Michigan coffers expected to swell by $6.8 billion through 2024

Michigan raised its revenue projections by $3 billion this fiscal year and another $2 billion next year as budget talks on spending and tax relief heat up.

The state now expects to collect $14.18 billion in general fund revenues and $17.34 billion in its school aid fund, up $1.73 billion and $1.26 billion, respectively, from the last estimates adopted in January.

The new forecast came Friday during the annual May revenue estimating conference.

The state anticipates the totals will shrink in fiscal 2023, which begins Oct. 1, with $13.97 billion of general funds now expected and $17.20 billion in the school aid. While the numbers will drop from fiscal 2022 the projections are still are up by $1.08 billion and $950 million, respectively, from January projections.

Estimates for fiscal 2024 were raised by $910 billion for the general fund and $890 million in the school fund. The new forecast raises revenues through 2024 by $6.8 billion but officials cautioned against as threats to the state’s fiscal momentum loom from the potential for an economic downturn, rising inflation, and the future path of COVID-19.

“I think this was one of the most difficult deliberations we’ve had,” said State Treasurer Rachel Eubanks. “We are trying to pinpoint a turnaround point” in terms of what’s happening with the economy and consumer behavior, and “we are seeing very good news today,” but “I think we just have to continue to maintain a fair sense of caution as we look at the medium and longer term.”

At Friday's estimating conference, Eubanks, Senate Fiscal Agency Director Kathryn Summers and House Fiscal Agency Director Mary Ann Cleary heard reports on the state’s economic prospects before agreeing on a revised revenue estimate for this year and projections for the next two.

Shifting monetary policy and the timing of Federal Reserve interest rate changes could help ease or hasten an economic downturn while international issues from the war in Ukraine and international sanctions could derail the economy while inflation and rising gasoline prices could drive shifts in consumer spending, reports reviewed by the group warn.  

Officials also cautioned that some of the revenue growth is one time in nature and that must guide spending decisions or the state risks developing a structural imbalance.

“It remains imperative that we continue to budget responsibly and with an eye toward the future,” said Budget Director Christopher Harkins.

Sales and use taxes are coming in above budget this year and a large “April filing surprise” on individual income taxes helped bolster the current year projections. Income tax withholding is on track for decade high growth.

“We had a lot of surprises that we weren’t expected that have popped up since January,” said David Zin, chief economist for the Senate Fiscal Agency. “Everything is stronger than we thought.”

In January, economists thought sales would slow based on a look at where consumer trends were headed but that’s not happened and April represented a record month with the state on track for its best growth rate ever of 12.8% for the year.

On income taxes, the previous estimates based on withholding anticipated 4.5% growth as the economic recovery slowed down but unemployment remains lower than previously expected and the state has seen year-to-date growth of 8.4%.

The rosier estimates will further fuel debate over spending and tax relief and the shape of the fiscal 2023 budget that must be adopted under state law by June 30th.

Gov. Gretchen Whitmer is a Democrat and Republicans hold a legislative majority.

Whitmer proposed using some of the state’s surplus to roll back the retirement tax and triple the earned income tax credit, raise school funding and infrastructure spending in her budget proposal. Last week, she proposed a $500 taxpayer rebate to help offset inflation.

“This is a plan to offer real relief right now — not a year from now. People need money as soon as possible to pick up groceries and put gas in the car this weekend,” Whitmer said in a statement.

In contrast, Senate and House Republicans last week pushed through a tax cut package last week that carries a two-year price tag of at least $2.5 billion by lowering the income tax rate to 4% from 4.25%, raising personal income tax exemption levels, and increasing the child tax credit.

"It isn’t the legislature’s money or the governor’s money to spend,” House Speaker Jason Wentworth, R-Farwell, said in a statement on the GOP package. “It’s the people’s money and they deserve to keep more of what they earn so they can better provide for their families.”

Whitmer in March vetoed the GOP’s previous attempt to slash the income tax rate to 3.9% calling it fiscally irresponsible.

Whitmer’s $74.1 billion budget proposal, which would boost reserves, raise education and infrastructure spending, and fund tax relief, moves the legislative debate over how to spend billions in tax surpluses and federal relief into high gear. It includes a $14.3 billion general fund and $16.6 billion school fund.

The proposed budget would provide a $51.8 million deposit into reserves that would bring the balance to nearly $1.5 billion, hitting a 5% target of general and school fund spending. It would also raise local revenue sharing by $49.8 million, or 5%.

The proposed spending relies on the previously projected $7 billion surplus based on the last revenue estimating conference and remaining American Rescue Plan Act relief and federal infrastructure aid, so the new forecast gives the state billions more to consider.

Lawmakers did agree in a bipartisan vote on legislation dubbed the Building Michigan Together Plan, signed by Whitmer in March, that spends $5 billion on transportation, water, and high-speed internet infrastructure projects across the state as well as making a deposit into the state’s unemployment trust fund.

The package relied on $3.9 billion of ARPA relief and $945.4 million from the federal Infrastructure Investment and Jobs Act funds and $591.6 million in state funds.

The state’s brighter economic prospects drew two rating outlook boosts in June 2021 when Fitch Ratings lifted the outlook on its AA rating to positive from stable and S&P Global Ratings raised the outlook on its AA rating to stable from negative. Moody’s Investors Service rates Michigan Aa1 with a stable outlook.

House Republicans are pushing a budget plan that pays down $2.6 billion in the teachers’ system pension debt, $1.2 billion for local municipalities and $350 million for the state police pension system. The package also calls for putting an additional $100 million in the rainy day fund and $674 million in the school aid stabilization fund and raising transportation spending by $1.3 billion from this year.