Midland Republican, argued the rebates would extend inflation as he argued past stimulus checks had done during the pandemic. He noted both chambers had freed up money in their budget proposals to accommodate the long-term changes they were proposing to Michigan tax structures. 

"As the Senate has moved forward, we've tried to keep that in perspective so we're not spending those dollars in other areas," said Stamas, the chairman for the Senate Appropriations Committee. 

Revenue up, uncertainty continues

State financial experts said they were surprised by the continued surge in not only personal withholding revenue but also sales and use tax revenue, which is trending about $2 billion above expectations. 

"In April, we received more money from the sales and use tax than we have ever received for any month ever," said David Zin of the Senate Fiscal Agency.

Annual sales and use tax revenue usually brings in about $12 billion, so changes to consumer behavior would have a big impact on the money state leaders have to work with when budgeting.

Despite rising inflation, economists and state financial experts presented positive outlooks over the next couple of years, though they expect a gradual slowdown in growth in Michigan and the nation. 

University of Michigan Economist Gabe Ehrlich said Michigan has recovered 7 of every 8 jobs lost during the COVID-19 pandemic and the state's unemployment rate has seen a corresponding decrease. He expected the state's unemployment rate to get back to pre-pandemic levels by the middle of next year.

But labor force participation is slower to follow those trends, Ehrlich said. The labor force participation rate hardly budged for a year, but ticked up to 59.8% in April, according to preliminary numbers. The increase is good news but still a percentage point or so lower than February 2020.

The state and nation have "substantially more job openings than workers to fill them," Ehrlich said. In Michigan, there are about 1.5 job openings for every unemployed worker.

"It now takes more job postings than ever to hire a single worker," Ehrlich said.

Obvious risks to all of the estimates Friday included continued supply chain woes, the rate or extent to which consumers turn from pandemic-era consumption of goods to consumption of services, and the continued risk of inflation. 

Eric Gaus, senior economist with Moody's Analytics, said one of the reasons inflation is not yet affecting consumer habits is because folks saved a lot during the pandemic.

"Excess savings was actually accumulated across the board but not evenly," Gaus said. Instead, savings are concentrated among the upper incomes.