Michigan deficit likely to trigger cuts in services

Chad Livengood
Detroit News Lansing Bureau

Lansing — An unidentified business cashed in two state tax credits worth $224 million last month — helping plunge the state's general fund budget into a deficit and setting off alarm bells inside Gov. Rick Snyder's administration.

Just two weeks into his second term, Snyder is facing a $325 million midyear shortfall that his budget director says will result in reduced government services and potential layoffs.

The cost of employer-luring tax credits — handed out largely under the prior administration of Democrat Jennifer Granholm — is coming into focus this year as Snyder prepares a 2016 fiscal year budget with $532 million less revenue than was expected eight months ago. It is also casting a shadow over his Tuesday State of the State speech.

Next year's revenue decline is due in large part to $351 million in additional tax credit refunds to businesses for which the Snyder administration is budgeting.

"We're starting to pay for the sins of the past," said Rep. Al Pscholka, R-Stevensville, chairman of the House Appropriations Committee. "Now what we're seeing is the bill is coming due."

Democrats contend Snyder isn't a saint on tax credits either, setting off partisan finger-pointing at the Capitol.

The nonpartisan Senate Fiscal Agency's analysis shows an additional $1.6 billion in unredeemed tax credits has been awarded to businesses since Snyder took office in 2011. Tax credits expected to be used total $4.9 billion, a figure that has grown $3.2 billion since 2011, according to the Senate Fiscal Agency.

"I find it convenient that two months after the election that we now found out … there's this explosion in tax credits that are beyond those of the last administration," said Rep. Sam Singh, D-East Lansing.

Snyder said Thursday his administration is still studying the ballooning cost of business tax credits and developing a better system for predicting when companies will cash them and deplete the state's coffers.

"For a long-term, going-forward basis, we'll have a much better handle on it," Snyder said.

For the current fiscal year, business tax credits are expected to deplete the state's general fund by $681 million, $252 million more than state budget officials estimated last May, according to the Treasury Department.

In December, a single firm redeemed two tax credits worth $224 million, said Terry Stanton, Treasury Department spokesman. By law, state officials cannot disclose the name of the taxpayer.

"$224 million is a pretty sizable hit," said Jeff Guilfoyle, a former Treasury official and now vice president of Public Sector Consultants in Lansing. "You hope there aren't other companies that have the potential to come out of the woodwork and do that as well."

State Budget Director John Roberts acknowledged Friday the $224 million refund caught the Snyder administration off guard.

"We believe the credits are now more transparent and definitely better accounted for than the surprise in December," Roberts said.

Michigan Economic Development Corp. spokeswoman Emily Gerkin Palsroke disputed the Senate Fiscal Agency's numbers, saying the economic agency calculates $455 million in additional tax credits awarded since Snyder took office.

David Zin, chief economist for the Senate Fiscal Agency, said the agency's calculations were made using MEDC data.

The cost of Michigan's tax credits was the focus of Friday's revenue-estimating summit of state economists at the Capitol.

Snyder made eliminating the Michigan Business Tax and the state's system of targeted tax credits a top priority when he took office in 2011.

The Legislature replaced the complicated business tax that year with a 6 percent corporate income tax, but allowed businesses owed previously awarded tax credits to remain on the MBT system until 2032.

"We're talking about something that isn't going to go away soon," said Jim Stansell, economist for the House Fiscal Agency. "As the economy picks up, taxpayers are more likely to claim them than they were during the recession."

Predicting when the tax credits would be redeemed has proved difficult. In the 2013 fiscal year, $75 million in credits were cashed in.

But in the budget that ended Sept. 30, business tax credits skyrocketed to $773.3 million, according to the Senate Fiscal Agency, with $224 million coming in after the fiscal year ended. They depleted the state's budget reserves.

Tax credit refunds are estimated to grow to $807 million in the 2016 fiscal year, which begins Oct. 1, according to the Treasury Department.

Lawmakers or the MEDC could amend prior tax credit contracts to reduce the cost to the state, Treasurer Kevin Clinton said Friday. "That is a possibility, which I don't think we've discussed," Clinton told reporters.

Snyder will announce plans to deal with the current deficit when he presents his 2016 budget plan on Feb. 11, Roberts said.

"I think you'd have to expect reductions in services," he said.

Roberts did not rule out layoffs of state workers or tapping the School Aid Fund — with a surplus of $35 million — to balance the general fund budget.

"I think it's too early to tell, but I'd say everything's on the table with numbers this size," he said.

Guilfoyle, who used to prepare revenue estimates during Granholm's budget-cutting days, said Snyder's cuts will not be easy.

"Unfortunately, the state has a lot of experience in doing this because we did so much cutting in the last decade," Guilfoyle said. "But taking $500 million out will be painful."