The Very Bad Fiscal News for this Year Offsets Improved Revenue Estimates for the Next Biennium
New budget figures from the Legislative Fiscal Bureau (LFB) indicate that the state is on track to have a $283 million deficit at the end of the fiscal year. That hole is $153 million deeper than what the Department of Administration (DOA) had indicated in November.
Of course, the Fiscal Bureau isn’t predicting that the state will actually finish the fiscal year with a substantial deficit; they are sizing up the amount of red ink that the Walker administration and state legislators have to eliminate in order to meet the constitutional requirement to have a balanced budget.
On many occasions in 2014, we expressed concerns that state lawmakers were going to have to make painful budget cuts before the end of fiscal year 2014-15 because the tax cuts enacted early last year were based on overly optimistic revenue estimates and because the state was planning to draw down almost all of the anticipated balance. Read more
The Department of Revenue (DOR) issued its report on December tax collections today, and at first blush the numbers look bad; however, I think they may actually suggest a modest upturn – relative to the November estimate for the current fiscal year (FY). Whether that assessment is accurate will become apparent later this week when officials release updated state revenue estimates for FY 2014-15 and for the next biennium, which begins on July 1.
What the short new report reveals on its face is that tax collections were down by 2.6% in December, compared to the same month in 2013, and tax collections for the first half of the current fiscal year were down by 2.7% compared to the last six months of 2013. Individual income tax collections for the last half of 2014 were down by 6.4% or $232 million, and corporate income tax revenue was down 8.0% or $38 million. Read more
New figures released last week by the Census Bureau show that total state and local spending and revenue in Wisconsin is not much different in Wisconsin than the per capita figures for the nation as a whole. For example, our analysis of the new data – which is for state and local revenue and spending in 2012 – found the following:
- Wisconsin ranks 25th in total revenue (including federal aid) per capita, and was 1.5% below the national average on that measure.
- Looking at all state and local revenue per capita, but excluding federal financing, Wisconsin ranked 19th and was 1.1% above average.
- We ranked 24th in total spending per capita, 2.9% below average, and 21st (just 0.2% above average) in a slightly narrower spending measure – direct general spending – which I think is better for comparative purposes because it excludes things like state-owned enterprises.
Wisconsin’s figures are higher compared to the national averages when they are measured relative to income, because personal income in Wisconsin is well below the average nationally. Read more
State Faces Gap of More than $2.4 Billion between Now and June 2017
State officials confirmed today what we have feared for many months – that Wisconsin’s spending needs in the next biennium far exceed the projected revenue, and the state must also close a very substantial budget hole in the current fiscal year. As a result, lawmakers are likely to make cuts that have harmful consequences for Wisconsin children and families and for the investments needed to keep Wisconsin economically competitive.
Despite the assurances of Walker administration officials over the last couple of months that the state is in strong fiscal shape, the figures contained in a report released by the Department of Administration (DOA) today confirm that balancing the state budget in 2015-17 will require very deep spending cuts or significant tax increases. Specifically, the DOA document reveals the following:
- Tax revenue for the current fiscal year is now expected to be $82 million below the amount estimated in May (on top of a $281 million tax shortfall in the first half of the biennium), and net appropriations are estimated to be $43 million less.
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%).
Governor Walker floated the idea this week of replacing the current gas tax with a sales tax on motor fuel. It’s an interesting idea, but I don’t think it would be good public policy because it would replace a stable revenue stream with a tax source that is far less predictable. (You can read more about the idea in this Journal Sentinel article.)
Although we don’t have details of what the plan would look like, the Governor said it would be revenue neutral – at least at first. But clearly the intent is that the sales tax approach would generate more revenue over time, as gas prices increase, and I think that’s a reasonable assumption to make. However, fluctuations in gas prices mean that in any given year this source of revenue could fall well short of the anticipated level.
From a political perspective the chief virtue of the plan, perhaps the sole virtue, is that it offers a way of potentially raising more revenue for transportation projects without periodically asking elected lawmakers to vote on gas tax increases. Read more
TANF Funding Squeeze Creates a Substantial Budget Challenge
The Department of Children and Families (DCF) budget proposes a very large cut in the portion of funding for the Earned Income Tax Credit that comes from the federal welfare reform block grant, which is known as Temporary Assistance for Needy Families (TANF). Specifically, the department’s 2015-17 budget proposes cutting $55.8 million from the TANF funding that gets transferred to the Department of Revenue, which would mean that state General Purpose Revenue (GPR) has to fill the very substantial gap.
Assuming the Walker Administration isn’t planning to cut the EITC, I applaud DCF for wanting to use state funds rather than TANF funds to finance that credit for low-income working families. Unfortunately, the Department of Revenue (DOR) budget proposal doesn’t currently include an increased GPR appropriation for the EITC. Taking both agency proposals together, we have a $55.8 million hole that needs to be filled by state policymakers, and that problem is on top of the other structural budget challenges that have gotten more media attention. Read more
The best way to create jobs and build a broad-based prosperity in Wisconsin is to invest in excellent schools, safe communities, and a solid transportation network.
But a new report released today takes a different approach, claiming that giving big tax cuts to the rich and raising taxes for others would help the Wisconsin economy. The report, released by the conservative Wisconsin Policy Research Institute, repeats the myth that tax cuts create jobs, despite growing evidence to the contrary.
The report advocates changing the state’s tax mix to rely less on the income tax and more on the sales tax, a change the group says would boost the state’s economy. But what the report fails to mention is that the result would be big tax cuts for people with the highest incomes and higher taxes for everyone else. If Wisconsin eliminated the income tax and raised the sales tax to make up for the resulting revenue loss, the top 1% of earners in Wisconsin – a group with an average income of $1.1 million – would get a tax cut of a whopping $44,000 on average. Read more
Concerns about increases in income inequality were voiced from a surprising perspective today, when Standard and Poor’s (the bond rating agency) issued a lengthy report titled “Income Inequality Weighs On State Tax Revenues.” The report concludes that “disparity is contributing to weaker tax revenue growth by weakening the rate of overall economic expansion.”
The authors offer this explanation for the correlation between income disparities and economic growth:
“…rising income inequality is a macroeconomic factor that acts as a drag on growth. There is evidence, although not conclusive at this point, that the higher savings rates of those with high incomes causes aggregate consumer spending to suffer. And since one person’s spending is another person’s income, the result is slower overall personal income growth despite continued strong income gains at the top.”
An article in today’s Washington Post sums up the findings in clearer terms:
“Even as income has accelerated for the affluent, it has barely kept pace with inflation for most other people. 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