Michigan has nearly $1B more than expected for budget; surplus debate focused on tax relief

1/10/2014

LANSING, Mich. — Gov. Rick Snyder’s budget director said Friday that a tax cut or rebate is “inevitable” given Michigan’s now-confirmed budget surplus of nearly $1 billion but cautioned that other priorities such as education and public safety also deserve attention.

“Obviously whenever you have this much revenue, a tax cut or tax relief is inevitable, and that makes sense,” John Nixon told reporters at the Capitol after the administration and legislative economists settled on consensus revenue estimates. “But the question is, to what extent, what size and how does that compare to all of the other critical investments that we need to make?”

He declined to say whether the Republican governor will call for tax relief in his February budget proposal to the Legislature. Some of the majority Republican lawmakers already have suggested gradually dropping the state income tax rate from 4.25 percent to as low as 3.9 percent over time.

The surplus is being attributed to Michigan’s modestly improving economy — which is starting a fifth straight year of recovery after devastating job losses in the 2000s — and higher-than-expected business tax revenue. Companies still paying an old, expiring business tax are claiming fewer credits.

Nixon cautioned that two-thirds of the $971 million in unanticipated revenue is “one-time” money that won’t be available on an ongoing basis.

Some high-ranking Republicans want a broad, long-lasting tax cut this election year. Another option might be a one-time rebate to taxpayers.

Democrats are hoping for more targeted relief to reverse GOP tax hikes on individuals that mostly offset slashed business taxes in 2011. They want to fully restoring a credit for low-wage earners and again exempt pension and retirement income from taxation. Ending the “pension tax” has support from some Republicans as well.

The GOP also is focused on spending more on road and bridge upkeep, while Democrats say public schools and colleges should be a priority. And local governments contend they shouldn’t be left out after the state siphoned off billions in revenue-sharing over the last decade to help address deficits.

“Our ability to recover from the recent recession is disproportionately slower than it is for state government, and without the state honoring their financial obligations to local units, we will continue to struggle to provide the most basic of local services,” said Shelley Pinkelman, president of the Michigan Association of Counties’ board of directors.

An advocacy group for the poor said cutting income taxes wouldn’t create jobs and would help high-income households the most.

The agreement on revenue projections — to be revisited in May before the budget is finalized — came in conjunction with generally positive reports about the state’s economy.

University of Michigan economist George Fulton said Michigan had the country’s fourth-highest growth in the private sector from 2010 to 2012. Since Michigan began to rebound after the auto industry’s near collapse and revival with a government bailout, it has gained jobs.

Still, only slightly more than half of the 857,000 jobs lost from 2000 to 2009 will have been replaced three years from now, Fulton said.

“Overall the news is good,” he said, adding that there is still “substantial ground to be made up.”

The state will add on average 64,000 jobs a year from 2014-16, and the unemployment rate — third-highest in the U.S. — is projected to drop to below 7 percent in 2016.

Detroit’s three automakers, drivers of Michigan’s economy, are expected to gain some market share, yet years of strong sales gains will likely slow.