$300M deficit forecast for Michigan's budget for next year

5/15/2008

LANSING - Michigan faces a budget deficit of at least $300 million next year, and its economy is expected to be weaker than projected earlier, according to a state forecast.

Lawmakers were briefed yesterday on the bleak financial picture.

Reasons for the projected budget shortfall include a sluggish economy, struggling housing market, the federal economic stimulus plan, and newly enacted state tax subsidies to lure Hollywood to make movies in Michigan, said Gary Olson, director of the nonpartisan Senate Fiscal Agency. "There's really not much good news in the forecast," Mr. Olson told members of the Senate Appropriations Committee.

Compared with forecasts made in January, the U.S. and Michigan economies will be weaker, both this year and next. Inflation is expected to be higher, income growth slower, and employment lower than anticipated. State tax revenue will fall $550 million short of projections for the budget year that starts Oct. 1.

It appears there is enough money that legislators and Gov. Jennifer Granholm can avoid having to make midyear spending cuts to K-12 public schools and other government services in the existing budget, which runs through Sept. 30.

"We're actually in decent shape, considering where we've been in the last few years," said Sen. Michael Switalski of Roseville, top-ranking Democrat on the Appropriations Committee.

The House and Senate fiscal agencies and administration officials will meet tomorrow to revise figures on how much revenue state government can expect to collect in this budget year and the next.

The House Fiscal Agency was more optimistic than the Senate in its forecast, released earlier in the week. It estimated the state treasury next year will take in $424 million less than expected.

Yesterday Mr. Olson estimated a potential $300 million deficit in the next budget.

That is assuming there is some leftover money from the current budget, state revenue-sharing aid is not increased for local governments, tobacco settlement payments to the state are withheld during a dispute, and the Legislature spends less than what Ms. Granholm proposed in her budget, Mr. Olson said.

Even then, he said, spending cuts are expected for the 2008-09 budget. Ms. Granholm has ruled out higher taxes.

While some of Michigan's budget struggles may be blamed on the economy, some stem from policy decisions.

Federal rebate checks sent to taxpayers to boost the economy will increase casino taxes, lottery revenue, and sales tax revenue. But because the new Michigan Business Tax is linked to federal taxable income and businesses will claim an acceleration in depreciation under the federal stimulus plan, the budget will see a net loss of $127 million over two budget years.

A new refundable tax credit aimed at boosting the film industry will cost the state another $110 million next budget year.

Mr. Olson said the incentives will be "wildly successful," but added there is "no way" any increased economic activity from making movies and TV shows will offset the checks cut to studios for their production costs.

Reduced property values will affect how much goes to schools through the state education property tax.

Next year, revenue from the real estate transfer tax could be down 52 percent from its peak in the 2003-04 fiscal year.