LANSING – The coronavirus pandemic could permanently change the U.S. and Michigan economies in ways that will have unknown impacts on future state tax revenues, economists told state officials at a Friday revenue estimating conference.
The pandemic is accelerating the shift from brick-and-mortar retail sales to online sales, which negatively impacts employment. It is depressing business travel, which impacts car rentals and auto sales, and that could particularly impact Michigan if the shift to online meetings continues after the pandemic is over. And it is hurting downtowns and the value of office buildings, which would impact property tax revenues, if the work-at-home phenomenon continues after the virus is gone.
On those issues, “it’s too soon to tell, but it’s definitely something to keep watching for,” state Treasurer Rachael Eubanks said after the conference.
What was determined at the conference — which involved the treasurer, the budget director, and key lawmakers and officials from the two legislative fiscal agencies — was that there is far more money in state coffers than officials expected back in August.
But that does not mean Michigan’s economy — or the state budget — is in good shape, officials said.
Combined general fund and School Aid Fund revenues for the 2021 fiscal year that began Oct. 1 are up $1.2 billion from what officials estimated in August, but still down about 2% from August.
Future growth will be significantly influenced by how quickly and effectively the coronavirus vaccines are rolled out.
Employment plummeted during the coronavirus pandemic that began in March, but due mostly to $1,200 federal stimulus checks and $600 per week federal supplements to state unemployment insurance checks, personal income and retail spending rose.
There was a huge shift in spending from services, which generally are not subject to sales tax, to goods, which are taxable. That also helped state revenues.
Unemployment checks are taxable income and income tax withholding from unemployment checks soared to $557 million in the 2020 fiscal year — more than four times the level of annual collections during the last recession, officials said. More than $200 million in unemployment withholding is expected in the 2021 fiscal year, which is down sharply from 2020 but still well above normal, and officials said state revenues could rise further through further federal stimulus programs announced by the administration of President-elect Joe Biden but not yet approved by Congress.
Still, looking at the overall economy, “we are in a deep hole right now,” and a “multiyear recovery process is needed,” Eubanks said.
Permanent economic changes from the pandemic could complicate that recovery.
For example, business travel could be permanently reduced because so many businesses successfully adjusted during the pandemic to holding most meetings online, said Joel Prakken, chief U.S. economist at IHS Markit, an international firm based in London.
Meeting remotely “for most purposes is perfectly fine and is significantly less expensive than the old model,” Prakken said.
“I’m not sure that business travel will return to its pre-pandemic level any time soon.”
That could negatively impact car rental companies and auto sales generally, he said.
In another sector, the shift that was already happening from brick-and-mortar retail shopping to online shopping has been accelerated during the pandemic, said Gabriel Ehrlich, director of the Research Seminar in Quantitative Economics at U-M.
Economists have said work-from-home could also depress the demand for office space long after the pandemic is over.
Michigan’s economy is still strongly tied to the fortunes of the auto industry, though not like it once was.
Nationally, auto sales were projected to drop 15% in 2020, to 14.4 million sales of cars and light trucks, from 17 million in 2019. Sales are expected to improve to 16.4 million this year and tick up to 16.8 million in 2022 and 17.2 million in 2023, according to U-M economists.
Big Three sales, which most significantly impact Michigan, were projected to drop 17% in 2020, to 5.8 million units from 7 million in 2019, according to U-M. Those sales are expected to increase to 6.6 million units this year and 6.8 million units in 2022.
The relatively rapid rebound in car sales this year is one of the reasons — along with the strong doses of federal stimulus — Michigan’s tax revenues have not declined as much as anticipated, said David Zin, chief economist with the Senate Fiscal Agency.