Michigan Economic and Budget Outlook Robert Kleine State Treasurer Bloomfield Hills School District April 19, 2011
Summary • U.S economy doing better than expected • 10-year recession in Michigan is over • Michigan has revenue problem not spending problem • State revenues running well above projections • Required spending cuts could do more damage than tax increases • Business tax cuts not likely to create many new jobs • Schools districts expected to cut costs and deliver better results • Local govts. facing fiscal crisis- rev. sharing cuts will push many over edge
Six 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.
ISM Indices Show Expansion ISM Manufacturing Index May 2011= 53.5 ISM Non-Manufacturing Index june 2011 = 53.3 Source: Institute for Supply Management.
U.S. Has Gained Nearly 1.5 Million Jobs Since February 2010 Source: U.S. Bureau of Labor Statistics, U.S. Department of Labor; 4/1/2011
Corporate Profits Up Sharply in 2009 and 2010 2010 Q4: $1678.3 Source: Bureau of Economic Analysis
Key Economic Concerns • Rising oil prices • Slow recovery of housing market • Deep cuts in government spending • Continued high unemployment • Slow growth in incomes of middle class
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."
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. 2009-2011 estimates are from the May 2010 Consensus Forecast.
Michigan’s Recent Job Gains Have Been Strong Source: RSQE, Michigan Forecast April 2010, and Bureau of Labor Statistics.
Michigan Vehicle Employment Transportation Equipment Employment Increases (Thousands) Source: Bureau of Labor Statistics.
Michigan Payroll Employment and Vehicle Production 6 Month Moving Average – Year over Year Percent Change Source: Bureau of Labor Statistics & Michigan Department of Treasury
Michigan Cut Taxes Significantly from 1995 to 2005 FY Tax Cuts in Millions IIT Rate Increase & MBT Surcharge Source: Michigan Department of Treasury; does not include Proposal A property tax cut
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.
FY ‘10 GF-GP Revenue at FY ‘88 LevelDown 32% Since 2000 Billions of Dollars 2000 $9.8B 1988 $6.7B 2010 $6.7B Note: GF-GP figures are presented on a Consensus basis. 2010 estimated.
FY ’10 Inflation AdjustedGF-GP Lowest Since 1965 Billions of 2010$ 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.
School Aid RevenuesFY 2010 Total Earmarked Resources: $10.7 Billion Almost half of the School Aid revenues come from the Sales and Use Tax. Source: May 2010 Consensus
SAF Revenues Growin FY 2011 and FY 2012 SAF Revenues Year-Over-Year Pct. Change Source: May 2010 Consensus Conference.
SAF Revenue Below FY 2005 Level Consensus Estimate
FY ’11 Inflation Adjusted SAF Lowest Since Proposal A Adopted Billions of 2011$ 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.
Total State SpendingFY 2011 Total Spending: $47.1 Billion Over 75% of total budget devoted to health, human services and education spending. Source: OBDGG, CM, 3/10/10
School Aid Fund Budget Outlook * Ongoing Revenue equals consensus estimate for FY10 & FY11. ** Expenditures in FY12 are increased from FY11 by inflation. Source: Michigan Department of Treasury.
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.
Michigan State Government GF/GP Appropriations Dollars in Millions Source: State Budget Office.
Michigan State Government Total Appropriations Dollars in Millions Source: State Budget Office.
Michigan State Government 10,700 Fewer Employees than 2000 Source: Michigan Department of Treasury
Government Not LargeCompared to Other States Source: Bureau of the Census, 2008 State and Local Government Employment Survey
Strengths of Proposal • Treats tax expenditures as spending- finally • Improves horizontal equity • $200 million for OPEB funding • Addresses structural budget deficit • Simplifies business tax
Weaknesses of Proposal • Increases income inequality • Shifts burden from business (particularly well off professionals) to seniors and low income families • Employee concessions excessive- requires 8.5% pay cut plus 20% payment for health care • Increased taxes on individuals will offset benefits of lower business taxes • Revenue sharing cuts will be devastating
Weaknesses of proposal (cont.) • Corporate income tax is unstable and easy to manipulate • Education cuts will hurt economic future
Priorities • Retain all or most of EITC • Reduce revenue sharing cuts • Reduce tax burden on low-income seniors • Reduce tax cuts for non-corporate businesses • Reduce education cuts
Proposed Changes • 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
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
Michigan Business Tax • A Business Income Tax at 4.95% • A Modified Gross Receipts Tax at 0.8% • Surcharge added at 21.99% capped at $6 million per taxpayer. • Provides over 30 tax credits. • Increases reliance on profits, so revenue will be more volatile than SBT. • Revenue: $2.3 billion in FY09 and an estimated $1.9 billion in FY10 & $2.2 billion in FY11. • Businesses with gross receipts of < $350,000 do not have to file a return and businesses with < $20 million in gross receipts only pay a tax of 1.8% of profit.
Corporate Income Tax Pros & Cons PROS • Only corporations making a profit would pay. • Widely used, therefore multistate companies would have lower compliance costs. • Longer legal history provides more certainty CONS • Revenue stream is extremely volatile (federal corporate income tax revenue declined 55% in FY 2009). • Many businesses (noncorporations) avoid the tax. • No direct relationship between profitability and dependence on government services.
Business Tax Cuts Will Not Create Many New Jobs • Business tax cuts offset by tax increases on individuals and families and spending cuts • Most of tax relief goes to non-mobile retail and service businesses • Business taxes are only 5% of state GDP and tax cut amounts to only 0.5% of GDP
Business Tax Cuts by Sector • Services- $575 million • Prof.& Tech services- $181 million • Manufacturing- $279 million • Retail Trade- $153 million • Wholesale trade- $139 million • Real Estate- $110 Million • Construction- $90 million • Finance & Ins.- $75 million • Other- $112 million