Many people predict doom for the state budget as the pandemic threatens to lower state tax revenues. This happens, in part, because lawmakers are deliberately shutting down large portions of the economy to slow the spread of the virus. But the state government can be resilient, and lawmakers have the tools to prepare for any fiscal harms the pandemic may inflict.
It should be noted that when Michigan’s income and sales taxes — the two largest taxes that will be affected by the stay-at-home orders — decrease, it means that people are generally earning less income and making fewer purchases. People should be concerned more about the direct harms caused by both the virus and the orders to limit activity than the government’s reliance upon these taxes for revenue.
The effects on the state budget are important, too. A lot of people depend on tax revenue for their salaries. There are likely to be spending reductions in the current year from what was budgeted, and next fiscal year won’t have as much revenue as previously expected, either. How much, though, is uncertain, especially since the effects will be smaller if the pandemic ends quickly.
Elected officials will face some new challenges, but they should be able to live with the revenue shortfalls. State revenues have been growing in recent years, and it’s easier to consider short-term reductions than what the state can accomplish in the long run with permanently reduced revenue. One thing that makes short-term adjustments easier is that the current state budget includes $9.5 billion more of state tax and fee revenue than it did in fiscal year 2009-10. This is a 16% gain above inflation, so the ongoing shortfall could just lead to a lessening of the gains the Michigan budget has experienced.
Added to this, the state will get some money from the federal government to prevent some spending reductions. The federal government has already announced grants to state and local governments for education and Medicaid spending. There are further federal grants to state and local governments already approved, though they come with some restrictions we have argued ought to be removed.
Lawmakers, over the past nine years, have also set aside over $1 billion for this very situation, which will further mitigate the need to reprioritize the budget.
It’s worth noting that pandemic or no, lawmakers always face unlimited demands for a limited pool of funds. There is no shortage of ideas on how to spend public money, and available revenue cannot fund them all. Schools, local governments, higher education, conservation, insurance coverage, infrastructure — you name it, and there’s bound to be someone arguing about how it can use more taxpayer spending.
Budgeting is inherently a matter of setting priorities of what to do with a limited amount of revenue. That doesn’t change when revenue numbers are down.
Even so, there is room in the state budget to cut if lawmakers want to save money. Here are some ideas to free up $1.4 billion.
It is not a given that the governor and legislators will be aligned in the idea that the goal should be to reprioritize the resources they have. The governor and some legislators may want to raise taxes. Others will prefer to go into debt.
Whether lawmakers agree that they should reprioritize their spending rather than raise taxes or go into debt will determine whether they quickly address revenue shortfalls or whether the budget debate drags on and is resolved to no one’s satisfaction. They haven’t had much luck so far in finding agreement on fiscal matters. The dispute over how to increase road funding last year meant that when the budget came due the deadline, no one got what they wanted, and Michigan wound up with less road funding. There’s no certainty that the Legislature and governor will agree to reprioritize resources, even in the pandemic.
Yet they start with the idea that they should look within the existing budget to address any fiscal shortfalls. It’s the most natural place to start. There are some things they can do to lessen the blow, and Michigan has lived with less in the past.
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