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Economic and Fiscal Overview: the Good, the Bad and the Ugly

Economic and Fiscal Overview: the Good, the Bad and the Ugly. Lansing Torch Club April 2012. Department Of Treasury Responsibilities. Collect $25 billion in taxes from 6 million taxpayers Manage state’s common cash and $55 billion in pension funds Issue bonds for state and school districts

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Economic and Fiscal Overview: the Good, the Bad and the Ugly

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  1. Economic and Fiscal Overview: the Good, the Bad and the Ugly Lansing Torch Club April 2012

  2. Department Of Treasury Responsibilities • Collect $25 billion in taxes from 6 million taxpayers • Manage state’s common cash and $55 billion in pension funds • Issue bonds for state and school districts • Monitor finances of more than 2,000 local govts. • Manage student loan programs incl. MET and MESP • Oversee state property tax system • Serve as economic and tax advisor to governor • 1,700 Employees

  3. The Ugly • Worst recession since 1930s • Michigan employment declines for 10 straight years • Stock market drops 55%

  4. Number of Quarters for GDP to Return to Peak and Decline

  5. Sales and Big 3 Market Share Collapses Consensus Est. Source: Automotive News.

  6. Michigan Vehicle Employment Transportation Equipment Employment Increases (Thousands) Source: Bureau of Labor Statistics.

  7. Michigan Payroll Employment and Vehicle Production 6 Month Moving Average – Year over Year Percent Change Source: Bureau of Labor Statistics & Michigan Department of Treasury

  8. Michigan Taxes Decline as a Percent of Personal Income Michigan State Tax Revenue as a Percent of Personal Income Note: FY 2010 tax estimate based on May 2010 Consensus. FY 2010 personal income based on ORTA and consensus estimates May 2010.

  9. FY ‘10 GF-GP Revenue at FY ‘88 LevelDown 32% Since 2000 Billions of Dollars 2000 $9.8B 1988 $6.7B 2010 $6.7B Note: GF-GP figures are presented on a Consensus basis. 2010 estimated.

  10. FY ’10 Inflation AdjustedGF-GP Lowest Since 1965 Billions of 2010$ 1999 $14.3B 2010 $6.7B 1965 $6.5B Note: GF-GP figures are presented on a Consensus basis and adjusted for inflation to 2010 dollars using the state and local government price deflator. FY 2010 is the May 2010 Consensus estimate.

  11. SAF Revenue Below FY 2005 Level Consensus Estimate

  12. FY ’11 Inflation Adjusted SAF Lowest Since Proposal A Adopted Billions of 2011$ 2011 $10.8B 1995 $11.6B ConsensusEst. Note: SAF figures are presented on a Consensus basis and adjusted for inflation to 2011 dollars using the state and local government price deflator. FY 2010 & FY 2011 are the May 2010 Consensus estimates.

  13. Value of State Pension Funds (billions)

  14. Actions to Balance Budget • Cut spending- far more than any other state • Raised taxes-$1.3 billion • Reduced public employee benefits • Reduced state employment by 10,000 • Closed 8 prisons • Expanded business tax incentives • Federal Aid up sharply • Left $1.3 billion surplus

  15. Federal Aid to Michigan (millions)

  16. The Good • National economy recovering at modest pace • Michigan recovery stronger than most states

  17. Ten Quarters in a Row of GDP Growth Observed Real GDP Growth 3.0% Growth Figures are annualized percent change from preceding quarter in 2005 chained dollars. Source: Bureau of Economic Analysis. Forecast quarters in red are the September 2010 Global Insight forecast.

  18. U.S. Has Gained Nearly 3.6 Million Jobs Since February 2010 Source: U.S. Bureau of Labor Statistics, U.S. Department of Labor; 4/1/2012

  19. Corporate Profits Up Sharply in 2009 and 2010 2011 Q3: $1970.1 Source: Bureau of Economic Analysis

  20. Michigan’s 10-year recession Comes to an End Michigan Wage and Salary Employment Year-Over-Year Change (In Thousands) Avg. Cons. Forecast Note: Bureau of Labor Statistics. 2012-2014 estimates are from the January 2012 Consensus Forecast.

