Reduced Tax Estimates Show the Importance of Budget Reserves

Thursday, January 21, 2016 at 1:51 PM by

As you’ve probably heard or read by now, Wisconsin got some bad news today regarding state tax collections – which are now expected to be $158 million less than previously expected during the 2015-17 biennium. But the good news is that some other re-estimates partially offset the revenue loss, bringing the net change to the 2015-17 budget to -$94 million (compared to the previous estimate), and the state’s reserves can absorb that hit. 

The bottom line is that the state is now expected to finish this biennium with a “net balance” in the general fund of $70.2 million, instead of the $164.5 million net balance that had been estimated a few months ago. The key lesson to be drawn from the numbers released today by the Legislative Fiscal Bureau (LFB) is that tax collections and other revenue can be volatile and are difficult to predict, so it’s important to build a sizeable “ending balance” or budget cushion into each budget. 

In this case the fact that our budget is still in the black is partially the result of some good luck at the end of the previous biennium. When state lawmakers passed the 2015-17 biennial budget in July of last year, they were only expecting to leave a net balance of $66 million at the end of this biennium (on top of the minimum required balance of $65 million, so the projected gross balance was expected to be $131 million). However, we learned last fall that tax collections proved to be higher than expected in the first half of 2015, which was a significant factor in boosting the balance carried into the current biennium, and that good fortune made the net loss of $94 million announced today much more manageable. 

Before we celebrate that the state still expects to finish this biennium with a net balance of $70 million (and a gross balance of $135 million), keep in mind the following:

  • Congress is considering a bill that could put a hole in state revenue by prohibiting states from imposing the sales tax on Internet services. The state estimated a year or two ago that such legislation could cost Wisconsin about $119 million per year (and counties roughly $8 million).
  • The new LFB memo notes that the latest projections are based on a national economic forecast “prepared before the current declines in oil prices and global stock markets.” Some people think the sharp drop in stock prices is signaling less robust economic growth over the next year or two than had been assumed just a few weeks ago. Even if that’s not the case, if stocks don’t rebound substantially, reduced income from capital gains could be a drag on state tax revenue.
  • The state budget figures assume that agencies are going to lapse to the general fund about $334 million in the current fiscal year and more than $726 million in the second year of the biennium! That’s a very tall order.
  • The gross balance of $135 million now projected by the LFB amounts to only three days of general fund spending, which is a precariously thin margin of error. 

On a much more positive note, the LFB memo points out that there’s a potential “surplus” of $72.6 million in the Medicaid budget, although their calculations do not take that into account.  The Fiscal Bureau is essentially saying that it’s premature to bank on those savings, and I agree, but it’s encouraging that trends in the Medicaid budget may improve the overall budget picture.  

Overall, the numbers released today are very disappointing, but not calamitous. The state budget remains in the black, at least for now, but the margin of error is now considerably narrower than had been anticipated in the fall. That development could put the state budget in the red if Congress ends taxation of Internet services, or if global and national economic growth continue to slow. 

Jon Peacock

Categories: 2015-17 biennial budget, Blog, taxes | Comments Off on Reduced Tax Estimates Show the Importance of Budget Reserves

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