Positive News on Revenue, but not for State Reserves
Wisconsin got some good budget news this week, but our state may once again squander an opportunity to use an upturn in revenue to shore up its meager budget reserves. That’s very disappointing because states should set aside funding when revenue exceeds expectations, in order to have stronger reserves to weather economic downturns.
The good news this week was that the preliminary estimate of Wisconsin’s actual 2014-15 tax revenue is $71 million (0.5%) more than the last projection, which probably has a lot to do with the fact that national economic growth was stronger than previously estimated in the second quarter of 2015. Although Wisconsin’s individual income tax revenue fell below the projected level by about $24 million, corporate income tax collections are almost $70 million higher than expected, and sales and excise taxes are about $29 million above the anticipated amounts. The total is 4.3% above the amount in the prior year, though it falls about $100 million short of the optimistic Department of Revenue projection in November of last year.
The better-than-expected revenue collections mean the state has a modest balance to carry into the 2015-17 biennium, which is positive news. However, that balance and the state’s rainy day fund only add up to enough revenue to fund the state for a little more than a week, which is far less than experts say states should hold in reserve.
The new revenue figure for 2014-15 is $23.6 million above the amount assumed in the 2013-15 biennial budget bill (Act 20). When the Legislative Fiscal Bureau (LFB) initially released its August 26 memo regarding the improvement in revenue, they incorrectly said that half of the $23.6 million increase ($11.8 million) would be added to the state’s rainy day fund. But later that day the LFB corrected the memo by deleting that statement because they remembered that state lawmakers had suspended the statutory requirement for building up that reserve fund.
Of course, having $71 million to carry into the next biennium is still good news and it could make the budget more secure over the next few years. However, things don’t always work out that way because Wisconsin lawmakers have a long history of using unanticipated revenue in ways that aren’t sustainable, thereby leading to budget problems down the road. With that in mind, it’s disappointing that the Governor and legislators have once again bypassed the statutory requirement that would have set aside at least a small amount of the revenue growth.
One effect of the increased tax revenue is that it could make the structural deficit look smaller. Although a revised structural deficit calculation may suggest that the state is in pretty strong shape, the true magnitude of the challenge the state will face in future years is masked by the unrealistic assumption that state agencies will make huge lapses to the general fund – including well over $700 million in FY 2016-17, and about $1.4 billion in the 2017-19 biennium.
There will be no shortage of ideas inside and outside the Capitol for how the $71 million revenue increase might be used in the current biennium, such as enacting more tax cuts or reducing some of the budget bill’s spending cuts (and I’ll be happy to suggest some ideas regarding budget cuts that might be eased). But as lawmakers debate the budget options, let’s hope that they make it a priority to use the modest revenue increase in a sustainable way that decreases, rather than increases, the state’s structural deficit.