Budget Shortfall Shows Downside of Risky Approach to Tax Cuts
Last week we learned that state tax revenues fell far short of projections for the budget year that just ended. The shortfall means that next year the state is likely to face another round of budget cuts — cuts that slow economic growth and reduce investment in education, health care, and our state’s workforce.
The irony is that not too long ago, state lawmakers were trumpeting Wisconsin’s budget surplus, which neared $1 billion over two years. But instead of using those resources to build up a meaningful budget cushion, state lawmakers rushed to pass tax cuts. Legislators were in such a hurry to cut taxes that they passed a $100 million property tax cut last October in just four days, leaving little time for public debate. Lawmakers also passed two other major tax cut packages in 2013 and 2014.
The three big tax cut packages hurt the state’s bottom line, but they didn’t do much to lower taxes for Wisconsin’s lowest-wage workers. The 20% of Wisconsin workers who earn the least – a group with an average annual income of $14,000 – received an average tax cut of only $48 in 2014 from these three large tax cut packages. In comparison, taxpayers in the top 1% of earners in Wisconsin, who had an average income of more than $1.1 million, received a tax cut of $2,518 on average.
The tax cuts also didn’t do much to create jobs. Private sector employment in Wisconsin continues to grow more slowly than the national average, and in general, the rest of the Midwest has been out-performing Wisconsin in job creation.
The tax cuts didn’t do much to cut taxes for people with modest incomes, and didn’t help create jobs – but they did make it harder for the state to balance its books. The most recent of the tax cut bills suspended a statutory requirement that when revenue is growing faster than expected (which appeared to be the case in January), half of the increase must be set aside in the state’s rainy day fund. In addition, the governor and state legislators have repeatedly delayed a statute requiring an increase in the budget balance the state must aim to have at the end of each fiscal year.
For now, the state’s fund balance for the 2014 budget year is enough to cover the revenue shortfall. But Wisconsin has a two-year budget, and next year the fund balance probably won’t be enough to cover the budget hole. The Wisconsin constitution requires that the state’s budget be balanced, meaning that new budget cuts may be needed to make up for lawmakers’ unrestrained approach to tax cuts.
The bottom line is that recent budget surpluses offered lawmakers an opportunity to get the state’s budget on a sound footing, but lawmakers instead chose to enact large tax cuts. The state’s current budget difficulties could have easily been avoided if lawmakers had shown restraint in cutting taxes.
Tamarine Cornelius & Jon Peacock