State Tax Collections Fall Further Below Expectations

Tuesday, December 27, 2016 at 2:15 PM by

Very Slow Tax Growth Suggests Budget Difficulties Ahead

New tax collection numbers that were released late on December 23 do not bode well for the Wisconsin budget. The November tax figures released by the Department of Revenue (DOR) late last Friday – a week after negative job numbers – suggest significant challenges ahead for state budget writers.

I’m not sure whether DOR released the tax collection data just a couple of hours before the Christmas break in order to avoid public notice, but if that was their plan it worked very well. There doesn’t seem to have been any media coverage of the new numbers.

Here are a few key figures from the latest tax data:

  • Total tax collections in November were 2.3% below the amount collected in November 2015.
  • For the first five months of the current fiscal year, total tax collections are just 1.2% above the total for the same portion of the prior year, and that’s well below what is needed to hit budget projections.
  • Sales tax collections, which are a significant barometer of the state’s economic health, are up just 1.0% this year.
  • Individual income taxes are up 3.5%, but corporate income and franchise taxes are down 22%.

For state policymakers, the DOR report contains Grinch-like numbers, though corporations probably don’t see it that way. Their taxes actually decreased by about 217% in November, compared to the same month of the prior year!  If you didn’t think tax revenue could decrease by more than 100%, you aren’t alone. I was very surprised to learn that corporations actually received $9 million more in tax refunds last month than the income and franchise taxes they paid to the state!

To put the latest revenue numbers in context, keep in mind that the state needs 3.7% tax growth this year to reach the revenue level projected by the Legislative Fiscal Bureau (LFB) last January. Revised revenue projections released by the Dept. of Administration (DOA) in November reduced the estimate for the current fiscal year to just 2.3%, which they estimated would reduce the balance at the end of this budget period to just $104 million.

The actual increase in tax revenue for the first five months of FY 2016-17 has been just half the revised growth rate. If the 1.2% rate of tax growth continues, the state would take in about $160 million less than DOA projected in its November report. That would necessitate corrective actions since a shortfall of that magnitude would wipe out the anticipated $104 million balance.

Spending has also been less than anticipated, and some of that trend was already factored into the November projection of a $104 million balance. However, I won’t be surprised if a new Dept. of Health Services report that will be released within the next week will further reduce the Medicaid spending estimate. A downward trend in Medicaid caseloads and costs could help minimize the corrective measures needed to keep the budget in balance, if revenue collections don’t get a positive bounce.  [Jan. 5th update: As I expected, the newly released Medicaid figures project larger savings than previously anticipated.  Read more in this WCCF blog post.]

Governors are often able to find short-term solutions to keep a budget in balance at the end of a biennium, without great difficulty. The much more difficult problem is that lower-than-projected revenue growth in the second year of a budget period means the previously anticipated tax collections in the next biennium will probably have to be lowered by a significant amount.  In addition, the use of short-term solutions, such as drawing down budget reserves, means that some of the revenue growth in the following biennium has to be used simply to get the state back to where things had been.

State revenue collections can bounce around from month to month, so perhaps tax growth will be far stronger over the rest of this fiscal year than during the first five months. The state’s budget experts in the Fiscal Bureau and the Walker administration have access to far more data than I do, and perhaps they will have some positive news to share with us in late January when the LFB releases new revenue projections for the current fiscal year and the following two years. I certainly hope so, but the latest revenue trends and new job numbers suggest otherwise.

Jon Peacock

Categories: 2015-17 biennial budget, 2017-19 biennial budget, Blog, corporate tax, STATE TAXES, taxes | Comments Off on State Tax Collections Fall Further Below Expectations

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