Friday, Jan.15 was one of my favorite budget holidays (let’s get real; every important budget-related date—revenue estimating conferences, budget announcement, start of the fiscal year—is a budget holiday for me, but CREC ranks up there near the top). State fiscal experts came together virtually to come to a consensus on economic conditions and state revenues, setting the basis for the Governor’s budget recommendation expected in February. While the news as compared to the start of the pandemic is better, it continues to show that revenues have not kept up with the budget needs, which are especially great during the ongoing pandemic and are vitally important for Michigan’s recovery.
The Consensus Revenue Estimating Conference (CREC) is a conference held twice each year—in January and in May—that determines the anticipated General Fund and School Aid Fund revenues for the year. The principals, including Directors of the House and Senate Fiscal Agencies, the Treasurer, and the State Budget Director, hear from economists from the Research Seminar on Quantitative Economics from the University of Michigan, other national economists and experts in varying subjects, and state fiscal experts to set the revenue estimates. The conference held in January sets the basis for the Governor’s budget recommendation announced typically in February, and the conference held in May sets the basis for the final budget.
COVID-19 had had a significant impact on Michigan revenues—so much that last year, a third revenue estimating conference needed to be held in August before finalizing the Fiscal Year 2021 budget. Adjustments in revenue estimates at the conference are normal, as forecasting the economy and revenues are difficult in good years. Forecasting during a pandemic is nearly impossible—needing to predict economic factors like unemployment, wages, and personal income; the likelihood of federal aid; and changes in consumer habits. And while the revenue situation has clearly improved since the start of the pandemic, it is still significantly down from where we anticipated to be pre-pandemic.
Plus the adjustments upward, and stronger than anticipated revenues, were largely due to federal aid. Fiscal experts noted that Michigan’s income tax withholding from unemployment benefits was greatly increased, even when compared to the last economic recession, due in part to the additional $600 per week in federal benefits provided during the pandemic (the recent stimulus provides an additional $300 per week). Additionally, two direct payments to taxpayers, one larger one early in the pandemic and one that started being distributed around Christmas, helped stabilize personal income, and payments to states helped balance budgets. Finally, COVID-19 caused a significant change in personal consumption habits, with people making more purchases, and significantly more online purchases, of taxable goods rather than spending them on services. This helped bolster sales tax revenues.
There is still a lot of risk associated with the estimates. There’s still uncertainty surrounding the ongoing COVID-19 pandemic, such as the supply for the vaccine and the new variant, as well as the probability for additional federal aid. Additionally, the income tax rate will automatically start reducing soon due to the rate reduction trigger already in law, and with base year General Fund revenues significantly depressed due to COVID-19, growth during recovery will result in significant and possibly multi-year rate reductions. At a time when the state desperately needs new, progressive revenues as well as additional federal aid to ensure all Michiganders, especially Michiganders of color and Michiganders with low incomes, see an equitable recovery from the pandemic, this rate reduction is seriously flawed and reckless policy.
Coming out of the pandemic, Michigan needs better investments in education, assistance programs, and public health to ensure a full and equitable economic recovery. While many of the funding priorities included in the Governor’s latest supplemental request, as well as the requests made by the Biden Administration, are good first starts, but more needs to be done. We heard more from the Governor on her priorities at her State of the State address on January 27, many of which align with the League’s priorities, and I know we look forward to hearing her budget recommendation in early February.
The budget is anticipated to be fast-paced again this year, with a goal of finalizing funding amounts by the end of June. So over the next few weeks, start working on your legislative and budget priorities, read up on how you can influence the state budget, and let’s work together to make a Michigan that works for us all.