Michigan to face $2B budget squeeze in general fund
Lansing, Mich. — Tax cuts, increased road construction, past economic development incentives and other factors will combine to reduce or divert state revenue by $2 billion annually in just over four years — the equivalent of 20 percent of Michigan’s general fund account.
That’s a key takeaway from a report issued this past week by the nonpartisan Citizens Research Council of Michigan. It says while the state is rebounding from two major recessions, budget turbulence is ahead due to policy choices in Lansing.
Future lawmakers will be forced to make “many difficult decisions,” according to the report. The $2 billion financial squeeze could be exacerbated by federal funding cuts or another economic downturn.
Here’s why the experts are sounding the alarm.
The $10 billion general fund is Michigan’s second-largest. Unlike the larger school aid fund and the smaller transportation fund — restricted accounts to which money is automatically dedicated — the general fund accounts for most discretionary spending on things such as prisons, universities, welfare, environmental protection and state parks. But its revenue sources, predominantly income tax collections, are projected to increase very slowly and not keep pace with inflation. Inflation-adjusted revenue is actually down overall since a decade ago and seems to have plateaued.
Republican Gov. Rick Snyder and the GOP-led Legislature previously enacted two big changes that will affect the budget once they’re fully implemented. Under a road-improvement plan that raised fuel taxes and vehicle registration fees, general funds will be shifted to the transportation account starting in 2018. The transfer will max out at $600 million in 2020 and beyond. The package also includes income tax relief worth $200 million for homeowners and renters, which will kick in for the 2018 tax year.
Another major move is that a tax on industrial machinery and other business equipment is being phased out. The state is reimbursing local communities for the lost revenue. That’s about $350 million this year, which will rise to roughly $500 million in the middle of the next decade.
Snyder and lawmakers slashed business taxes in 2012 by replacing the main tax with a corporate tax levied on fewer businesses. Yet many large companies still file under the older code to cash in refundable credits they received to add or keep jobs in Michigan. Many incentives were awarded by then-Democratic Gov. Jennifer Granholm’s administration to hold onto auto jobs during the Great Recession. Some deals will run through 2032. The state is still liable for a staggering $9.2 billion over the next 15 years, the report says, “significantly limiting the flexibility that legislators have when putting together future budgets.”
Smaller revenue reductions
Others laws enacted in recent years will cut revenue: the phase-out of driver responsibility fees for drunken driving, reckless driving and driving without a license; limits on personal tax liability for corporate officers; tax exemptions for data centers; and a trade-in allowance that reduces taxes on car sales.
Beginning this year, the state is covering a small share of the cost to expand Medicaid insurance coverage to 660,000 low-income adults under the federal health care law. Within three years, $220 million will need to come from the general fund. If the expansion ends, Michigan still could face other costs because the federal expansion funding has been covering mental health and prisoner health care. The Citizens Research Council also notes uncertainty over how much the state could pay to help municipalities better provide legal representative to poor criminal defendants.
Income tax cut
The 2015 roads plan provides for annual income tax reductions starting in 2023 if general fund revenue outplaces inflation by a minimum amount.
The report says the net $2 billion reduction in the general fund due to cost increases and revenue diversions is nearly 10 times what is was a couple of years ago.
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