Missed Opportunities in the Governor’s Budget Proposals
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. Though we’re still waiting for additional details in tonight’s State of the State address and in the subsequent legislation, the following areas appear to me to be the biggest disappointments in terms of missed opportunities:
Ignoring current budget holes — It appears that the Governor’s plan won’t address a $93 million shortfall in Medicaid funding and a likely deficit of about $19 million in the state’s welfare to work program. If lawmakers don’t fill those holes in the next couple of months, the executive branch might decide to take administrative actions to cut back those two programs, or they might simply let those problems fester until the legislature reconvenes in January 2015.
Failing to reverse tax increases for low-income households – As we’ve noted on many previous occasions, the 2011-13 budget bill raised taxes for low income households by significantly cutting the Earned Income Tax Credit and eliminating the annual adjustments for inflation in the formula for the Homestead Credit. The latter credit is being badly eroded by inflation because it’s one of the only parts of the tax code that isn’t adjusted each year. The failure to undo those tax increases is a deeply disappointing aspect of the Governor’s plan.
Squandering an opportunity to reduce the structural deficit – Though we await a more definitive Legislative Fiscal Bureau analysis of how the Governor’s plan affects the structural deficit, the preliminary indication that the plan would actually increase red ink in the next biennium is surprising and very worrisome. There are many bipartisan steps that lawmakers could take to use the current surplus to get the state’s fiscal house in order, such as reversing the substantial increase in state borrowing in recent budget bills.
Failing to invest in measures to improve Wisconsin’s economic competitiveness – The plan doesn’t make the sorts of investments in Wisconsin’s workforce and infrastructure that would make Wisconsin more competitive in the future and would have a much more positive effect on job growth in the years ahead.
Over the next week or two we will take a close look at who does and doesn’t gain from the tax cuts the Governor proposes. Though we need to get more details, my initial reaction is that the tax cuts are more even-handed than I had anticipated. Because the income tax cut just reduces the rate for the lowest bracket of income, it delivers the same savings for virtually everyone at the top end of that bracket or above. The property tax cut will provide more assistance to large property owners than to small homeowners, and any assistance to renters will be very indirect, but it isn’t nearly as tilted toward wealthier people as the income tax cuts in the biennial budget bill.
In future blog posts we’ll offer perspectives on how a bipartisan plan could do far more to help low-income Wisconsinites who have been hit the hardest by the recession, while also reducing red ink in future budgets and putting Wisconsin on a much more stable fiscal foundation.