[00:00:00] Craig Thiel: Hello, and welcome to Facts Matter, a podcast of the Citizens Research Council of Michigan. I’m Craig Thiel, the Research Council’s Research Director, and I’m joined today by Bob Schneider, a Senior Research Associate at the Council. We’re recording this podcast The afternoon following the most recent State Revenue Estimating Conference.

Bob was tuned in to the conference early this morning and I asked him to join us today to unpack some of the main highlights from the conference and what it means for the state’s Budget situation today and looking forward. Welcome to the podcast. Bob’s

[00:00:46] Robert Schneider: Craig. Good to be here.

[00:00:49] Craig Thiel: Just to remind our readers this is a twice a year event.

The revenue conference. The 1st 1 is in January and is kind of the Yeah. level setting in terms of the fiscal picture of the state for the governor’s budget recommendation. And then this conference reconvenes again in late spring here in May to kind of Review where revenues are as they the Michigan legislature settles on a final spending plan for next year.

Can you tell our readers what the main highlights are coming out of this this conference as we look at the economic picture of the state and the national economy? I

[00:01:35] Robert Schneider: think the news was good. The news was generally good. The U. S. economy, the national economy has been growing.

The forecast today expects that growth to continue. Real GDP, which is kind of the metric we use to monitor the health of the national economy, expected to continue to grow through the next few years that it, two and a half percent, which is a normal, healthy rate. Inflation is falling back nationally.

So the national economy is looking good. Michigan too. We as of late last year the Michigan economy recovered its employment level from prior to COVID after COVID broke, we lost a million jobs. And then over the next. Several years, slowly recovered those jobs back. We’re back now. And inflation also looks like it’s cooling in Michigan, not quite as much maybe as the national economy.

I think one of the, one of the real interesting takeaways from the economic presentation today. Gabe Ehrlich is the director of Michigan, University of Michigan’s research seminar in quantitative economics, RSQE, and they’re regular participants in the, in the in these conferences and they provide the, the underlying model.

That the state economists use to forecast the economy and in forecast state revenues. He showed a chart that I thought was interesting inflation improving in Michigan, but not quite the same as the national as national inflation. And. What he did is he kind of dug underneath inflation and it’s this Detroit CPI as the representation for local inflation in Michigan.

And looked at the different elements of it, the different items and found things that you would call kind of non essentials things like recreation and apparel. Those are the things with the lowest inflation rate and the, and the things that are dragging the the Detroit CPI down. On the other side of it.

The things that were inflation is a little hotter. It was, it was what you might call essentials health care housing and rent food things we need, recreation is something we want. But food and housing are things we need. And he used that to explain kind of the conundrum economists run into sometimes is all the data look good.

Employment’s up, real GDP doing well, unemployment’s at a fairly low level, but the public is still feeling this angst about the economy. And he pointed to that when even if your income’s going up, if The things you need the most, putting food on the table, affording a reliable vehicle.

If inflation’s hot, you still feel a little anxious. So that was one real interesting slide that he showed. I think the best news though, they closed and showed when we think of living standards, whether it’s in the country, in the state, in a city when we think The metric that’s often used is real disposable income and in fact, real disposable income per capita.

That’s going up in your state, for instance, then most people are doing okay. Incomes are growing faster than, than the cost of living and living standards are kind of going up. Real disposable income per capita in Michigan went down, had a bad year between 21 and 22 when income slowed a little.

And then in particular, that’s when we saw the spike in inflation. The forecast shows it’s been. And growing sense and, and they forecast that to continue to continue to grow slowly, but to continue to grow through, through 2026 and 2027 and that’s good news. That would suggest that living standards on the whole at least should continue to continue to grow.

So the economic forecast today, I think continued to be positive as it has been for a while. I think the, the probability of a recession is continued to shrink as. As time is going on.

[00:05:28] Craig Thiel: Yes, I listened in this morning. I didn’t hear the dreaded our word really mentioned at all, which is a little different than 18 months ago when some economists were kind of on the fence about the probability of a recession here in 2024 and 2025.

I was wondering you and I talked about Michigan’s labor participation rate. And we, know from some work that we had done previously, how Michigan was kind of behind the national average here. And that was going to be something we want to monitor as we think about long term economic growth in this state, anything come out of the conference, at least to shed some light on, on that

[00:06:12] Robert Schneider: and in fact, there’s been great improvement.

