Michigan tax revenue forecast up again, despite grim pandemic predictions

Michigan is expected to have $1.7 billion more to spend in fiscal year 2022 than initially predicted in May 2021, continuing a months-long streak of beating dour predictions at the beginning of the pandemic that prepared for a $3.2 billion shortfall. 

The state's Consensus Revenue Estimating Conference on Friday also provided improved forecasts for fiscal years 2023 and 2024 and reported record tax revenue for the 2021 fiscal year.

In all, Michigan generated a record high $29 billion in net revenue in 2021 and is predicted to bring in $28.5 billion in fiscal year 2022, $29.1 billion in fiscal year 2023 and $29.9 billion in fiscal year 2024, according to state economists.

“Revenue growth continues to be strong as the economy recovers,” State Treasurer Rachael Eubanks said in a statement. “We are also still seeing the positive impacts of the federal stimulus programs. We expect growth rates to return to more typical levels as the support of the stimulus fades.”

In addition to that funding, the state has remaining about $7 billion in fedCOVID relief funds, $7.3 billion from federal highway programs and at least $563 million in federal aid through the bipartisan infrastructure bill passed last year. 

State Budget Director Chris Harkins warned that, like the federal relief money, some of the predicted gains in state revenue for 2022 and '23 appear to be transitory or "one-time." 

The 2022 and '23 upward projections are based in part on a surplus from 2021 rolling into the future budgets for a one-time boost, and state tax revenue could drop depending on post-pandemic consumer behavior.

"We are still recovering from a pandemic, so these numbers can and will fluctuate as we move forward," Harkins said.

Gov. Gretchen Whitmer will build her next budget around the new predictions and propose it to the Legislature in the coming weeks. 

House Appropriations Chairman Thomas Albert, R-Lowell, urged similar caution surrounding the improved projections, citing unknown effects to the state budget because of inflation. He said the state will make "targeted investments" with the extra cash, but avoid creating "ongoing costs."

"I’m worried that federal government policies, supply chain issues and labor force shortages might exacerbate that trend," Albert said of rising inflation. "It’s unsustainable and could cause serious problems for our economy, so we must be prepared for potential consequences."

Similarly, Sen. Jim Stamas, R-Midland, expressed caution over the improved budget outlook, noting the last two years have shown "change can happen quickly and dramatically."

“We should also remember that the budget picture we are seeing in state government is not reflective of the reality many families are facing around the kitchen table and in small businesses across our state, where people are struggling with the ongoing pandemic and rising costs," Stamas said in a statement.

Sen. Jim Runestad, R-White Lake, called for tax cuts in the wake of the surplus and higher predicted revenue announced Friday.  

“In light of the CREC report, there is no excuse for continuing to overtax Michigan residents," said Runestad, who chairs the Senate Finance Committee. "Government works best when the people are not overtaxed and can make their own decisions on what they want to support with their hard-earned dollars.” 

Tax revenue up

State tax revenue was up to historic levels in fiscal year 2021, with a preliminary total of $29 billion in tax revenue funneling into the state's general and school aid funds. The $29 billion represents an about 17% growth in net revenue from the year prior.

"That's the highest rate of annual growth in (general fund) we've seen in four decades," said Eric Bussis of the state Department of Treasury. 

The growth exceeds what was predicted for the fiscal year in January 2020, prior to the pandemic, and later economic forecasts that adopted gloomier predictions because of the COVID-19. The $29 billion total represents an about $3.5 billion increase from the January 2020 predictions and about an about $2.7 billion increase from the May 2021 projections.

The $2.7 billion surplus collected over projections in 2021 will be pushed into the 2022 budget on top of the expected $1.7 billion increase in tax revenue in fiscal year 2022 from the May 2021 projections. 

"The swing has been absolutely unbelievable," Harkins said.

The increase in tax revenue includes increases in income tax revenue — $1.8 billion in withholding in income tax and $1.7 billion in non-withholding — as well as about $12 billion in sales and use tax revenue, up about $2 billion from fiscal year 2020.

Much of the increase in sales and use tax revenue is due to a change in consumer behavior during the pandemic as stimulus checks rolled in and people put more of their money into goods instead of services, where they might be exposed to the virus.

"The pandemic shifted consumer behavior," Bussis said. "People were staying at home, they were buying things online, they had extra stimulus cash."

Expected slowdown

The state treasury and House and Senate fiscal agencies predicted most of the growth in tax revenue is expected to slow or recede slightly as the economy balances out over the coming months. The jumps in revenue simply are "not sustainable," said Jim Stansell, senior economist for the Michigan House of Representatives. 

Contributing to that slowdown is the discontinuation of stimulus funds as well as expected changes to consumer behavior — namely, consumers spending money on more services and fewer goods as the threat of the pandemic wanes.

"How consumption changes is really going to change consumption taxes," said David Zin of the Senate Fiscal Agency. "That’s a really big source of uncertainty for our predictions.”

Also contributing to the risks that could change predictions are unexpected resurgences of the pandemic, continued supply chain impacts, inflation and Federal Reserve policy changes, such as increasing interest rates in a bid to tame rising prices.

"The question that we’re all trying to determine, and why we are seeing this kind of bumpiness in the ongoing versus one-time revenues, is because that (federal) stimulus has concluded," Eubanks said. "...Once they’ve expended those funds, then what happens?”

Other parts of the economy will take a slower path to recovery. The predictions Friday did not anticipate the state's wage and salary employment numbers will not get back to pre-pandemic levels within the forecast's timeframe, which ends in 2024. 

eleblanc@detroitnews.com