After years of pandemic disruptions, record-setting surpluses and economic highs and lows, Michigan’s tax revenue is stabilizing — and the state’s top financial officials and economic experts view that as good news.

The state is expected to bring in $31.5 billion in tax revenue in the current fiscal year, slightly down from last year but $418 million more than previous projections, the Department of Treasury and the nonpartisan House and Senate fiscal agencies agreed Friday.

In the next fiscal year beginning in October, projected tax revenue is expected to be $32.3 billion.

“Today’s numbers reflect revenues that are consistent with expectations, and that’s not a small thing,” State Treasurer Rachael Eubanks told reporters Friday. “The economy is strong and stable … and we are returning to those pre-pandemic norms — or whatever a new normal may look like for us.”

The latest estimates came out of Friday’s Consensus Revenue Estimating Conference, the first of two annual meetings where state fiscal analysts and economic forecasters provide a snapshot of the state’s economy and tax revenue projections to inform the budget process.

Here’s a look at what we learned, and what it means for Michigan:

Still a surplus, but smaller

In recent years, Michigan saw a surge in federal funding from COVID-19 relief and infrastructure investments and also raked in multibillion-dollar surpluses from higher-than-expected income tax collections and robust consumer spending on taxable goods.

That contributed to the state’s biggest annual budgets ever: Last summer, Gov. Gretchen Whitmer signed an $82 billion budget, spending down most of what had been a projected $9 billion state surplus.

Friday’s projections show a more modest state revenue surplus, $418 million in the current fiscal year and $147 million in the next.

State Budget Director Jen Flood said the previous influx of surplus funding was put to use in one-time investments. Looking ahead, she said the strategy will be to manage those investments while working within the state’s typical means.

“We’ve been able to make some state-level investments within our normal budget availability that we feel confident we’ll be able to continue, whether that’s investing in our kids, our local communities or growing the economy and creating jobs,” Flood said.

What’s changed?

Analysts have been expecting a dip in revenue after several big tax changes last year, including a one-time income tax cut triggered under a 2015 law by unusually high tax revenues in fiscal year 2022.

Legislative tax policy changes, including an expansion of the Earned Income Tax Credit for low-income workers, tax reductions for seniors and additional business incentives also contributed to the decrease from “historic highs,” Ben Gielczyk, associate director of the House Fiscal Agency, said Friday.

Overall, though, “these general fund amounts still represent relatively strong collections, historically,” he continued.

House Speaker Joe Tate, D-Detroit, said in a statement he viewed the analysts’ findings as confirmation Democratic-led policies worked.

“We crafted a responsible plan for Michigan that allowed us to put money back into the hands of working families and return thousands of hard-earned dollars to older adults without sacrificing programs and services that benefit millions of residents,” he said.

Republicans, who have been pushing for a permanent income tax cut, said the latest revenue estimates indicate that the state could afford lowering taxes for Michigan residents.

“Any increases Michiganders have seen in their wages over the last couple of years are still being eaten up by inflation,” Lightner said. “The role of state government isn’t to spend all of people’s money.”

Economic outlook: Good, with caveats

Economic forecasters on Friday had mostly positive news about the national economy: Inflation is coming down, wages are on average slightly up, unemployment rates are holding steady, and interest rates are decreasing.

The possible “turd in the punch bowl” in coming years, said Daniil Manaenkov, a forecaster with the University of Michigan, is a softening labor market, along with slowing job growth due to stagnant population rates.

“There are pockets of weakness out there,” he said. “Even though we don’t expect a recession, the chances of recession are still non-trivial.”

Gabriel Ehrlich, also with the University of Michigan, noted that while there’s generally been progress on lowering inflation rates, Michigan hasn’t seen as many benefits: “It’s been a little bit slower here in Michigan than nationally,” he said.

The economists predicted interest rates in the housing market will decline, but that high rates and costs will persist for vehicle sales, which could impact the overall market.

Manaenkov said that’s reason for optimism for people seeking residential housing, but added that the market will still be tight as people with ultra-low mortgage rates will remain reluctant to sell.

“Existing housing is going to remain quite unaffordable by the standards of the 2010s,” he said.

Ehrlich said Michigan’s employment numbers are close to returning to pre-pandemic levels, but saw a temporary dip due to the United Auto Workers strike. Overall, he said job openings are about a quarter higher than they were at the start of 2020, with the strongest demand in the Grand Rapids area.

“Depending how you measure it, employment in Michigan has either recovered already from the pandemic or we’re getting close,” Ehrlich said.