LINKEDINCOMMENTMORE

Lansing — Michigan tax collections have failed to keep pace with the state’s growing economy, according to new data showing plunging business tax revenue over the past five years and stagnant sales taxes have kept the state’s coffers from swelling like in past recoveries.

Michigan made $40 million on its principal business taxes in 2016 after paying out nearly $880 million in tax credit refunds, the state Treasury said last week, narrowly besting mid-year projections of a net loss.

The massive refunds largely stem from a tax credit program that Gov. Rick Snyder and the Republican-led Legislature subsequently scrapped in 2012. But outstanding credits, along with sluggish sales tax growth, combined to drive down Michigan general fund revenues last year despite increased personal income tax collections.

“The numbers just don’t add up,” said Mitch Bean of Great Lakes Economic Consulting, a former director of the state House Fiscal Agency. “When the economy is going well, personal income increases, but we’ve got different aspects of our revenue system that don’t really reflect growth in our economy.”

That wasn’t always the case, said Bean, who oversaw the Fiscal Agency from 1999 to 2011. Michigan “absolutely” experienced bigger revenue bumps when its economy was humming in the 1990s, he said.

In addition to major business tax changes enacted in 2011, he noted lame-duck approval of an auto part recycling fee sales tax exemption as evidence of “a death by a thousand cuts” in Lansing.

Michigan’s tax revenue contrasts

The growth of Michigan’s sales tax revenue has stagnated in recent years, while business tax revenue has plunged.

YearSales tax revenueBusiness tax revenue
2011$6.711 billion2011 $2.06 billion
2012$6.955 billion2012 $1.275 billion
2013$7.050 billion2013 $660 million
2014$7.363 billion2014 $138 million
2015$7.247 billion2015 $443 million
2016$7.3 billion2016 $40 million
*2017$7.51 billion*2017 $270 million

Note: Business tax revenue comes from the new Corporate Income Tax, the old Michigan Business Tax and the old Single Business Tax.

*Projected

Source: Michigan Treasury and House Fiscal Agency

Budget officials are predicting a revenue rebound in the current fiscal year, anticipating both healthier sales tax growth and smaller refunds under the old Michigan Business Tax.

“We believe they peaked at a level of about $880 million,” said Michigan Treasury senior economist Jay Wortley about the tax credits. “In fiscal year (2017), we expect net MBT refunds to fall to about $670 million.”

Most of the budget-busting credits were issued under the Michigan Economic Growth Authority program from 1995 through 2011, with refunds linked to investment or job goals. The program was launched by Republican Gov. John Engler and expanded by Democratic Gov. Jennifer Granholm in a bid to keep companies from fleeing the state during the height of the Great Recession.

The large refunds shocked state budget makers two years ago and created a $325 million shortfall the state fixed through spending cuts and revenue shifts.

But budget officials argue the state is now better poised to predict redemption schedules because of 2015 deals the Snyder administration struck with Detroit’s three automakers, the largest credit holders in a program with an estimated $9 billion in long-term liability for the state.

Ford Motor Co. agreed to a $2.3 billion cap, Fiat Chrysler agreed to a $1.7 billion cap and General Motors Co. agreed to cap the value of its credits at an unknown amount, declining to disclose terms of the deal it struck with the quasi-governmental Michigan Economic Development Authority.

MEGA credit refunds are again expected to cost the state between $530 million and $600 million in 2017, but the state is expected to save considerable money as related advanced battery development tax credits fall off the books over the next three years.

Refunds under the battery credit program, created by Granholm in 2009, totaled $238 million last year but are expected to cost the state $50 million in 2017 and $25 million in 2018, Wortley said.

Officials say there are signs some companies that were issued smaller credits are abandoning them and instead choosing to file under the state’s new 6 percent corporate income tax.

“There are a lot of small ones out there that don’t add up to a whole ton of money, and there is potential for the taxpayer to say it’s not worth it to file to make the requirements,” said Jay Stansell, senior economist for the House Fiscal Agency.

