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Agency Requests Underscore Wisconsin’s Budget Challenges

By: WI Budget Project Tuesday September 16, 2014 2:11 pm
A dollar being cut with scissors

Wisconsin agencies need more money, but the state budget faces serious shortfalls.

Most state agencies have submitted their budget requests for Wisconsin’s upcoming 2015-17 budget. These requests are worth taking a look at because they can give some insight into Governor Walker’s priorities for the next budget. The requests can be found here, on the Department of Administration’s website.

Back in July, Governor Walker told state agencies that their 2015-17 budget requests should assume that there will be zero growth in General Purpose Revenue (GPR) appropriations. (He did carve out a few exceptions to that rule.) But nearly all the major agencies that have submitted requests so far requested at least modest increases in funding. The growing tab for these requests helps illustrate the significant challenge of balance a budget at a time when the state is expected to needs almost $1.8 billion of revenue growth just to provide flat funding.

One agency, the Department of Health Services, has indicated that it will require a big boost in spending to pay for health care for people with low incomes: $760 million over two years. Part of the added cost comes from the fact that the federal government  decreases the share it pays of the state’s Medicaid program as Wisconsin’s economy improves.  It’s unclear from the DHS document whether they are seeking a $760 million increase in General Fund spending or plan to make  to make very large Medicaid cuts to offset the increased costs.

The new Medicaid cost projections make it clearer than ever why Wisconsin should accept the federal funding for expanding BadgerCare coverage, which the Fiscal Bureau estimated could save as much as $300 million in the next budget period.

Other budget requests include:

  • No increase in GPR for the Wisconsin Economic Development Corporation, the state’s lead economic development organization;
  • An increase of 1.9% GPR, or $45 million, for the Department of Corrections, with few large new initiatives proposed;
  • A 6.1% increase in GPR for the Department of Justice;
  •  $95 million in new GPR for the University of Wisconsin, to “fund a new plan to create jobs, boost graduation numbers, and deal with a tuition freeze;” and
  • A 10.1% increase in GPR for the State Public Defender Board, which includes funding for a pay raise for public defender attorneys, and an increase in the rate paid when the agency contracts with outside attorneys for services.

Not all state agencies have submitted their complete budget proposals at this point. In particular, the Department of Public Instruction has submitted a budget request that covers school safety and technology, but doesn’t plan to submit the request related to school funding until later this fall. DPI’s initial request asks for money to support a new school safety center, which would provide guidance to schools on school violence and emergency preparedness. DPI has also asked to provide additional funding directly to districts to support programs and activities that prevent school violence and protect students.

 

Standard and Poor’s Says Inequality Suppresses Economic Growth and State Revenue

By: WI Budget Project Tuesday September 16, 2014 6:56 am
Standard & Poor's HQ in NY

Even Wall Street rating agency Standard & Poor’s sounds the alarm on income inequality.

Concerns about increases in income inequality were voiced from a surprising perspective today, when Standard and Poor’s (the bond rating agency) issued a lengthy report titled “Income Inequality Weighs On State Tax Revenues.” The report concludes that “disparity is contributing to weaker tax revenue growth by weakening the rate of overall economic expansion.”

The authors offer this explanation for the correlation between income disparities and economic growth:

…rising income inequality is a macroeconomic factor that acts as a drag on growth. There is evidence, although not conclusive at this point, that the higher savings rates of those with high incomes causes aggregate consumer spending to suffer. And since one person’s spending is another person’s income, the result is slower overall personal income growth despite continued strong income gains at the top.

An article in today’s Washington Post sums up the findings in clearer terms:

Even as income has accelerated for the affluent, it has barely kept pace with inflation for most other people. That trend can mean a double whammy for states: The wealthy often manage to shield much of their income from taxes. And they tend to spend less of it than others do, thereby limiting sales tax revenue.

The new report provides an argument against relying solely or primarily on sales tax revenue. It concludes that the correlation between income inequality and slower revenue growth “was stronger in the sales tax-reliant states than it was for the income tax-dependent states.” Keep that in mind if Wisconsin lawmakers dust off the idea the Governor floated last year of possibly eliminating the state income tax and replacing that revenue with a huge boost in sales tax revenue.