We. Michigan, there was a significant gap and we did some work on this. I had a blog about a year ago tracking this. And of course, we talked about the labor force participant rate participation rate in our series on Michigan’s future outlook. And the good news is there that that labor force participation has gone up in Michigan over the last nine months or so.

And we’ve really closed much of the gap with the United States as a whole. We’re still lower than the national rate, but it’s gone up. pretty significantly. And that’s in the face of, you know, we still, as again, as we pointed out in our, in our research series of shrinking population and an aging population.

So it’s going up even though the population is getting older, more retirees and more, more folks reaching retirement age. I think immigration. into the state, particularly international immigration I think was talked about today as an important factor in that. And it’s something that if you know, we’ll, we’ll continue to probably be, be an important thing for, for the state going forward in, in that.

And in that aspect,

[00:07:24] Craig Thiel: so, of course, the economic picture nationally in Michigan then sets the table for how our tax structure in Michigan responds to those economic changes and therefore, the revenue that’s generated from that tax system. A key part of the discussion is to get an update on our major fund revenues.

to the state treasury. That’s the general fund and the school aid fund. What can you tell us about a couple highlights coming out of the conference on the revenue front? I know, as I mentioned in the lead in, we’re in the middle of setting the budget final budget for next year. So these revenue estimates are are.

Timely and very, very salient.

[00:08:16] Robert Schneider: The forecast were I think the most important takeaway is revenues continue to grow. So if we look at the numbers we expect overall revenues to grow 2 percent or Two, two and a half percent in 2025 and over 3% those, those total revenues in 2026.

So we still get so we’re, we still get revenue growth. I think what’s important, one thing it’s important, and we probably need to give a shout out to our state economists who do the forecasting. They had some really rough years during COVID. Remember we just passed some major tax reform changes to the.

Taxation to retirement, certain retirement income, an expanded earned income tax credit. Those are going to, those took a big chunk of revenue away from the state and you needed to forecast how much revenue you were going to forego. They seem to have nailed it. I mean, these last two forecasts were pretty good.

We’re pretty darn close. So they seem to have done well in forecasting the changes that those tax reforms would bring. You mentioned the budget that’s being ramped up right now. I think the changes today probably don’t, Make any major don’t have any major overall impacts on on putting the budget to bed.

This spring hopefully in June. But it will impact, it will impact the distribution of that revenue across those, those two main funds. So, in terms of wrapping up. This year’s budget. That’s where deliberations are ongoing. You talked about the general fund. That’s the state’s discretionary revenue that, is part of the great bulk of budget decision making.

We saw in for this year. The most important thing isn’t even so much. How much it grows from last year, but how much changes there from January, the January estimates on which all this budget has been based so far, and then these new May estimates and the general funds on the general fund side revenue, the revenue was adjusted up for fiscal year 25, the budget that’s being considered right now by about 235 million.

That’s a lot of money. It sounds like a lot of money. It’s really, it’s about one and a half percent adjustment up. That’s not huge. It’s not earth. shattering in any way, but it’s an extra 200 million on the general fund side that will be available this year. As they wrap that budget up a couple hundred million means maybe more investments will be retained in the budget.

General fund side comes from a very strong corporate, the main driver is big corporate income tax revenue growth. That’s been a very healthy tax. Revenues grown pretty significantly that all goes to the general fund. So the general fund saw that saw that boon from the corporate income tax, the opposite on the opposite end, the school aid fund.

Revenues were adjusted down and that largely comes out of a slightly slowing a slower growth in the sales tax. And the school aid fund receives revenue from a lot of sources, but the primary source, the biggest source is the sales tax. And we’ve seen that slow down during COVID. We had booming sales tax revenues not only because incomes and a lot of federal economic stimulus to, to households were up.

But we saw people start to shift their own spending patterns towards goods stuff. I’m buying stuff rather than services stuff. Goods are taxed under the sales tax services generally are not. And maybe we’re seeing a sort of return to normal on that front, which is slowing sales tax growth. So on the school aid side, the school aid fund, it’s down 160 million.

Again, not a massive change. But about 1 percent down from January. So on the school aid side, you’re going to see a little less revenue and that may make things just a little bit tighter on that side of the budget. So I think that neither of those things are massive, but they will give a little room on the general fund side and things may get tighter on the on the school aid fund.

