New Law Endangers Michigan’s Fiscal Future

Earlier today, Michigan Gov. Rick Snyder signed a package of tax changes that will eventually fund improvements to the state’s transportation infrastructure, but it comes with cuts to other services and a weakened long-term fiscal position.  When most of the law’s provisions are phased in five years from now, they will collectively drain (PDF) more than $800 million from local governments, universities, health care, and corrections every year.  Making matters worse, a modified income tax trigger could push the general fund loss to $1 billion per year within a decade and could turn this so-called “funding” package into a net revenue loser.

Below is a list of the package’s most significant components (revenue estimates are for Fiscal Year 2021):

New Revenue

• $404 million from increasing the gasoline tax by 7.3 cents and the diesel tax by 11.3 cents on Jan. 1, 2017.  These tax rates will also be tied to inflation starting in 2022.
• $221 million from increasing most vehicle registration fees by 20 percent and from levying higher fees on electric vehicles.

Funding Shifts

• $600 million annually will be moved out of the general fund to be spent on transportation.  The Detroit Free Press identifies local governments as the group most likely to face funding cuts under this shift, followed by higher education, public health, and corrections.

Tax Cuts

• $206 million in tax cuts will be distributed to Michiganders by expanding the state’s property tax credit for low- and moderate-income families.  Some features of the credit will also be indexed to inflation starting in 2021.
• A sizeable, but uncertain revenue loss will come from cutting the state’s top income tax rate via an ill-conceived “trigger” mechanism.  Starting in 2023, the state’s income tax rate will be reduced if general revenue growth exceeds the inflation rate multiplied by 1.425.  The non-partisan House Fiscal Agency estimates (PDF) that if this law were in effect today, $593 million in revenue would be lost next year as a result of dropping the tax rate from 4.25 to 3.96 percent.  If this type of cut is combined with the property tax credit expansion, fuel tax increases, and vehicle registration fees just described, the net result of this “funding” package will be to reduce state revenues—not raise them.

Ultimately, these reforms to Michigan’s fuel taxes are long-overdue and the property tax credit expansion is a reasonably effective way of offsetting some of these taxes for lower-income families.  But the components of this package that will have the largest impact on Michigan’s budget in the years ahead are the $600 million general fund earmark for transportation, and the automatic income tax cuts scheduled to take effect long after most of today’s lawmakers have left office.