Michigan experts see rising revenues, $850M surplus as GOP, Dems prepare for budget talks

Lansing — Michigan has a nearly $854 million surplus in the current fiscal year and is expected to see growth in tax revenue over the next three years, state leaders concluded Friday.

The state's budget experts adjusted their revenue expectations upward for fiscal years 2025 and 2026 by $770 million and $910 million, respectively — gains that are likely to play into negotiations between the Republican-led House and the Democratic Senate and governor's office as they hash out the annual budget and seek a permanent revenue source for more annual road funding.

House Speaker Matt Hall, R-Richland Township, argued Thursday that the current surplus and expected revenue increases in 2025 and 2026 should be used for roads, repeating arguments that the state's roads and bridges could be funded with existing revenue.

Hall has suggested, in addition to any surplus funds, that the state could also shift money currently going toward economic development instead to benefit roads. House Democrats introduced unsuccessful bills last year that would generate additional revenue through measures such as toll roads, fuel tax hikes and registration fee increases.

"I think we should put that into roads and bridges and infrastructure," Hall said. "That's going to really help us."

Gov. Gretchen Whitmer in a Friday statement did not say how the money could be used, but said the projected increases were a sign the state economy "is headed in the right direction."

“Thanks to our hardworking people, innovative businesses, and strategic financial management, state revenues came in strong, much higher than we expected," Whitmer said. "Our economy is also projected to continue growing over the next few years."

State Sen. Sarah Anthony, a Lansing Democrat who chairs the Senate Appropriations Committee, said the gains will allow lawmakers to "sustain vital funding and continue addressing the real challenges facing working families."

State Rep. Sarah Lightner, a Springport Republican who served as House Appropriations minority vice chair last session, argued the money should be used for the state's "crumbling local roads" and to give taxpayers some sort of return of their money.

“Beyond infrastructure, this additional revenue should go back to where it belongs — in the pockets of hardworking Michiganders," Lightner said.

Fiscal experts on Friday couched their economic predictions by pointing to inherent risks that could dim revenue growth, such as the global tariff increases promised by President-elect Donald Trump. And a consumer sentiment researcher said the state's upward revenue trends don't appear to have a trickle down effect on consumers' glum economic outlook.

Sales, income taxes higher than expected

The estimates made regarding Michigan's future tax revenue emerged from a nearly three-hour meeting Friday among fiscal experts from Whitmer's office, the state House and the state Senate, called the Consensus Revenue Estimating Conference.

Overall, the fiscal year 2024 tax revenue was revised upward by $854.1 million, with a $552.3 million gain in general fund revenue and a $301.8 million increase in school aid fund revenue.

Revenues for fiscal year 2025 were revised upward by $770.4 million, with a $312.7 million boost in the school aid fund and $457.7 million hike in general fund revenue. For fiscal year 2026, the total upward adjustment from past estimates was $910.2 million — $591.2 million in general fund revenue and $319 million in the school aid fund.

The increases in projected revenue were believed to be attributed in part to an increase in income tax withholding as well as continued high rates of sales and use tax revenue.

Michigan's sales and use tax revenue has outperformed projections since the start of the COVID pandemic in 2020 — a phenomena initially attributed to individuals spending their stimulus checks and higher-than-usual unemployment checks but now believed to be a habit with staying power.

While sales and use tax revenue — and the consumer spending on goods underlying the revenue — is beginning to even out, it has not dipped back to pre-pandemic levels as expected. Instead of dipping by 0.6% as initially expected, it decreased 0.3%.

Additionally, Michigan's revenue from the 4.25% individual income tax is expected to increase at a greater rate than fiscal experts initially forecast.

Experts projected Friday that Michigan's income tax total would increase 4.8% instead of the 2.9% increase initially predicted.

Those tax revenues made up for a decrease in the 6% corporate income tax revenue, which decreased 1.6% instead of an expected increase of 1%.

Tariffs still an unknown

University of Michigan economists predicted a continuation of downward trends in inflation and unemployment in Michigan and continued increases in state tax revenue. But they stressed that many of their economic predictions depended on the reach of tariff increases that Trump has threatened against other countries, including neighboring Canada and Mexico.

Trump's threatened tariff hikes present a "significant wild card" in any sort of Michigan economic outlook, UM economist Gabriel Ehrlich said.

"The biggest uncertainty — at least in the near term — comes from the timing of tariffs," said UM economist Daniil Maneankov, noting economists are anticipating those tariff increases to begin in 2026 based on a roughly one-year delay in the implementation of tariffs in Trump's first term.

"We expect limited retaliation from China throughout 2026," Maneankov added. "And we do not expect significant/lasting new tariffs on the rest of the world. It doesn't mean that there won't be some temporary tariffs that are used for negotiation purposes, but we don't expect them to stay."

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But consumer sentiment regarding the proposed tariff increases and the economy in general is more circumspect, with many consumers worried about the impact of those tariffs, said Joanne Hsu, director of the surveys of consumers at UM's Institute for Social Research.

In some cases, those concerns about elevated costs in the months to come are causing people to make purchases now to avoid a possible tariff-related hike in the future.

"We have no idea how pervasive these tariffs will be, whether its just a negotiation ploy, how many countries its going to effect,” Hsu said, but noted UM economists had believed tariffs would not drive up inflation further. "Will consumers eventually adopt that view? Or will they continue to think, 'I need to spend now to avoid worse times in the future.'"

eleblanc@detroitnews.com