The Department of Administration (DOA) announced last week that the state finished the 2013-14 fiscal year with a budget balance of almost $517 million, and many state lawmakers were quick to congratulate themselves for having a budget “surplus.” I don’t fault them for that; I think I would have done the same thing. However, the fleeting existence of a budget balance doesn’t support the argument some lawmakers have made that Wisconsin has turned a corner with respect to careful budget stewardship and long-term planning.
There are a number of reasons why I think it’s ironic that some lawmakers have been patting themselves on the back for getting halfway through the biennium with a relatively large budget balance. Consider the following points:
The “surplus” will be very short-lived – Because of the latest round of tax cuts, net appropriations for the current fiscal year exceed the budgeted revenue level by $569 million, so the state is very rapidly drawing down its budget reserves. Read more
Structural Deficit Calculation Jumps to Nearly $1.8 Billion
It’s remarkable how quickly the state’s fiscal picture can turn around, even during a period when the national economy is on the mend. During the campaign season two years ago, GOP incumbents were making a big deal of the fact that they had eliminated the state’s structural deficit. Today we learned from the Legislative Fiscal Bureau (LFB) that the structural deficit has returned with a vengeance; the new figure of $1.766 billion is the third largest structural deficit estimated by the LFB since 1997 (for the 10 biennial budgets from 1997-99 through 2015-17).
Although that turnaround in the state fiscal picture is surprising to many people, it shouldn’t be. Wisconsin lawmakers have a long history of banking on surpluses that are estimated during the first half of a biennium (especially in election years) and promising tax cuts and/or spending levels that aren’t sustainable and that lead to big deficits. Read more
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.
State lawmakers seem intent on passing the property and income tax cut package proposed by Governor Walker. So far the proposal has passed the Assembly, has been approved with minor changes by the legislature’s budget panel, and was approved by the Senate today. The proposal will need to head back to the Assembly for final approval before being signed by Governor Walker.
Here are five things to know about the tax cut proposal. Some of them have been well-reported in the media, but others have received little attention.
1. The proposal cuts income and property taxes, for a total of $537 million in tax cuts over two years after factoring in indirect impacts. Here is how that amount breaks down:
- $404 million in an across-the-board property tax cut.
- $99 million for reducing the bottom income tax bracket from 4.4% to 4.0%. The maximum benefit from this measure would be about $58 per year.
In their eagerness to provide tax cuts, state lawmakers have pushed aside a law aimed at encouraging fiscal responsibility that requires half of state surplus revenue be set aside for a rainy day.
When the budget surplus of nearly $1 billion over two years was announced earlier this year, it seemed likely that Wisconsin’s rainy day fund would get a much needed boost. State law requires that when revenues exceed budgeted amounts, half the additional revenue must be deposited into the state’s rainy day fund, which is used to cushion against future economic downturns. In the absence of a tax cut package, the projected level of surplus would result in an additional $443 million transferred to Wisconsin’s rainy day fund over the next two years.
Wisconsin’s rainy day fund has long been underfunded. In fact, for years that fund was nearly completely empty. Since the end of the recession, the state has been regularly depositing money into the rainy day fund when revenues have exceeded projected amounts, and Wisconsin’s rainy day fund currently has a balance of $279 million. Read more
Rejected Plan Included Larger Tax Cuts for Most People and Smaller Structural Deficit
The Assembly approved the Governor’s proposals for the projected state surplus today, without any substantial changes, and rejected an alternative plan offered by Democrats. That plan would have reduced the structural deficit, while also providing larger tax cuts to most Wisconsinites, and more funding for technical school training and K-12 eduction.
The plan offered by Assembly Democrats would have replaced the property tax cuts proposed by the governor with a $500 million increase in a current property tax relief program known as the First Dollar Credit. That credit provides the same amount of property tax relief to the owner of a small home as the owner of a very expensive home or commercial property in the same school district.
The major elements of the Democrats’ proposals are the following:
- Decreasing property taxes by an average of $231 in 2014(15), or $100 more than the Governor’s plan.
The tax cut package proposed by Governor Walker is expected to easily pass the Assembly, but some Republican senators are expressing hesitation at approving legislation that digs a deep hole in the next budget.
The tax package sailed through an Assembly committee yesterday, passing on a party-line vote and clearing the way for a vote on the Assembly floor next week.
The Senate has been less eager to approve the package, with Senate leaders citing the need to avoid throwing the budget out of balance in the future. One modification to the Governor’s proposal that may find more favor in the Senate, according to the Journal Sentinel, is to keep the tax cuts largely as the Governor has proposed, but skip the $117 million contribution to the state’s rainy day fund that is included in the package and instead keep that money in the state’s main account. This move would avoid creating a larger hole in the state’s next budget, but would do so by eliminating the most fiscally responsible part of the Governor’s plan. Read more
The tax cut proposed by Governor Walker would divert $340 million that would otherwise be deposited in the state’s rainy day fund, and use that money for tax cuts instead. The result is that there will not be enough in Wisconsin’s rainy day fund to ride out an economic downturn. Rainy day funds act as budget reserves to tap when recessions or other unexpected events cause revenue declines or spending increases.
Normally, state law requires that half the surplus that occurs when tax revenues exceed projections be deposited into the state’s rainy day fund. If that happened, the current surplus would result in a deposit of $443 million over two years into the state’s rainy day fund, bolstering the state’s ability to avoid tax increases or damaging budget cuts during future recessions. But the proposal by Governor Walker would deposit about $100 million – the exact amount isn’t known at this point – into the rainy day fund, and use the rest for tax cuts and reduced tax withholding. Read more
Tax Plan Increases Red Ink in Next Budget and Leaves Holes in This One
Governor Walker conceded to reporters that his new tax cut proposals will increase the red ink in the 2015-17 state budget by about $100 million – meaning that lawmakers will have to grapple with a structural deficit of more than $800 million as the state goes into the next budget cycle.
According to initial statements to the press corps, his proposal includes a $406 million reduction to property taxes, a $98 million cut in personal income taxes, and the use of nearly $323 million to adjust income withholding schedules (which costs the state up front, but reduces the subsequent refunds the state owes to income tax filers). Another $100 million or so will be put into the state’s rainy day fund.
The deeper structural deficit is likely to be the most contentious aspect of Walker’s plan among Senate Republicans, but it is just one of many reasons why I think his proposal is extremely disappointing. Read more
Governor Signs Property Tax Relief Bill; Assembly Shelves Dem Amendment with Much More Relief for Most Homeowners
Today Governor Walker signed a bill that provides $100 million of property tax relief over the next two years. The bill will do the following:
- Reduce property taxes by an average of $13 this year and $20 next year for people owning median value homes.
- Increase to $725 million the fiscal hole or structural imbalance in the next biennium (which means that first $725 million of new revenue is needed just to maintain flat funding).
- Reduce the projected balance at the end of the current biennium to $125 million, which is enough to cover three days of state spending.
The bill was approved by a lopsided vote in each house of the legislature. In the Assembly, all but 12 Democrats voted for passage of the bill, but not before they offered a substitute amendment that would have provide substantially more property tax relief and would have targeted much more of that relief to residential property owners. Read more