Governor’s Proposal Would Divert Money from Rainy Day Fund to Tax Cuts
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.
Wisconsin has been making strides in setting aside money for a rainy day, but it still isn’t nearly enough. There are no hard and fast standards for how much a state should have set aside in its rainy day fund, but the Government Finance Officers Association recommends that states have at a minimum of 5% to 15% of annual general revenues set aside. For Wisconsin, those guidelines mean that we should have somewhere between $750 million and $2.25 billion set aside in budget reserves. Right now, Wisconsin has just $279 million in the rainy day fund, or less than 2% of revenues.
In addition to the rainy day fund, Wisconsin aims to have a small minimum balance at the end of each fiscal year. But current law sets that minimum at just $65 million, which is only about 0.4% of general fund spending. Governor Walker and his predecessors have repeatedly delayed a statute that would increase that budget cushion to 2% of general fund spending. (Read more here about the need to increase the annual budget balance.)
This budget surplus represents a valuable opportunity for Wisconsin to finally set aside enough resources to weather future budget storms. Instead of significantly strengthening the state’s budget reserves, Governor Walker is using most of the surplus for tax cuts. That is a shortsighted move that could come back to haunt the state during future economic downturns.