Michigan pulled in about $920 million last year under the new corporate income tax but netted $40 million in principal business taxes because of refunds under the old tax, down from more than $2 billion in 2011 and nearly $2.5 billion in 2008.

The state also made more than $320 million in insurance industry business taxes in 2016, and supporters of the 2011 tax code overhaul note that small business owners who were exempted from the corporate tax still pay income taxes on flow-through profits.

Business tax credit refunds came in $150 million below earlier projections last year, a key reason why the state now has a $330 million budget surplus despite the huge hit. But as Republican legislators discuss a potential cut to or elimination of the state’s 4.25 percent personal income tax, the Snyder administration has expressed caution over the budget impact.

Legislators would be “out of their frickin’ mind” to eliminate the income tax without a source of replacement revenue for the $9 billion a year it generates, Bean said.

One option being discussed in Lansing is increasing or expanding the state’s 6 percent sales tax. But sluggish sales tax collections in the past two years have flummoxed state bean counters, who usually expect a strong economy to spur spending on goods subject to the sales tax.

While Michigan’s unemployment rate is near a 15-year low, per capita incomes are growing and the state added an estimated 83,000 jobs last year, the sales tax has essentially flat-lined. Collections dropped 1.5 percent in 2015 before rebounding 1.3 percent in 2016.

The state generated roughly $7.3 billion in sales tax collections last year, with about 15 percent of that dedicated to the state general fund, 10 percent to local businesses and 75 percent to the School Aid Fund.

Economists suspect at least three “culprits” for the sales tax stagnation: Michigan households are saving a larger share of their earnings, gas prices have remained below $3 a gallon and consumers are shifting more spending toward services rather than goods.

Michigan is among a handful of states that applies its sales tax to fuel purchases, and the decrease in gas prices from 2015 to 2016 was “the largest single component of the gap between sales and use tax growth,” said Gabe Ehrlich, director of the University of Michigan’s Research Seminar in Quantitative Economics.

Michigan pulled in $603.6 million in sales tax from fuel purchases in 2015, according to the state Treasury, but $511 million in 2016.

Officials expect gas prices to rise in each of the next three years, however, which will “eliminate this source of drag on sales and use tax revenue,” Ehrlich said.

Still the shift in consumer spending from goods toward services is expected to continue, he said, limiting sales tax revenue growth.

The long-running trend toward a virtual and service economy poses a challenge for policy makers who must ensure that tax policy evolves, too, Treasurer Nick Khouri said.

“In the old days, you’d buy a floppy disk and put it in your computer, and it was taxable. And now we move to this thing called the cloud, I don’t even know what the hell it is, whether it’s taxable or not,” Khouri said. “This trend is going to accelerate over the next five to 10 years dramatically as we move to a virtual economy.”

Michigan did experience a roughly $60 million boost in sales and use tax collections last year because of a new “Amazon tax” that expanded the definition of retailers who operate in Michigan and are subject to the state tax. But officials suspect the state is likely still missing out on a significant portion of revenue from taxable goods purchased online.

“We know Internet sales are growing faster than overall sales, so we’re probably losing more and more from those,” Wortley said.

joosting@detroitnews.com

Michigan’s tax revenue contrasts

The growth of Michigan’s sales tax revenue has stagnated in recent years, while business tax revenue has plunged.

Sales tax revenue

2011 $6.711 billion

2012 $6.955 billion

2013 $7.050 billion

2014 $7.363 billion

2015 $7.247 billion

2016 $7.3 billion

*2017 $7.51 billion

Business tax revenue

2011 $2.06 billion

2012 $1.275 billion

2013 $660 million

2014 $138 million

2015 $443 million

2016 $40 million

*2017 $270 million

Note: Business tax revenue comes from the new Corporate Income Tax, the old Michigan Business Tax and the old Single Business Tax.

*Projected

Source: Michigan Treasury and House Fiscal Agency

LINKEDINCOMMENTMORE
Read or Share this story: http://detne.ws/2iBFbLP