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
Budget Repair Bill May be Needed to Bring Budget Back into Balance
It’s been widely reported that state tax revenues fell well short of projections for the budget year that ended in June. But the nature of Wisconsin’s two-year budget means that the budget hole is likely to be bigger than many commentators realize, if current trends continue.
We already know that tax revenues fell $281 million short of projections for budget year 2013-14. That’s not good, but the end-of-year fund balance is enough to cover the shortfall, so it the shortfall doesn’t present any immediate problems.
The shortfall is likely to lead to bigger difficulties in 2014-15, the second year of the budget. Tax revenues for 2014-15 were projected to grow by 3.5% over 2013-14 amounts. But with 2013-14 revenues coming in so much lower than expected, 2014-15 revenues will be growing from a lower base. If 2014-15 revenues grow the originally projected 3.5% from the new, lower base, then at the end of the next budget year, Wisconsin would have a second shortfall of about $291 million. Read more
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