New budget gap of $244 million

Karen Holcomb-Merrill

The state Treasurer and the heads of the Senate and House fiscal agencies gathered today to hear economists talk about Michigan’s future. At the end of this meeting, known as the Revenue Estimating Conference, the three of them reached consensus on projected revenues available to the state.

While the Conference did bring some encouraging news about Michigan’s economy, it is clear that the state continues to have a serious General Fund revenue problem.  Revenue estimates from today show a new budget gap of $244 million for the 2010 budget.

A sharp decline in business tax collections is the cause for the recent fall in revenue. This unexpected news means that more revenue must be found or more programs and services must be cut. The Legislature, which has been working to address an anticipated $1.8 billion budget gap for the 2011 budget, must now also turn its attention to this new budget shortfall.

As state Treasurer Bob Kleine said today, this is a revenue problem, not a spending problem. Michigan has been in a budget-cutting mode for much of the last decade. Most recently, deep cuts have been made to health care, public safety and education.

On the heels of years of cutting, a balanced approach to this shortage of state revenues must include the evaluation and closing of some tax expenditures, which cost the state about $35 billion a year. As state revenue has plunged, tax loopholes have increased every year.

Michigan also needs to modernize its tax structure to provide for stable revenue.  In the short-term this can be done through extending the sales tax to most services.  And in the long-term, Michigan should adopt a graduated income tax which would produce more revenue and would provide a tax cut for 90 percent of tax filers.

Without structural changes, the state will continue to face budget gaps and programs and services will be in jeopardy each year. Earlier this week, Senate Fiscal Agency Director Gary Olson indicated that without revisions to the tax structure and even with an assumed 3 percent increase in revenues, the state faces continuing budget shortfalls.  His projections were that the gaps would range from $1.2 billion to $1.8 billion a year over the next several years.

Economist George Fulton, one of the presenters at the Conference, described Michigan’s economy and budget situation as “despair followed by hope.”  Part of that hope rests on lawmakers taking action now to close tax loopholes and to modernize the state’s tax structure.

 — Karen Holcomb-Merrill

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