  21. Vehicle Sales Up, Big 3 Market Share Stabilizes Consensus Est. Source: Automotive News.

  22. Michigan Unemployment Rate, Monthly, 2008-2011

  23. State Budget • The Good, the Bad, and the Ugly

  24. State Budget Balances, FY 2011-FY2013(millions)

  25. Michigan Expenditure GrowthLowest Among States Source: Office of Revenue and Tax Analysis, Michigan Dept. of Treasury, 07/27/10, based on NASBO State Expenditure Surveys 2001 and 2009.

  26. Michigan State Government 10,700 Fewer Employees than 2000 Source: Michigan Department of Treasury

  27. Government Not LargeCompared to Other States Source: Bureau of the Census, 2008 State and Local Government Employment Survey

  28. The Bad Taxes raised on the poor and seniors and education budgets cut to pay for business tax cuts

  29. Summary of Tax Reform • Reduce business taxes by $1.7 billion by replacing MBT with 6% CIT, and make up lost revenue by raising personal income taxes. • The number of businesses paying state business tax reduced by 70%. • Taxes increases fall mainly on seniors, and low and middle-income families. • The stated purpose is to improve the Michigan business climate and simplify the tax system.

  30. Unnecessary Budget Changes • Cuts in K-12 and higher education budgets • Cuts in revenue sharing • Reduction in EITC from 20% to 6% • Some personal income tax increases

  31. A Better Approach • Extend 6% corporate income tax to business income with a possible exemption of $250,000-raises $550-$700 million • Retain a 0.1% gross receipts tax on all business- raises $250 million • Impose a tax on selected services such as sports tickets and service contracts • Provide a $20,000 pension exemption for individual returns and $40,000 for joint returns, or at minimum phase out exemption

  32. Proposed Changes (cont.) • Leave the income tax at 4.35%- saves average taxpayer less than $1 a week- raises $165 million • Retain or possibly reduce EITC to 10 or 15% for two years • Use revenue in excess of estimates to restore revenue sharing cuts or cut in EITC- revenues likely to be at least $200 million higher in both FY 2011 and FY 2012 • Add one tax credit for all charitable contributions- $150/$300

  33. Federal Budget Issues • The truth about the Federal budget

  34. Federal Revenues and Expenditures as % of GDP, 1971-2012

  35. Federal Spending Increases During Recessions

  36. Federal Government Spending – FY 2010 Source: Office of Management & Budget

  37. Federal Budget: FY 2010 and FY 2020 Projection billions of dollars Source: Congressional Budget Office

  38. Total Tax Revenue as % of GDP, selected OECD Countries, 2009

  39. Is it Possible to Cut $1 Trillion fromFederal Budget in One Year? • Interest on the Debt- $264B • Social Security- $727B • Veterans Support- $63B • Military & Civ. Retirement- $141B • Medicare- $572B • Medicaid- $273B • Defense- $710B • Income Support- $343B • Rest of Budget- $563B

  40. Possible Budget Cuts • Medicare & Medicaid (10%)- $85B • Defense- $100B • Income Support (10%)- $34B • Rest of Budget (25%)- $140B • Total- $359B (9.8%) • $1 Trillion cut would require 50% reduction in these programs

  41. Higher Income Groups Capture Most Income Gains

  42. Index of Income Inequality, Selected Nations, (2000-2008)

  43. Index of Income Inequality, Selected Nations (cont.)

  44. Average Annual Family Income, 2009

  45. Income Inequality Louis Brandeis: "We can either have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can't have both."

  46. History of Recessions

  47. Key Income Tax Changes • Eliminate or reduce pension exemption • Eliminate most credits- city income tax, contributions to universities and charities • Freeze tax rate at 4.35% until 1/1/2013 and then lower to 4.25% (rate was scheduled to decline to 3.9% by 2015). • Exemption for interest, dividends, and capital gains repealed for people age 65 and 66; currently $10,218/$20,437 less pension exemption. • Repeal $600 child care credit.

  48. Key Income Tax Changes (cont.) • Homestead property tax credit reduced- income phase out now $41,000/$50,000 (from $73,650/$82,650); senior rebate reduced from 100% to 60% at incomes over $20,000; TV cap of $135,000 • EITC reduced from 20% to 6%.

  49. Pension Exemption Changes • Exemption eliminated for persons age 59 or less- at age 67 will receive $20,000/$40,000 exemption which covers both Soc. Sec. and pension. • People 60-66 in 2012 will receive $20,000/$40,000 exemption plus Soc. Sec. exemption. • People 67 and older in 2012 will not be affected. Private pension exemption is $45,842/$91,680 and public pensions are exempt.

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