New Tax Hikes in Michigan Expected to Boost Total Revenue Collections

CHICAGO — A pair of new tax hikes is expected to boost total revenue collection in Michigan through 2009, but fiscal analysts warned that revenue in the current fiscal year will fall about $370 million short due to weak natural revenue growth under revised estimates announced Friday.

The shortfall, however, will likely be plugged from a surprise $350 million surplus the state ended fiscal year 2007 with on Sept. 30. The surplus was not announced until last week when the state’s audited financial results were released.

Michigan’s total revenue in fiscal 2008 is expected to reach $20.6 billion. That number includes both general operating funds — which are expected to total $9.2 billion — and the school aid fund, which is expected to total $11.5 billion, fiscal analysts told lawmakers during the state’s semi-annual revenue estimating conference.

Democratic Gov. Jennifer Granholm will use the fiscal estimates to craft her fiscal 2009 budget, which will be presented to the legislative appropriations committees in February

The local economy is expected to worsen through 2009, aggravated by a slowing national economy. Michigan currently has the nation’s highest unemployment rate, at 7.7%, and that could climb to 8.7% by 2009, analysts warned. The state’s economy is particularly plagued by a struggling housing market, rising energy prices, and a decline manufacturing jobs.

State revenues are expected to receive a significant boost from two tax increases passed by the state Legislature in mid-2007, including a measure to raise the income tax to 4.35% from 3.9% and a new 22% surcharge on the Michigan Business Tax.

With the tax increases taken into account, the state’s funds are expected to grow 5.8%, or $1.2 billion, in fiscal 2008, and 2.3%, or $464.6 million, in fiscal 2009, said analysts. Without the tax increases, natural revenue collection would have dropped 0.9% during the current fiscal year and grown only 1.0% in fiscal 2009, according to estimates.

“We have significant tax changes which will affect the growth rate,” Jeff Guilfoyle, director of the economic and revenue forecasting division of the state treasury, told lawmakers.

The unexpected $350 million fiscal 2007 surplus was largely a result of the income tax increase, analysts said. Other taxes, including gas and oil taxes, also performed better than expected last year.

But the current year’s budget is facing a shortfall of the same size. The general fund was expected to bring in about $234 million less than earlier estimated, of which approximately $114 million comes from the Legislature’s 11th-hour decision to swap out a new service tax with a surcharge on the Michigan Business Tax. The school fund is expected to fall short by about $135.8 million in 2008.

“We continue to see very slow growth in state tax revenues,” said state Treasurer Robert J. Kleine in a statement after the conference, which he helped chair. “General fund revenues have dropped nearly 40% since 2000. Moving forward, the slowing national economy will reduce 2008 revenues below levels assumed in the budget.”

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