More Bad Economic News for Michigan

The bad news continues for Michigan. The following story is more evidence that Michigan must pay attention to reforming its tax laws. There have been repeated calls for many, many different types of reforms but the Governor and the Legislture have yet to get serious about proposals. It is expected that they will get busy this Fall and look at tax revenue, tax structure and further budget cuts.

Mich. tax revenue in July $50M less than expected
Mark Hornbeck / Detroit News Lansing Bureau
Lansing -- A top state economist says the tax collections report for July due out Tuesday will show the state is another $50 million short, adding up to a $170 million deficit for the year.
The economy is crawling at an even slower pace than state fiscal experts estimated in May, meaning federal stimulus money likely will be used to patch the hole in the budget year that ends Sept. 30.
"You never know what's going to happen the next three months. Revenues could rebound," said Jay Wortley, senior economist for the Senate Fiscal Agency, the financial arm of the state Senate. "But right now, the economy is weaker than we thought it would be and it's affecting almost everything, particularly income and sales taxes."
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While details aren't available from the Treasury until Tuesday, indications are that consumer spending and business activity are slower than projected, Wortley said, and income tax revenue is down due to high unemployment.
Should Gov. Jennifer Granholm and state lawmakers make ends meet by tapping federal recovery cash, there will be less available for the next budget that begins Oct. 1.
The shortfall in the general fund, the state's main checking account, for next year will be $1.8 billion, the Senate Fiscal Agency estimates. Tax receipts for the school aid fund will be nearly $1 billion low, so the state is looking at an overall shortfall of $2.7 billion to $2.8 billion, Wortley said.
Granholm and legislative leaders are meeting weekly behind closed doors to try to resolve next year's budget with a combination of program cuts, tax or fee increases and stimulus money.
Wortley says the downward trend "is adding up to big numbers" that are hurting the state budget.
Senate Fiscal Agency director Gary Olson said earlier that the economy isn't entirely to blame for the continued drop in tax revenues.
Money collected for the general fund and the school aid fund are falling much faster than the state economy is shrinking, in part because residents and successful businesses are shelling out a smaller proportion of their personal income to the state, Olson said.
"The revenue as a percent of personal income has just been plummeting," said Olson, who has headed the nonpartisan agency for 18 years. "These are very, very significant declines."
The percentage of their personal income that state residents and profitable businesses pay in state taxes has dropped over a full percentage point since hitting a high of 8.4 percent in the mid- and late 1990s. So far this fiscal year, the rate is 7.3 percent.
Residents aren't necessarily paying fewer tax dollars. But as their incomes have risen, they're giving the state a smaller proportion of their money -- 2 full percentage points less than they did a decade ago, Olson said.
Much of the reason for the drop is that Michigan has been cutting taxes and adding exemptions, essentially forcing state government to shrink. That's a welcome move to some, but a concern to others who worry the state is cutting too deeply into services such as education, policing and the safety net for the poor.
The state tax system also has failed to change as taxpayers' behavior has changed. Consumers are spending less of their personal income on sales taxes, for instance, because they're buying fewer goods, which are taxed, and more services, which are not.
"Our tax system, for a variety of reasons, is not keeping up with the economy," Olson said. "Part of it is tax cuts, but part of it is that we are not taxing things that are growing in the economy."
The Associated Press contributed to this report.