CHICAGO — Gov. Rick Snyder dodged a bullet Friday when a divided Michigan Supreme Court affirmed his controversial move to tax retirement income, a measure that balances the two-month-old 2012 budget and is part of the Republican governor’s ambitious overhaul of the state’s tax code.
The court did strike down one provision of the new law, which will mean the loss of $60 million in expected revenue this fiscal year and $91 million in 2013. Meanwhile, opponents, including public employee unions and AARP, said they may take their challenge to federal court.
The state high court’s 4-3 ruling preserves more than $300 million in new annual revenue generated by the tax. The money will help offset revenue lost by Snyder’s decision earlier this year to eliminate the unpopular Michigan Business Tax.
The court’s decision was the latest good news for the governor as he nears the end of his first year in office.
University of Michigan economists last Friday said the long-beleaguered state is poised to enter its second year of recovery and that the state gained more jobs in 2011 than in any year since 2000.
Revenue for the fiscal year that just ended is up nearly $500 million over original expectations, driven by rising personal income linked to the growing labor market.
The recently released Bloomberg Economic Evaluation of States report said Michigan is recovering from the recession at the second-fastest pace among U.S. states., behind only North Dakota.
The domestic automobile industry is driving much of Michigan’s growth, according to economists and analysts.
“They are doing a little bit better than anticipated, and that’s probably not unexpected,” said David Hitchcock, a Standard & Poor’s analyst who covers the state. “With a higher level of manufacturing than other parts of the country and a cyclical recovery, you’d expect that sector to come back a little bit faster.”
Standard & Poor’s and Fitch Ratings both maintain AA-minus ratings on Michigan’s general obligation debt. Fitch revised its outlook to positive from stable last July.
“It’s a positive for the state that this [new retirement law] was upheld, as the budget expects those revenues to come in,” Fitch analyst Kenneth Weinstein said.
Fitch’s positive outlook revision last summer noted the state’s history of prudent budgeting and an economy that appears to be slowly recovering.
“Their economy is being helped by some growth in the automobile industry,” Weinstein said. “But we still expect it to grow more slowly than the rest of the U.S. over a longer period, because they’ve fallen so far behind economically.”
Moody’s Investors Service rates the state Aa2 with a stable outlook, one notch higher that the other two agencies.
Michigan has $1.8 billion of outstanding general obligation bonds, while outstanding transportation and lease-backed bonds — the state’s two main revenue bond programs — totaled $5.2 billion in 2010.
Michigan is one of only three states that currently exempts most pensions from state income tax.
Snyder proposed the new tax earlier this year as part of the $45.6 billion 2012 budget, and it immediately sparked several lawsuits.
In May, he asked the state’s highest court to issue a peremptory opinion on the law before it was to take effect in January.
“Our administration has been unwavering in its position that the removal of the public pension income-tax exemption was the right and prudent thing to do,” the governor said in a statement issued after the court’s decision last week. “It will provide for the long-term structural stability of the state’s budget while minimizing the impact on current retirees and seniors. This will help get Michigan’s fiscal house in order and economy back on track.”
The reforms eliminate the state tax exemption for public pensions, while greatly reducing tax exemptions for recipients of private pensions.
Snyder’s tax changes, which generally shift tax burdens to individuals from businesses, are among the most sweeping changes to the tax code in Michigan’s history.
The overhaul eliminates the Michigan Business Tax, leading to the loss of around $1.7 billion in tax revenue annually. It will replace the revenue with the new retirement tax, a new 6% corporate income tax that predominantly affects larger companies, a financial institutions tax, the elimination of most individual and business tax exemptions, and the delay of a scheduled income-tax rate decrease to 4.25% from 4.35% until January 2013.
At the University of Michigan’s annual economic outlook conference in Ann Arbor last week, economists said the state is enjoying its second year of recovery and that it gained 63,000 jobs in 2011, the most in a decade.
The manufacturing and health care sectors added many of the jobs. Personal income rose by nearly 6%, the biggest jump in more than 10 years.
The recovery will continue through at least 2013 but will be slower than last year, said economist George Fulton, who has led the university’s revenue and economic forecasting efforts for years.
Michigan is expected to gain 32,000 jobs in 2012 and 45,000 jobs in 2013, Fulton said.
“If our forecast is correct, the recovery period through 2013 would replenish only about 20% of the jobs lost from mid-2000 to the summer of 2009,” Fulton said in a statement. “So there is still a great deal of ground to make up.”
Fulton predicts final 2011 revenues will be $440 million higher than earlier estimates, and that in 2012 revenue will increase by $423 million and $370 million in 2013.
Fulton and other university economists will use the numbers when they join with state-based fiscal analysts and budget officials at the revenue estimating conference in January.
The House Fiscal Agency will tally final 2011 revenue figures in mid-December, but so far its figures are tracking with the university’s, said Rebecca Ross, the HFA’s senior economist.
Like Fulton and credit analysts, she warned that the state’s recovery remains fragile and could slow over the next few years. Michigan continues to face several challenges, including Detroit’s fiscal problems.
Outside the state, Ross cited concerns like the failure of the so-called supercommittee to reach an agreement over federal debt and cuts amid Europe’s ongoing financial problems.
“There’s still a lot of uncertainties out there that we will have to see shake out,” she said.
