State Tax Collections Fall Far Short of Projections
$281 Million Revenue Shortfall in 2013-14 Will Mean a Big Jump in the Structural Deficit
State lawmakers got bad budget news today, when the Legislative Fiscal Bureau (LFB) released state tax collection figures showing that 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.
State lawmakers banked on revenue growth when they wrote the state’s two-year budget and followed up with additional tax cuts. It’s not clear at this point what will result from a substantial revenue shortfall, but one potential outcome is the state could face a new round of damaging budget cuts. What makes the state’s new budget challenge very disappointing is that it could have been easily avoided if lawmakers hadn’t rushed early this year to use every bit of increased revenue projections for another round of tax cuts, without setting funds aside for an adequate budget cushion.
Although sales tax revenue nearly met expectations – falling short by $11 million, or 0.2% – individual income tax revenue was almost $179 million below the anticipated level (a 2.5% shortfall), and corporate income tax collections came in $97.7 million (9.2%) less than expected.
The $281 million shortfall is very worrisome for a number of reasons:
- The budget provided very little margin of error because it left a closing balance of only $165 million at the end of the biennium (which is just $100 million more than the $65 million required minimum balance). Each of the last several budget bills has postponed the statutory requirement that would significantly increase the minimum annual cushion (known as the “statutory balance”) that legislators are required to set aside.
- The state was expecting 3.5% revenue growth in the second half of this biennium (i.e., the 2014-15 fiscal year); and now that the 2013-14 base level is 2% lower than anticipated, it will take 5.6% growth in tax 2014-15 collections to hit this year’s target of $14.7 billion (without even closing the 2013-14 shortfall).
- If tax collections do grow by 3.5% in 2014-15, as previously anticipated, the shortfall will grow by about $291 million this fiscal year, for a total shortfall of about $572 million (or $472 million after subtracting the budget bill’s $100 million “net balance”).
- On top of these problems, the Dept. of Health Services has projected a $93 million GPR shortfall in the Medicaid budget for 2013-15; and the gaming revenue being withheld by the Potawatomi tribe may also exacerbate the state’s fiscal challenges.
The Fiscal Bureau had calculated in May that the state was facing a “structural imbalance” or structural deficit of $642 million GPR in the next biennium (2015-17), and the reduced revenue estimates will probably add substantially to that problem. That figure represents the amount of revenue growth that would be needed in the next biennium simply to freeze spending – without factoring in any of the increased costs from factors such as inflation and rising numbers of people needing state services.
Although I’ll defer to the LFB on making new structural deficit calculations, I can illustrate how a downturn in revenue can affect that figure. Let’s assume, for purposes of this illustration, that revenue does grow by 3.5% in the second half of the biennium, as previously anticipated. Since that growth is from a lower base, it means that 2014-15 revenue base, used in calculating the structural deficit, will be about $291 million less than the LFB had previously assumed. That reduction gets multiplied by two (for each year of the next biennium), resulting in a$582 million increase in the structural deficit beyond the amount the LFB previously anticipated. One also needs to account for the fact that the state wouldn’t be carrying a balance into the next biennium, and might even need to find a way to delay some costs from this fiscal year to the next one – further adding to the structural deficit.
Of course, the Wisconsin Constitution requires the budget to be put back into balance, and it remains to be seen how that will be accomplished. Those choices could reduce the structural deficit somewhat – at least in terms of not carrying forward red ink into the next biennium. But unless tax growth in 2014-15 is well above the previously assumed 3.5% growth rate, I think it’s safe to say that the structural deficit in the next biennium will be well above $1 billion.
Some will note that the state has faced much larger fiscal challenges many times in the past, and that’s a legitimate point. What makes the state’s new budget challenge so disappointing is that it’s the result of not being prudent in reacting to the projections last fall of increased revenue growth. The rush to use all of that projected revenue for election-year tax cuts, without setting funding aside for an adequate budget cushion, puts state lawmakers back in exactly the sort of budget mess that they promised two years ago to avoid.