Legislative Report March 2022
The Michigan Legislature has returned from the winter break and (despite a few COVID-related delays in the Michigan House) are back in full session. Governor Whitmer’s State of the State Address and her subsequent budget recommendation laid out her goals for the upcoming year and the next fiscal year. Highlights of her proposals include the elimination of the so-called “retirement tax” as well as increases in the Earned Income Tax Credit, credits for electric vehicles, and large increases in mental health funding.
Republican leaders in the Michigan House and Senate, meanwhile, have focused on legislation that would reduce Michigan’s Income Tax rate from 4.25% to 3.9%. They have also targeted COVID-relief funds to shore up the Unemployment Insurance Trust Fund and provide grants to small businesses who have been hardest hit by the pandemic. Whether or not the two branches of government will be able to find agreement on any of these competing proposals (even at a time when Michigan revenues are sky-high) remains to be seen. It is, after all, an election year.
More on these issues and others below.
Unprecedented Budget Surplus and Unspent Federal Funds Create Long Wish Lists
On January 14, State Budget Director Chris Harkins announced that the latest consensus revenue estimates continued a two-year pattern of sharp revenue increases. The revised estimates predict an additional $3.1 billion in combined revenues from the state General Fund and the School Aid Fund for the 2022 fiscal year. Moreover, the closing of books for the 2021 fiscal year showed an additional surplus of $2.7 billion in the two funds. There are also $5.2 billion in unspent federal dollars from the American Rescue Plan, and upwards of $10 billion in expected federal infrastructure funds on the way. This is an incredible amount of money.
As would be expected, policy makers are all over the map on how to deal with this enviable problem. There have been several calls for tax cuts, with some targeted at certain populations (e.g. seniors, working poor, green energy industry) and others looking for broad-based reductions (e.g. Michigan Income Tax, unemployment insurance rates, various business taxes). There have been proposals to make major investments in education (e.g. staff recruitment programs, teacher certification assistance, tax vouchers for parents), grants to businesses (e.g. support for businesses harmed by pandemic, licensing and regulatory cost assistance), state services (e.g. staff recruitment – particularly in Department of Corrections, expansion of mental health beds, increased support for in-home health care), debt reduction (e.g. additional payments to state and municipal pension systems, early payment of highway bonds), and countless other pet projects and schemes.
Budget Director Harkins cautioned that much of these revenues should be considered “one-time money,” but aside from the federal funds, this determination seems to be based more on the feeling that this level of revenues will not last rather than the more traditional definition of “one-time funds.” The conventional wisdom in Lansing where budget shortfalls are common but budget surpluses (especially on this scale) are unheard of certainly is making most policy makers leery of making long-term assumptions based on these numbers. Of course the one place where this aversion to long-term planning evaporates is when it comes to making massive, long-term tax cuts.
Speaking of Long-Term Tax Cuts…
For example, on the same day as the State of the State address, the Senate Finance Committee reported Senate Bill 768 that seeks to reduce the individual Michigan Income Tax rate from 4.25% to 3.9%. The bill would also create a $500 per dependent tax credit. The windfall is even better for the business community, who would see the corporate income tax rate cut from 6% to 3.9. The estimated impact on the state budget would be a reduction of $1.6 billion in the 2022 fiscal year, $2.3 billion in FY 23, and $2.4 billion in FY 24. This would eat up the vast majority of the current revenue surplus – the surplus about which Budget Director Harkins referred to as “a lot of it being one-time in nature.”
On March 1, the House of Representatives passed their own version of a tax cut bill that keeps the Senate’s reduction in the personal income tax but left out the cut for businesses. The House also incorporated their own version of a pension tax reduction that would increase the personal deduction on persons aged 62 and older. The House version also includes a $500 per child tax credit.
The House Fiscal Agency estimates that, when fully phased in, the tax cut plan would reduce revenues by approximately $2.5 billion per year. This would eat up the majority of the current surplus, and would not leave much margin for error should the economy cool down in the future. It would also eliminate the ability to carry out a good deal of Governor Whitmer’s budget proposal (see below), as well as several Legislative budget goals. The House version of the bill was incorporated in Senate Bill 768 which passed by a 62-42 vote. The Senate concurred in the House changes on March 3, and the bill is now on its way to the Governor desk. However, due to the impact the loss of revenue would have on Governor Whitmer’s budget priorities, it is likely that she will veto the bill.
Governor Calls for Increased Spending for Economic Development, Public Health, and other Priorities
Governor Whitmer’s budget proposal was announced on February 9, and she laid out a far-reaching plan to use the current budget surplus to accomplish a number of longstanding goals. Her proposal includes $3.2 billion for wage pass-throughs, one-time grants and ongoing salary enhancements for state-funded programs experiencing critical staffing shortages. The proposal would continue and expand the $2.35 per hour wage pass-through for direct care workers, and provide recruitment and retention funds for public and private employees. One part of the proposal would set aside $50 million for recruitment and retention for public safety employees, which would include staff at the Department of Corrections and the Department of State Police.
Infrastructure is also heavily featured in the Governor’s proposal. The budget includes $500 million for water infrastructure improvements (such as lead line replacement); nearly $1 billion in combined funds for roads, bridges and public transit; $250 million in broadband internet expansion; and $66 million in pump station improvements aimed at preventing flooding. The budget also calls for investment in state-run infrastructure, including plans for a new mental health hospital totaling $325 million, and $250 million to improve state parks and trails.
Of course, these proposals are subject to the approval of the Michigan Legislature. Governor Whitmer is expected to veto a tax-cut plan passed by the Michigan Legislature (see article above), and that will likely start off budget negotiations on a sour note. However, a veto will at least preserve a budget surplus which can fund priorities for both Democrats and Republicans.