Yeah. And then looking ahead, if next February the governor is gonna release her fiscal year 2026 budget recommendation. And we saw the same pattern in the numbers for general fund and school aid fund. Not all, it’s in 24, 25 and 26, we saw a general fund up school aid fund down for, for those same reasons.

Again. Those changes aren’t massive in their in you know, in terms of their incremental impact. I think the biggest the biggest thing affecting next year’s budget isn’t anything we really learned today, but it’s a reminder and it’s something we talked about, Craig, in our webinar and in February on the governor’s on the governor’s budget proposal.

What will help on the general, even more on the general fund side, general fund already got a little bit of a boost, but when we look ahead to fiscal year 2026 the budget that’ll be introduced next February we’re going to get even more general fund revenue coming back listeners may remember we had in the last tax reform package, one of the elements was we took If I half billion dollars in corporate income tax revenue and took it out of the general fund and directed it to some special funds.

It’s 550 million to be exact. Went to our business attraction fund, the sore fund. That is used to, you know, entice businesses to come to Michigan. And then a smaller placemaking fund it was 50 million to make communities more livable and inviting and have some amenities that. that redirection was for fiscal year 24 23, 24, and 25, that 550 million spills back into the general fund next year.

And that’s going to, along with the along with the improved budget outlook revenue outlook that, that was forecasted today, that extra 550 million dollars is going to create some additional room to grow that general fund budget or to implement other tax relief if that’s the desire of lawmakers but there will be some budget room next year particularly on that general fund side.

[00:14:29] Craig Thiel: Well, overall, it sounds like compared to Past revenue conferences where there was major volatility between revenue estimates, we’re talking about things that are more on the margin both when it comes to economic conditions and revenue estimates. I’d be curious. Are there any. Cautions out there, headwinds as it relates to the economy or revenue generation that our listeners might want to be aware of.

I mean, are the disruptions across the globe are Thank you Clearly have economic impacts. But have those already kind of been baked into these? I mean,

[00:15:09] Robert Schneider: the best guess on all of those are baked into the economic modeling and the estimates. But yeah, I mean, there’s still I think there’s greater hope than there has been in some time that maybe the fed has done what they wanted to do and achieved a soft landing.

They’ve raised interest rates in order to try to slow inflation. It looks like it’s working. It’s not done yet, but it looks like it’s working. And I, I think things look good on that front, but it’s still a risk. We have an election coming up. That’s going to decide things like they can be important to the national economy and to the Michigan economy trade policy.

The Biden administration recently announced some some tariffs against China. President Trump, when he, during his presidency certainly played hard ball on tariffs and trade policy. So, we’ll see. How does that all work out? On the revenue side, one thing that was talked about that I’d mentioned on the revenue side, and it’s probably not anything that’s going to be a factor in the next year or two, but we had some new economic development initiatives that, Basically, allow eligible developers and businesses to retain income tax withholding from workers who are working on a new project or working at one that’s been in place.

And these were statutorily enacted in the last in the last couple of years, good jobs for Michigan program and and others. Effectively, there’s going to be a lot of foregone revenue from those programs spread over potentially many years, but it’s like a billion dollars in potential revenue loss in the future, and we’re not really sure when we’re going to see it.

And how soon we’re going to see it, but we know it’ll come at some point in time as, businesses take advantage of those programs. And the forecasters today, the state economists noted that as, as something that is going to be something they’re going to need to monitor very closely and could bring surprises in future years.

Probably not in fiscal year 2025, maybe not much even in fiscal year 2026, but as we move down the road that’ll become more of a factor and more of a question mark for revenues.

[00:17:29] Craig Thiel: Sounds like an uncertainty similar to what we had to deal with the mega tax credits that were authorized and really the state didn’t know when the entities that could claim those credits were going to actually call for the credit to be cashed in effectively.

And that created some consternation among budget and revenue watchers a number of years ago. So we’ll keep our eyes on that. Overall, I’m hearing from you that nothing. Should stand in the way of a timely completion of the budget, a July one statutory deadline should be met as this legislature heads off to campaign for fall elections rest assured the CRC will continue to monitor the, the state’s fiscal situation including these revenue estimates.

I want to take a minute now and thank Bob for appearing on the. the podcast with me. And just to remind you that this is Craig Thiel. I’ve been speaking with Bob Schneider as part of our Facts Matter podcast. Thank you very much, Bob. Thanks,

[00:18:36] Robert Schneider: Craig.