Snyder officials: Michigan has $330M ‘one-time’ surplus

Jonathan Oosting
Detroit News Lansing Bureau

Lansing — Michigan Gov. Rick Snyder and the Republican-led Legislature will have roughly $330 million in extra “one-time” money to work with as they craft the next state budget or debate potential tax cuts, according to administration budget officials.

House Republicans peg the surplus at $478 million, citing an outstanding balance minus some decided Medicaid caseload costs.

While their calculations differ, they’re based on consensus revenue estimating figures arrived at Thursday in Lansing, where administration and fiscal agency officials agreed on real and projected tax revenues for last year, this year and next.

Michigan pulled in $332.6 million more than expected in fiscal year 2016, including $51.3 million for the School Aid Fund and $281.3 million for the general fund, which the state uses to pay for most traditional government services.

Officials also agreed to raise combined revenue projections for the current year by $206.2 million. Legislators already spent some of the surplus funds last year, however, and $80 million in new revenues from an insurance tax code change has already been built into the current budget.

The new figures are good news for the state but officials cautioned they do not represent a sustained tax windfall. General fund revenue beat earlier estimates but actually fell 0.2 percent between 2015 and 2016, owing largely to sluggish sales tax collections and companies continuing to cash in large credits issued under the old Michigan Business Tax.

Officials also lowered revenue projections for 2018 and warned of looming budget pressures for fiscal year 2019, including a new road funding law that will require a $150 million shift in general fund dollars and a $200 million expansion of the Homestead Property Tax Credit.

“In terms of where we are in 2018, we’re in pretty good shape,” said incoming Budget Director Al Pscholka. “... It’s 2019 where the balance sheet becomes a little more problematic. We do have some one-time revenue, and that’s one-time money.”

Redemption of old business tax credits cost the state nearly $880 million last year, but that was about $150 million less than previously expected, a main reason why revenues topped projections. Outstanding credits, primarily extended to automakers during the Great Recession to keep them from fleeing the state, are projected to cost the state about $9 billion through 2032.

Snyder told The Detroit News some of the one-time surplus could be deposited into the state’s Rainy Day Fund or spent on aging infrastructure. He pointed to a recent commission report suggesting the need for $4 billion a year in extra spending to modernize state roads, water and communications networks.

“It’s not going to solve the billions of dollars we’re looking for, but it could help seed and do some work,” the governor said. “And in particular, that one-time money could be well suited for those kinds of projects because it doesn’t involve the long-term hiring of people.”

The surplus is also expected to intensify talks over a potential income tax cut. House Republicans on Wednesday introduced a plan to cut the state’s 4.25 percent income tax rate to 3.9 percent in 2018, and then gradually eliminate it over the course of the next 40 years.

“I think it’s a good conversation to be had, and I’m supportive of it in theory,” said new House Appropriations Chairwoman Laura Cox, R-Livonia. “Obviously, I have to keep my appropriations hat on and make sure we’re not promising something we can’t afford.”

The income tax generated $9.3 billion for Michigan in 2016 and is the largest state source of revenue in the budget. It’s projected to generate roughly $9.7 billion in the current fiscal year.

Democrats have expressed concerns with the potential budget impact of eliminating the income tax, arguing that unexpected revenues should be used for needed investments.

“Instead of entertaining proposals that would dramatically reduce state revenue, these dollars must be invested where they matter most: better funding for our schools, job training for hardworking Michiganders and community funding for police and fire protection,” said House Minority Leader Sam Singh, D-East Lansing.

Asked about tax cut plans, Pscholka said the beginning of the new term is a good time to “have that discussion of how do we fund state government?” Those talks could include possible expansion of the state sales tax to generate some replacement revenue, but Senate Appropriations Chairman Dave Hildenbrand suggested economic growth could allow the state to cut income taxes but not services.

“It depends how aggressive any tax reduction is and how many years (it) is spread over,” said Hildenbrand, R-Lowell. “If you do a tax cut that’s phased in over five years, it’s a leap of faith. You’ve got to hope the economy stays strong or the people that serve beyond us will have to make a decision on what to do, whether cut spending or raise revenue down the road.”

The new-found surplus comes one week after Snyder signed a controversial law plugging a state budget hole using $10 million from an unemployment insurance “contingency” fund critics say is flush with cash because of erroneous penalties paid by Michigan residents.

Hildenbrand said Snyder and legislative leaders had agreed to that tax shift in May when finalizing the current year budget, before they knew revenue projections would increase.

If the state needs that $10 million to pay back residents falsely accused of unemployment fraud, “I’ll be the first to say we’ll put it back in there, so any obligations out of that fund will be honored,” he said.

Economy growing slower

The new revenue estimates are based partially on predictions of continued economic growth in Michigan. But economists who presented new data Thursday couched their bullish projections by acknowledging uncertainty at the federal level, where President-elect Donald Trump and the Republican-led Congress are expected to pursue tax cuts and repeal of a national health care law.

“Nonetheless, we remain optimistic about the Michigan economy’s prospects over the next few years,” said Gabe Erlich, director of the University of Michigan’s Research Seminar in Quantitative Economics. “As long as national economic policy remains prudent and there are no major external shocks to the economy, we see more growth in Michigan’s future.”

Michigan gained roughly 83,000 jobs in 2016, the seventh consecutive year of growth and a faster pace than 2015. University of Michigan economists expect the state to add 34,000 jobs in 2017 and 53,000 jobs in 2018.

All told, Michigan has gained 504,600 jobs since the depths of the Great Recession, which saw the state lose 858,100 jobs between 2000 and 2009. Ehrich said Michigan will have gained back 664,000 of those jobs by 2019, replacing more than three in four jobs that were lost.

“The continuing but slowing recovery in Michigan is consistent with the moderate potential of the U.S. economy and sustained but static Detroit Three vehicle sales,” Erlich said.

While manufacturing jobs have driven much of Michigan’s economic comeback, UM economists expect the state to lose 9,000 manufacturing jobs in 2017 and another 2,000 combined in 2018 and 2019. The largest gains are expected in professional business services, construction and health services.

Light vehicle sales are expected to fall slightly in the next three years after peaking at 17.55 million units in 2016. Detroit automakers are expected to gain some market share in coming years, however, and UM predicts their sales will essentially remain flat.

“The market is saturated with a lot of lightly used cars coming back from leasing,” said economist Daniil Manaenkov. “So basically there’s going to be competition between new cars and leases.”

Staff Writer Michael Wayland contributed.