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Budget Needs $460M Belt-Tightening After Revenue Numbers

May 24, 2016

The state budget office is looking to scale back the Fiscal Years (FY) 2016 and 2017 budgets a combined $460 million through the current budget-crafting process in response to revenue estimates approved by state economic experts. No negative supplemental is expected.

While not singling out any particular item in the budget, State Budget Director John Roberts suggested a scaling back on some of the investment increases made in the proposed budget.

Maintaining the state’s investments in education, public safety, reaction to the Flint water crisis and tackling the Detroit Public School debt are the top priorities, he “can’t guarantee” anything.

However, Roberts said supplemental funding waiting in the wings might need to wait.

“We submitted some pretty good-sized supplementals for ’16, we might delay some of that,” Roberts said. He added that he could see that happening either with a supplemental accompanying the final budget bill, or rolling those into the omnibus.

“There will be funding for Flint for the 16-17 period,” Roberts said, adding that, “We don’t envision much change in the number.”

Flint Mayor Karen Weaver issued a statement today that said she “would certainly hope that these potential budget cuts do not come at the expense of Flint residents,” and that she trusts “that the commitment the governor has made to provide the city with the resources necessary to fix this problem will stand, despite the hole in the state’s budget.”

Roberts said Flint was one of the Governor’s “highest priorities” but said it wasn’t his place to guarantee anything.

“So Flint will be one of the highest priorities, so again, from our standpoint, we will be pushing to make sure that the full investment for Flint is there,” Roberts said.

Overall, state officials have $159.2 million less to work with when crafting the FY 2017 budget, based on state revenue numbers approved today at the Consensus Revenue Estimating Conference (CREC). That number is $75.4 million down from May in the General Fund and $83.8 million down in the School Aid Fund (SAF). Combined the state is down $173.9 million for the current fiscal year 2016. 

The numbers come after the Department of Treasury’s projected $22 million revenue decline for Fiscal Year (FY) 2017, which were much more bullish than those coming out of the fiscal agencies, which had FY ’17 revenue drops of $305 million (SFA) and $177 million (HFA).

Treasury also projected a revenue increase of $175 million in FY ’18 while the fiscal agencies scaled back their estimates $266 million (SFA) and $162 million (HFA).

The fiscal experts agree Michigan is continuing to trod along on a path of slow growth, but the second-straight low performing sales tax revenue is something that struck state Treasurer Nick Khouri as being “horrible.”

The 20 percent drop in gas sales tax revenue from $263 million to $209.1 million speaks to lower gas prices, but Khouri noted that gasoline sales accounts for a small portion of sales tax revenue.

He said he feared that declining retail sales nationally represents a longer-term trend of consumers going to the Internet for purchases or spending their money on non-taxable services.

The state is collecting some $60 million in sales tax revenue from retailers with a nexus in Michigan, but Khouri said, “If this is a longer term deteriorating, we have problems,” considering the sales tax is one of the three main pillars of state revenue.

Khouri said he wasn’t as concerned about the 20 percent decline in Corporate Income Tax (CIT) revenue, considering that number was up by about the same percentage last year, reflecting a general volatility in that tax.

On the positive side, income tax withholding payments continue to be strong and the $1 billion PowerBall jackpot earlier this year combined with the advent of iLottery has created stronger than expected numbers out of Treasury.

But the state’s taxes were on the minds of lawmakers after the conference. For Republicans, it was the sales tax and online sales. For Democrats, the corporate income tax.

If people’s buying habits are changing, “that’s something we need to take a look at,” said House Appropriations Committee Chair Al Pscholka (R-Stevensville), who also said the next step on the issue, however, must come from the federal government.

Last session, the state passed a bill mandating that all online retailers with a nexus in Michigan must collect a sales tax on Internet sales (See “Internet Sales Tax Bill Signed Into Law,” 1/15/15). Treasury officials confirmed that the expected $60 million in taxes is being collected on those purchases.

The next step could be the long-debated interstate compact, which would allow states to more efficiently collect online sales taxes. This would need Congressional approval to take effect.

“I know they are hesitant for some reason to do it and my advice to them is, ‘Get some guts,” Pscholka said. “There’s this dichotomy like we’re taxing the Internet, like we’re taxing people’s service. That’s not the issue. The issue is the actual purchase on line and they need to make that distinction.”

On the Democratic side, the focus is on Gov. Rick SNYDER’s business tax changes he signed into law in 2011, which took $1.7 billion off the table for future budget years.

The problems with the city of Flint’s municipal water supply and the Detroit Public Schools (DPS) speaks to a more systemic problem with how Michigan funds its services, particularly local governments and public infrastructure, said House Minority Floor Leader Sam SINGH (D-East Lansing).

“This issues we’re seeing in Flint, the issues we’re seeing in Detroit Public Schools, there are going to be other schools that are going through these same types of issues. What is going to come up next?” Singh asked.

“If you don’t solve these issues for the entire state, you’re going to see these types of problems year after year,” he said.

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