A quicker recovery and more tax revenue leads to better budget outlook for Michigan

LANSING, Mich. - Michigan's budget outlook is not as bad as was thought -- thanks to federal pandemic relief aid, higher consumer spending and tax payments than expected, and a quicker recovery by the manufacturing and auto industries, officials said Monday.

In May, Gov. Gretchen Whitmer's administration and legislative economists projected a combined $6.3 billion shortfall in the state's two main funds over this fiscal year and next. They revised that hole downward, to $3.4 billion, in a rare third revenue-estimating meeting on Monday.

That means the situation is not as dire as the Democratic governor and Republican-led Legislature begin work to pass a budget to start Oct. 1. Billions of dollars from a federal bailout that were used to address a projected deficit in the current budget, combined with larger-than-expected tax collections, could instead effectively help in the next fiscal year. 

State budget director Chris Kolb estimated a hole of less than $1 billion in the combined $23 billion school aid and general funds, down from a potential $3 billion shortfall.

"This is good news because we can carry forward these improved revenues to help us avoid major cuts in fiscal year `21," he said, while adding that Michigan still faces $4.2 billion less in revenue over the next two budget years than was estimated before the coronavirus hit. "These are large revenue losses that will require difficult decisions without additional federal aid, especially in fiscal year '22. Tough decisions will still be required in the next five weeks."

The Whitmer administration's funding priorities include education, public safety, municipalities and public health, said Kolb, who called the passage of another federal stimulus package "a must."

Budget experts said their economic forecast was on target in the spring, but they underestimated the impact on income and sales tax revenues.

One reason is people are spending more on taxable goods -- home improvements, computers and cars -- and less on services that are not taxed and remain closed: athletic events, concerts and movie tickets. Other factors are the federal government's supplemental $600 weekly benefit for residents who are out of work or temporarily laid off, the $1,200 checks that were issued to most individuals and the Paycheck Protection Program for businesses -- which added $43 billion to Michigan's economy from April through June. The state taxes unemployment payments.

Officials urged caution, however, due to uncertainty over whether Congress and President Donald Trump will do another round of stimulus checks and keep in place jobless benefits that expired at the end of July. A new $300-a-week benefit -- authorized by Trump after talks broke down -- is expected to last into September.

"If COVID outlasts the stimulus, you still have some pretty substantial revenue impacts," said David Zin, chief economist with the nonpartisan Senate Fiscal Agency.

State Treasurer Rachael Eubanks said she was surprised at how willing consumers were to spend the federal assistance so quickly.

GOP lawmakers who help write the budget said while the revenue numbers are better, Michigan is by no means out of the woods and must be restrained and responsible with spending. House Appropriations Committee Chairman Shane Hernandez of Port Huron called for fully and safely reopening the state's economy despite the virus, reducing spending and adding to -- not pulling from -- savings to lessen future budget cuts when federal help ends.

"In no way is federal money a permanent solution," he said.