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Biz Credits Trim State Funds $288.9M This Year, $526.5M Next

January 27, 2015

Michigan government has $288.9 million fewer dollars to spend in the current fiscal year ending Sept. 30, state officials announced January 16th, and the amount of money Gov. Rick SNYDER is able to count on for the following fiscal year is $526.5 million less.

Business tax credits issued several years ago are bearing more fruit than economists projected eight months ago because Michigan’s improved economy has boosted companies’ employment and revenue numbers to the point where they now qualify for the breaks.

Budget Director John ROBERTS wasn’t pushing the panic button after the Consensus Revenue Estimating Conference (CREC). But with about three weeks until Feb. 11, when Snyder is slated to give his budget recommendations, Roberts did concede, “This is serious.”

When the budget office started putting together it’s FY ’16 budget this past fall, “this wasn’t the number we were using,” so “there’s a lot we have to do in a short amount of time,” he said.

“But you know this Governor. He’ll present a budget that is balanced,” Roberts said. “He’ll have his strategic investments and we’ll have those things we can no longer afford.”

Roberts projected there will be reductions in services, but wasn’t in a position to say whether layoffs would be part of the equation or how much School Aid Fund money would be used to offset the General Fund. Dipping into the Rainy Day Fund doesn’t appear to be a first preference.

Estimates coming out of the Consensus Revenue Estimating Conference (CREC) this morning showed General Fund revenues are coming in $324.6 million less than expected in the current Fiscal Year (FY) 2015 and $532.1 million in FY ’16. The main reason is businesses are cashing in on tax credits they were awarded more than four years ago.

School Aid Fund revenue is coming in slightly better than expected — $35.8 million for FY ’15 and $5.6 million for FY ’16 for a net hole in FY ’15 of $288.6 million and $526.5 million in FY ’16.

This fiscal year, Michigan Business Tax (MBT) net refunds are expected to be $681 million, $252 million larger than the May estimate. For next fiscal year, the estimate could grow to $681 million, $351 million larger than previously thought.

To make the matter more unsettling for state lawmakers and state economists, Jim STANSELL of the House Fiscal Agency (HFA) said the outstanding Michigan Economic Growth Authority (MEGA) credits would last up until 2030. The battery industry credits are slated to continue until 2018.

“We’re talking about something that isn’t going away anytime soon,” Stansell said.

In fact, as the economy improves at the businesses that received these credits begin hitting the job growth and revenue numbers that activate these credits, the hit to the state will be greater . . . and harder to predict.

House Appropriations Committee Chair Al PSCHOLKA (R-Stevensville) said the program started under the Gov. John ENGLER administration Michigan and was put “on steroids” during the Great Recession and the Gov. Jennifer GRANHOLM administration.

The problem is the credits, themselves, didn’t help the businesses actually hit the goals they needed to claim the credits. So now when the state’s economy, as a whole, is starting to improve, the credits are being claimed.

“These are the sins of the past,” Pscholka said. “I’m not blaming anyone. That’s how economic development was done. It was state versus state. It was who could offer the biggest deal out there, and I think companies played states off each other.

“And come to find out the biggest thing that creates jobs is having a good place to invest money and having a workforce. Gee! Who knew?”

As far as cuts, Pscholka said he’s looking for cost savings “inside Lansing” as opposed to cuts to K-12 schools, local governments, community colleges or higher education.

Stansell also noted that between 55 and 60 of these credits were amended through the Michigan Economic Development Corporation (MEDC) in recent years. About three-quarters of these amendments basically allow companies to claim more than the original amount.

Maybe a company overperformed on an estimate and wanted a larger credit. Maybe a company credited more jobs at a separate location and wanted the credit to transfer. In many cases, these changes were allowed.

Roberts said the administration feels it has a handle on cost implication of the amended credits. It was how the improved economy impacted the other credits that they underestimated.

Sen. Curtis HERTEL, Jr. (D-East Lansing) asked for a list to be compiled of these amended credits and suggested that this is an issue the legislature may need to look at.

Meanwhile, House Minority Leader Tim GREIMEL (D-Auburn Hills) blew the whistle on “disastrous Republican policies” that have focused on “big corporations living rent-free in Michigan, leaving average families to foot the bill.”

Greimel referenced the tax switch made in 2011 that gave Michigan corporations a $1.7 billion tax break and outstanding corporate tax credits he put at $1.6 billion.

“Republicans have allowed the MEDC to become a runaway organization that is devastating the state’s financial health, while not holding it accountable for creating more jobs,” said House Minority Floor Leader Sam SINGH (D-East Lansing). “This policy is irresponsible and harmful to regular, working families, which is why we are committed to restoring fairness and building a Michigan economy that works for everyone.”

Overall, Senate Appropriations Committee Chair Dave HILDENBRAND (R-Lowell) said what he heard was a “lot of good news” from the standpoint that Michigan’s economy continues to gradually improve.

Hildenbrand said he would prefer to honor the commitments that have been made regarding the tax credits, but said there may be opportunities to put perimeters around them “just to make them more predictable long term for us as we do the state budget.”

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