The Other Side of the Coin for Income Tax Cuts: Structural Deficit Reopens
The state’s structural deficit is projected to re-open in coming years, thanks largely to the income tax cut proposed by Governor Walker and other recent tax cuts.
In 2013, the state’s General Fund is projected to have a structural balance of $146 million, which means that revenues were greater than state spending by that amount. But in coming years, state spending is projected to outstrip revenues, creating a structural imbalance that rises to nearly $350 million in 2017, as shown in the chart below. Based on these Department of Administration projections, state lawmakers would need to fill a hole of more than $600 million in the 2015-17 budget.
In the past, Governor Walker has placed a great deal of emphasis on the need to bring state spending in line with revenues. In his budget proposal for the 2009-11 budget, Walker pointed out that his budget reduced the structural deficit to an all-time low in the history of tracking this measure. He accomplished this by making very significant cuts in state spending.
Some opinion-makers are surprised that Governor Walker’s new budget proposal grows the structural deficit. The budget proposal increases the deficit largely by introducing a new income tax cut that will reduce state tax revenues by about $170 million a year. A number of phased-in tax cuts also contribute to the future mismatch between state revenues and spending.
Over the last 10-15 years, Wisconsin’s budgets on paper were very narrowly balanced, and in fact really weren’t, because they were passing forward structural problems from budget to budget. To the governor’s credit, in the last budget they spent a lot of political capital to get those budget balances up…So, it’s sort of 2-3 years of a lot of pain and suffering to improve these basic budget measures, and then sort of turn around and give up some of the progress. It’s sort of ironic.
It’s possible that revenues might be lower than projected in future years, widening the mismatch between tax revenue and state spending. That’s because the revenue projections made in January are based on economic forecasts that assumed that no cuts would be made from the sequester in 2013, and that Congress will replace the sequester with a balanced package of new revenues and spending cuts, which would go into effect starting in 2014. So far that assumption hasn’t panned out, and the negative effects of sequester on the economy could mean that revenue projections for the future were overly optimistic. If revenues come in at levels lower than projected, the structural deficit could increase even more.
In recent weeks there has been a great deal of discussion and debate about how the proposed tax cut would be distributed. Although that is a very important issue, the more fundamental question is whether we want Wisconsin to return to the practice of starting each biennium in a deep budget hole.
Tamarine Cornelius & Jon Peacock