Michigan’s process for estimating state revenues earns 4 out of a possible 5 points according to a new report from the Center on Budget and Policy Priorities. The report evaluated states to determine if they employ best practices that are known to create reliable revenue estimates to guide state spending, ensure financial discipline, and create a more robust and public debate about how the state raises and spends its resources.
Michigan received high scores for a revenue estimating process that: (1) requires consensus between the executive and legislative branches; (2) makes the process transparent to the public and media by publishing estimates that are easily accessible on the Internet; (3) holds meetings that are open to the public; and (4) adjusts estimates as the economy changes, with revenue estimating conferences held in January before the governor releases his proposed budget, and in May before final legislative action.
Michigan lost a point because, although a meaningful amount of input is solicited from outside authorities including experts from academia, business and other sectors, the state statute establishing Michigan’s consensus process identifies three principals within state government as decision-makers. The best practice, according to the report, is to include outside experts in the deliberations leading to the final revenue forecast.
The importance of a good process for predicting how much money the state will have to spend was underscored earlier this year as lawmakers worked on the budget for 2014-15. In January, the consensus was that Michigan’s fiscal picture was improving and would result in a budget “surplus” or revenues higher than expected to the tune of nearly $1 billion.
Even though the use of the term “surplus” was misleading given the years of budget cuts resulting from economic downturns, along with tax policies that reduced states revenues and shifted responsibility from businesses to low- and moderate-income workers, the January revenue projections set off a flurry of legislative tax cut proposals, including a proposed rollback of the state’s personal income tax.
Before legislative action was taken to reduce taxes, the “surplus” largely vanished, with the May revenue estimating conference showing slower than expected economic and revenue growth.
The fact that Michigan law requires a second look at revenues before the state budget is finalized—and 15 states do not regularly review their estimates during the course of the budget year—helped to avert tax cuts that would have increased already rising income inequality and further drained resources from the schools, universities, community colleges and other services needed to fuel economic growth.
With this piece of the budgeting process in shape, Michigan should turn its attention to reforms that are needed to ensure that there are adequate and stable state revenues to build a world class workforce and protect the state’s natural and human resources. The League has outlined options for modernizing Michigan’s revenue system, including the enforcement of taxation on Internet sales, expanding the sales tax to selected services, the annual review of tax breaks, and a restoration of the state’s Earned Income Tax Credit.