News Column

Tax Cuts, Fiscal Cliff Could Push Mich. Back Into Deficit Territory

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The State of Michigan, widely credited with righting its financial ship since 2011 after years of crisis, is again facing potential deficits that could be aggravated by a raft of bills passed in the lame duck session that ended Thursday, officials warned.

A variety of factors -- including state tax cuts and the possibility that the federal government could go over the fiscal cliff at the end of the year, triggering massive automatic spending cuts and tax increases that will affect state governments -- are creating the potential for shortfalls, officials cautioned.

"I passed out yesterday a Christmas stocking to members of the Appropriations Committee," state Sen. Roger Kahn, R-Saginaw, the committee's chairman, told the Free Press on Thursday.

"It contained a lump of coal and a document that shows the concerns for the next year."

The document details potential losses of $362 million in state revenue and $102 million in local revenue related to various tax bills pending or already passed in the Legislature. Some of the bills cited in the document, compiled with records from the State Budget Office and the Office of Revenue and Tax Analysis, were passed in the lame-duck session. But in some cases, they had amendments that lessened their impact. Others were inactive.

The document also identifies about $2.1 billion in other revenue issues unrelated to the lame-duck session, including $1.4 billion in additional money needed to fix roads and a $145-million shortfall in the Health Insurance Claims Assessment tax, a 1% tax on certain health insurance claims that took effect this year, replacing an earlier health tax that was eliminated.

The document says the amount of revenue that the state will lose if the federal government breaches the fiscal cliff is still to be determined.

Congressional leaders and President Barack Obama are working on a deal to avert the cliff, but Kahn said there are real state budget concerns, even if there is a deal.

"We have to be very careful," Kahn said.

State Rep. Vickie Barnett, D-Farmington Hills, said no one should be surprised that the state is facing possible fiscal shortfalls.

After cutting corporate, personal property, sales and income taxes, "it seemed pretty clear that we were going to be running out of money," she said. "This is something that most of us have been concerned about all session. They're moving bills without any fiscal analysis.

"You can't tax-cut your way to prosperity," said Barnett, a financial planner.

State Budget Director John Nixon was at a conference and unavailable for comment Thursday. But his spokesman, Kurt Weiss, said: "Anytime the Legislature passes legislation which increases state expenditures or reduces state revenues, outside of the budget process, we run the risk of seeing expenses outpace revenues."

However, "the administration is strongly committed to ensuring that Michigan does not return to the days of routine, ongoing structural problems in the budget" and is monitoring the situation closely, Weiss said.

The latest revenue figures from the House Fiscal Agency show general-fund revenues are up between $70 million and $130 million from what was estimated in May, but School Aid Fund revenues are down about $50 million from the May estimates. The changes called for in lame-duck bills would mostly affect revenues next year and later.

Mary Ann Cleary, director of the House Fiscal Agency, also urged caution in an interview with the Free Press on Thursday.

"Both the School Aid Fund and the general fund are tight for 2014," Cleary said.

Cleary's immediate concern is House Bill 5696, which would change the way new and used cars and boats purchased from dealers would be taxed.

Instead of paying sales tax on the entire purchase amount, the buyer would pay sales tax on only the difference between the purchase value and the value of any car or boat used as a trade-in in making the purchase -- good news for the consumer, but bad news for state and local government's bottom line.

Though the bill would phase in the change, it's estimated to immediately cut state revenues by $117 million and local revenues by $9.5 million, according to Kahn's document.

An amended version of the bill passed the Senate 37-1 Wednesday night, with Kahn casting the only no vote.

A version in September passed the House, which would now have to concur with the Senate version before it can move on to Gov. Rick Snyder for his signature. House approval was still pending at press time Thursday.

The Senate amendment Wednesday, phasing the change in over 10 years, will soften the immediate impact, but it did not ease Kahn's concerns.

A longer term issue, Cleary said, is the planned elimination of the personal property tax on commercial and industrial office furniture and equipment, which passed the Senate on Wednesday and passed the House on Thursday. The bill needs to go back to the Senate for final approval.

That change can impact the state budget by hundreds of millions of dollars, with the major impact starting in fiscal year 2016, Cleary said.

State Rep. Jud Gilbert, R-Algonac, said he thought the phase-in of tax cuts over several years would help alleviate the potential for deficits.

"If it's just a monthly report, that's not a concern," he said. "But if revenues are way down for the year, then yes, that's a concern."

More Details: Bills affecting the bottom line

Several recently passed or pending bills, some of which were still under consideration during the last day of the lame-duck session Thursday, are putting increased pressure on the state budget. They include:

Public Act 226 of 2012: Earmarks 4% of the sales tax from aviation fuel to the Michigan Aeronautics Fund.

--Estimated impact: $10 million

--Status: law

HB 4753: Eliminates tax when property transfers to certain family members.

--Estimated impact $1.6 million

--Status: Passed by Senate; in House on Thursday.

HB 4969/70: Exempts certain forest lands from property tax.

--Estimated impact: $4.4 million

--Status: Passed by Senate in lame duck, with changes.

HB 5444/5445: Exempts trucks and trailers used in interstate commerce from certain taxes.

--Estimated impact: $400,000

--Status: Passed in lame duck.

HB 5557: For 2011 only, extends deadline for downtown development authorities to seek certain reimbursements from state.

--Estimated impact: $200,000

--Status: Passed in lame duck.

HB 5696: Provides that when cars and boats are purchased from a dealer, buyer pays sales tax on only difference between the purchase value and the trade-in value.

--Estimated impact: $125 million, which will be lessened through a 10-year phase-in.

--Status: Passed Senate in lame duck; in House on Thursday.

HB 5732: Allows historic preservation tax credits to be assigned to others.

--Estimated impact: $2.4 million

--Status: Passed in lame duck.

Note: Estimated impact of bills could change as a result of late amendments.

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