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Budget chief: 'Real' cuts needed due to $289 million shortfall blamed on business tax credits

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LANSING, Michigan — Gov. Rick Snyder's budget director predicted "real" but as yet unspecified cuts to government services after economists agreed Friday that state revenue is $289 million short of projections in the current budget and $527 million below expectations for next year — largely because of large companies cashing in tax credits.

"The reductions will be real," John Roberts said after the annual January revenue-estimating meeting. He said it was too early to know if layoffs will be made.

The Republican governor will use the new numbers to decide how much to cut from the budget that began 3½ months ago and to finalize his budget plan for the fiscal year starting this October. He expects to outline this year's spending reductions while presenting his $53 billion-plus 2015-16 budget to the Republican-led Legislature on Feb. 11.

While revenue in the $11.9 billion school aid fund is $36 million above estimates from May, revenue in state government's other main fund — the $9.5 billion general fund — is down $325 million, which may affect a number of agencies including those handling public assistance, prisons, law enforcement, driver's licenses and environmental regulations.

A big reason for the shortfall is companies claiming old tax credits at a higher rate than expected. Jim Stansell with the House Fiscal Agency said about $5.4 billion in business tax credits were awarded from 2009 through 2011 and they can be claimed until 2032.

"As the economy picks up, since these are based on meeting certain employment or investment goals, taxpayers may be more likely to claim them than they would have been during the recession," he told Snyder administration officials and legislators on House and Senate budget committees.

When Snyder took office in 2011, he and the Legislature scrapped the Michigan Business Tax in favor of the Corporate Income Tax, relieving 95,000 businesses of having to pay a main business tax and eliminating new tax breaks for specific companies. But companies can continue under the old tax system until their previously awarded tax credits expire.

Stansell said some deals were amended so companies that created more jobs than promised could be rewarded.

According to the Senate Fiscal Agency, the value of credits authorized for use from 2015 to 2032 grew from $4.9 billion to $6.5 billion since 2011. The amount of outstanding credits expected to be paid increased $1.7 billion to $4.9 billion.

Despite the gloomy budget figures, officials also reported better news about the economy and underlying revenue growth.

University of Michigan economist George Fulton said Michigan is in the sixth year of recovery and has added 314,000 jobs since bottoming out in 2009. About 531,000, or 62 percent, of the 858,000 jobs lost from 2000 to 2009 will have been replaced by 2018, he said, with the state adding 68,000 jobs annually in the next three years.

"We have to pay for the sins of the past, and we will, but all indicators still show strong economic growth due to the decisions we have made over the last four years," said House Appropriations Chairman Al Pscholka, R-Stevensville.

"The credits, many of which were awarded as much as a decade ago, have been a serious risk over the last few revenue-estimating cycles, but have now turned to reality," state Treasurer Kevin Clinton said.

House Democrats, though, blamed the deficit on "disastrous Republican policies."

"It should be obvious to everyone by now that the Republican policy of all-but-eliminating taxes on corporations not only doesn't work, but is downright dangerous," said House Minority Leader Tim Greimel of Auburn Hills.


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