Wisconsin got some good budget news this week, but our state may once again squander an opportunity to use an upturn in revenue to shore up its meager budget reserves. That’s very disappointing because states should set aside funding when revenue exceeds expectations, in order to have stronger reserves to weather economic downturns.
The good news this week was that the preliminary estimate of Wisconsin’s actual 2014-15 tax revenue is $71 million (0.5%) more than the last projection, which probably has a lot to do with the fact that national economic growth was stronger than previously estimated in the second quarter of 2015. Although Wisconsin’s individual income tax revenue fell below the projected level by about $24 million, corporate income tax collections are almost $70 million higher than expected, and sales and excise taxes are about $29 million above the anticipated amounts. The total is 4.3% above the amount in the prior year, though it falls about $100 million short of the optimistic Department of Revenue projection in November of last year. Read more
If you look at a new memo from the Legislative Fiscal Bureau (LFB) that itemizes the tax and fee changes in the biennial budget bill, you wouldn’t know that the net effect of the bill is to cut taxes. The fact that the budget bill does cut taxes isn’t obvious in the latest LFB document for a couple of reasons:
- First, the LFB memo summarizes the state-level tax changes and doesn’t examine the reductions in local property taxes that result from increases in state spending for property tax relief and restrictions on local spending.
- Second, the bill uses short-term tax increases to provide a temporary offset to larger long-term tax cuts (and the latter are beyond the two-year time horizon of the LFB analysis).
Wisconsin had a razor-thin budget balance at the close of the fiscal year that ended in June, barely meeting the constitutional requirement for a balanced budget. Even this very narrow margin was possible only because Wisconsin had already taken several steps to reduce spending in that year, including pushing costs off into the future. The very small budget balance underscores the need for lawmakers to budget in a way that leaves a larger budget cushion and hedges against changing economic conditions or unexpected costs.
At the end of fiscal year 2015, the state had just $254,000 in its main fund, new documents show. The state plans to spend nearly $16 billion this year from that account in support of important state priorities like K-12 schools, the University of Wisconsin System, and access to health care. That means the state had a budget cushion of less than 0.002% at the end of the fiscal year. Read more
The Magnitude of Future Fiscal Challenges Is Masked by Unrealistic Assumptions about Funding Lapses
An updated analysis released today by the Legislative Fiscal Bureau (LFB) calculates that the recently enacted Wisconsin budget creates a $210 million budget shortfall or “structural deficit” that state lawmakers will have to close in 2017 when they write the 2017-19 budget. That’s a smaller shortfall than the LFB calculated a few weeks ago, but it confirms that Wisconsin isn’t on track to have the substantial “structural surplus” that Governor Walker was promising several months ago.
While the Governor was in South Carolina earlier this year, seeking support for his anticipated presidential campaign, he said: “At the end of the budget we’re debating right now for our next two years in my state, we will end with a structural surplus of $499 million.” The latest LFB figures indicate that the new budget bill puts the state on a track to miss that mark by more than $700 million. Read more
Governor Walker has signed the budget that determines Wisconsin’s spending priorities over the next two years and also makes many changes to policies that are not related to the state’s finances. His signature finalizes the budget bill and marks the last step in a budget process that began nearly a year ago.
This is the third biennial budget that Governor Walker has signed, and like the other two, this budget will have significant effects on the way people in Wisconsin live, work, and do business. In this budget, lawmakers:
- Approved several tax cuts, including one that will mostly benefit taxpayers with incomes over $200,000;
- Refused money from the federal government to improve access to health care for people with low incomes;
- Cut more than $250 million over two years from the University of Wisconsin System and froze tuition, likely making it harder for students to graduate on time; and
- Set in motion a dramatic expansion of a program that allows qualifying K-12 students to attend private school using publicly-funded vouchers for tuition.
Lawmakers included four major tax cuts in the 2015-17 budget, at the same time as they were limiting resources for critically important institutions like the University of Wisconsin system and public schools. When fully implemented, the tax cuts will reduce tax revenue by more than $250 million a year.
The four tax cuts include:
#1: Increasing the school levy tax credit.
Cost: $211 million in 2015-17 ($105.5 million per year)
Lawmakers increased the size of this tax credit paid to municipalities. Municipalities must then pass the money through to property owners in the form of lower property taxes.
Only about half the school levy tax credit lowers property taxes for Wisconsin residents on their primary homes. That means a large part of the remainder reduces property taxes for owners of commercial and industrial property and out-of-state owners of vacation homes.
The higher the value of the property, the greater the school levy tax credit is for property owners within an area. Read more
A sizable portion of new transportation borrowing approved by lawmakers will be repaid from the state’s General Fund, rather than from the Transportation Fund. The General Fund is the state’s main account for spending on education, health care, and communities. Using money from the General Fund to pay borrowing costs for highway projects reduces resources available for critically important institutions such as the University of Wisconsin System and public schools.
During budget deliberations, lawmakers had a tough time agreeing on how much to borrow for transportation projects. In his 2015-17 budget proposal, Governor Walker recommended borrowing $1.3 billion for transportation, but legislators balked at that amount. Instead, the legislature approved a budget that included up to $850 million in borrowing for transportation, and delayed a number of planned highway projects around the state to trim spending.
Of the up to $850 million in new borrowing for transportation, as much as $307 million of that amount could be repaid from the General Fund rather than from the Transportation Fund. Read more
How will the Wisconsin budget harm children and families? Watch these kids explain.
The budget that heads to Governor Walker’s desk for a signature includes over a hundred policy items unrelated to the state’s finances, a sharp increase from recent budgets. Including non-fiscal items in the state budget reduces opportunities for public participation and legislative debate, and sometimes also makes it harder to identify which lawmakers introduced specific proposals.
The budget bill is the one piece of legislation that lawmakers must pass. In theory, the bill is limited to issues that affect the state’s finances, including how the state raises revenue, spends money, provides services, and organizes government functions. But it is difficult for lawmakers to resist adding policy items not related to the state’s finances to the budget bill, and that seems to be particularly true for this budget session.
New Structural Deficit Calculation Assumes $2.15 Billion of Lapses over Three Years
The state’s fiscal health isn’t nearly as strong as the Governor and a number of other lawmakers asserted in the spring. While the Governor was courting GOP support in South Carolina for his upcoming presidential campaign, he said: “At the end of the budget we’re debating right now for our next two years in my state, we will end with a structural surplus of $499 million.” Unfortunately, the latest figures from the Legislative Fiscal Bureau (LFB) show that we need to change that plus sign to a minus sign, because the Governor’s optimistic assertion was off by about $1 billion.
A July 7th memo from the LFB projects that Wisconsin will start the 2017-19 biennium with a structural deficit of $490 million. In other words, the 2015-17 budget developed by the Joint Finance Committee (JFC) puts the state in a position where lawmakers would need to use the first $490 million of revenue growth during the 2017-19 biennium simply to maintain the spending commitments assumed in the second year of the 2015-17 budget. Read more