An economic forecast issued Monday by the Department of Revenue (DOR) provides more evidence that Wisconsin will face substantial budget challenges in the current fiscal year and the next biennium. According to that document, which is the fall 2014 Wisconsin Economic Outlook, the nation’s economic growth will fall well short of what DOR assumed in its last report, which was issued in January. (These used to be known as the quarterly economic reports, but for some reason are now issued irregularly and just once or twice a year.)
The January economic report was issued in conjunction with increased state revenue projections, which helped persuade state lawmakers to enact substantial tax cuts. But over the last 10 months the estimates of the national* economy, i.e. the “gross domestic product” (GDP), have changed as follows:
- The anticipated GDP in 2014 is now $152 billion less (-0.9%) than assumed in January.
- The estimate for 2015 is $210 billion lower than previously anticipated (-1.1%).
State revenue collections fell $281 million (2.0%) short of projections during the fiscal year that ended on June 30. Rather than growing by 1% as anticipated, state tax collections fell by 1%, and that will cause a substantial jump in the state’s structural deficit.
For the past month or so I’ve been scratching my head wondering when we would get an update from the WI Department of Revenue on state tax collections during the fiscal year that ended on June 30th. I’m not the only one who has been anxiously awaiting those numbers; four Democrats in the state Senate sent a letter yesterday to Secretary Huebsch asking when the FY 2013-14 revenue numbers will be released.
“Given the numbers we’ve seen to date, the delay is already fueling concern that they will show a revenue shortfall. How significant that shortfall is could have a wide ranging impact not only on future budgets but the current budget as well.”
I share the concern about the potential for a revenue shortfall. Read more
At least 13 Wisconsin counties may include an advisory referendum on the November ballot asking voters whether Wisconsin should expand BadgerCare and take the federal funding that would cover the full cost of newly eligible childless adults. The proposed ballot measure, which has already been approved in 4 counties and enjoys broad support, has generated debate about whether the Medicaid expansion topic is an appropriate matter for an advisory referendum.
There are many strong arguments in favor of taking the federal funding (see WCCF’s “Top Ten” list); however, some people who argue against including the BadgerCare question on the November ballot contend that it’s not a concern of county government. But even if we assume for the moment that an interest in county residents’ access to affordable health care isn’t reason enough for counties to allow voters to weigh in on the issue, counties also have their own reasons to be very interested in whether the state expands BadgerCare and accepts the federal funds:
- One very important consideration for counties is they bear the financial responsibility (rather than the state) for some community-based Medicaid services.
Revenue Collections Continue to Fall, While Medicaid Deficit Takes Large Jump
The state’s fiscal situation has gradually deteriorated in 2014, and new tax collection figures released late Friday afternoon show a continuation of that trend. That fiscal problem is exacerbated by a couple of areas where spending is growing, including a substantial increase announced today in the estimated Medicaid deficit.
Starting on the revenue side of the state’s budget ledger, here are some of the key figures gleaned from the Department of Revenue’s press release:
- General Fund tax collections fell $26 million in May, compared to May 2013, which is a drop of 2.5% (measured on an adjusted basis).
- Over the first 11 months of the current fiscal year, state tax revenue is down by almost $49 million or 0.4%.
- Although sales tax revenue is up by $186 million or 5.2% over the last 11 months, individual income tax collections are down by almost $290 million – a drop of 4.6%.
Several significant pieces of Wisconsin budget data were released late last week:
- Our state is facing a structural deficit of $642 million in the next biennium, which means that $642 million of growth in General Purpose Revenue (GPR) will be needed even if there is no net increase in spending levels in the 2015-17 budget.
- State tax collections were 21% lower in April than in the same month of the previous fiscal year. (See our May 23 blog post.)
- Total Wisconsin tax collections over the first 10 months of the current fiscal year are $21 million less than in the comparable portion of 2012-13.
None of these news items is cause for alarm right now, but the convergence of these facts means the state’s fiscal situation merits watching and might prove to be weaker than some state lawmakers have assumed.
Before taking a closer look at some of the cautionary considerations, let’s start by reviewing several positive perspectives on the state’s budget situation:
- The estimated structural deficit for 2015-17 is substantially smaller than the budget challenges the state faced in most of the other budgets since the late 1990s.
Figures released Friday by the Department of Revenue indicate that state tax collections were 21% lower in April than in the same month of 2013 – primarily because of a $332 million drop in individual income tax revenue. Perhaps more importantly, tax collections have been falling for the past several months – to the point that total tax revenue over the first 10 months of the current fiscal year is now a little bit (0.2%) below the total at this point of the previous fiscal year.
Of course, part of the sharp decline in April can be attributed to income tax cuts that took effect at the beginning of tax year 2014, and part is the result of reductions in income tax withholding that took effect on April 1. Those variables and others make it difficult to do the number crunching to assess whether the latest drop in tax collections is cause for alarm – especially on a gorgeous Friday afternoon when I’m anxious to get out of the office and start the holiday weekend. Read more
New Federal Money Provides Chance to Close Large Hole in W-2 and Improve Child Care
Wisconsin got some good news from Washington over the last couple of months, in the form of supplemental federal funding for Temporary Assistance for Needy Families (TANF) and additional child care and development funds (CCDF). The plans for using part of that additional funding – $19.8 million from TANF and $3.8 million from CCDF – will be reviewed by the Joint Finance Committee (JFC) on May 6th. (The LFB paper can be found here.)
I’ve written numerous times over the past year or so about the fact that the biennial budget bill made very unrealistic assumptions about declining participation in the state’s welfare to work program, known as Wisconsin Works or W-2. The budget bill cut the W-2 appropriation and siphoned off TANF block grant funding by using it to supplant state funds for the Earned Income Tax Credit. Read more
Perhaps, but Further Budget Cuts Are Likely to be Part of the Solution
It appears that the Wisconsin Legislature is on the verge of passing a slightly amended version of the Special Session tax cut bill, which uses the projected state surplus in a way that leaves the state with a “structural deficit” of about $700 million at the beginning of the next session. (See note below.) The good news is that the way the Fiscal Bureau calculates structural deficits doesn’t make any estimate of revenue growth in the next biennium. The bad news is that it also doesn’t account for any spending growth, and it depends on fairly strong revenue growth over the next 15 months, which is by no means guaranteed. (Technical correction: The structural deficit was reduced to $658 million by a Finance Committee amendment that requires $38 million to be cut/lapsed at the outset of the next biennium.)
Proponents of the proposed tax cuts contend that tax growth in the next biennium can be expected to surpass the amount needed to close the structural deficit. Read more