The Standard and Poor’s report says that its analysis “suggests that through a progressive tax structure, it’s possible to counteract much of the depressing effect inequality has on tax revenue growth rates.” It adds a caution that more progressive tax structures can also increase revenue volatility. Although that’s a relevant consideration, I don’t think it’s an argument against progressive income taxes. Instead it’s a reason for relying on a balanced mix of tax sources, including a progressive income tax, and for setting aside budget reserves during periods of strong revenue growth.

Increasing Both the Earned Income Tax Credit and the Minimum Wage Would Strengthen Wisconsin’s Families

By: WI Budget Project Friday September 12, 2014 7:57 am

From www.wisconsinbudgetproject.org.

State lawmakers who want to help Wisconsin families recover from the recession should move to boost both the state’s earned income tax credit and its minimum wage. Each policy on its own helps make work pay for families struggling on low wages, but improving them at the same time goes further to putting working families on the path to economic security and opportunity, according to a new report from the Center on Budget and Policy Priorities.
Earned Income Tax Credit
Low wages make it hard for working families to afford basics like decent housing in a safe neighborhood, nutritious food, reliable transportation, quality child care, or educational opportunities that put families on a path to greater economic security.

But, state lawmakers have tools that can help address stagnant low wages. One, increase the state Earned Income Tax Credit. Two, raise the state minimum wage and make future increases automatic to keep up with inflation

These policies both are targeted to assist only those who are working, helping them to better afford basic necessities, including the things that allow them to keep working, like car repairs and child care.

Improving both Wisconsin’s EITC and minimum wage will boost the income of low-paid workers and help keep many Wisconsin workers and their families out of poverty. Doing so would reduce the widening gap between the rich and those working in low-wage jobs, which holds our economy back.

Together the EITC and minimum wage do a better job of getting low-income children on a better path. The increase in family income can mean that kids go further in school and have higher future earnings in adulthood.

Both policies mean that low-paid working households can spend a bit more at local businesses – paying for things like gas, groceries, and child care – which is good for the economy.

Boosting the EITC and the minimum wage could help large numbers of workers. In Wisconsin, an increase in the state EITC could help keep taxes low for the more than 250,000 working parents who received the credit. Increasing the minimum wage to $10.10 would give a raise to more than half a million Wisconsin workers, and improve the family incomes of 234,000 children in the state.

Unfortunately, Wisconsin lawmakers give little sign of using either of these policy tools in the near future to improve the earning power of families with low incomes. Raising the minimum wage is not an issue that breaks neatly along party lines; some prominent Republicans, including 2012 Republican presidential candidate Mitt Romney, have voiced support for increasing the wage floor.  But in Wisconsin, Governor Walker called a proposal to raise the state’s minimum wage a “misguided political stunt,” and the legislature hasn’t taken up the issue. Far from improving the state’s EITC, Wisconsin lawmakers made deep cuts to that credit in 2011, increasing the amount of taxes paid by working families with children by $114 million over the last four years.

Together, a bigger EITC and a higher minimum wage can help struggling Wisconsin families make ends meet, boost the state’s economy, and improve children’s chances in life. Wisconsin lawmakers should use these tools to help working families and individuals achieve economic security.

New Wisconsin Figures Are a Sobering Reminder of the Need for More Prudent Budgets

By: WI Budget Project Tuesday September 9, 2014 6:14 am

Structural Deficit in Wisconsin Calculation Jumps to Nearly $1.8 Billion

Financial charts, a calculator and a folded pair of reading glasses

Wisconsin needs better budgets.

It’s remarkable how quickly Wisconsin’s fiscal picture can turn around, even during a period when the national economy is on the mend. During the campaign season two years ago, GOP incumbents in Wisconsin were making a big deal of the fact that they had eliminated the state’s structural deficit.  Today we learned from the Legislative Fiscal Bureau (LFB) that the structural deficit has returned with a vengeance; the new figure of $1.766 billion is the third largest structural deficit estimated by the LFB since 1997 (for the 10 biennial budgets from 1997-99 through 2015-17).

Although that turnaround in Wisconsin’s fiscal picture is surprising to many people, it shouldn’t be.  Wisconsin lawmakers have a long history of banking on surpluses that are estimated during the first half of a biennium (especially in election years) and promising tax cuts and/or spending levels that aren’t sustainable and that lead to big deficits.  And this year by the time lawmakers were putting the finishing touches on the last round of tax cuts, there were already warning signs that the state’s fiscal challenges could be quite a bit larger than the LFB’s previous structural deficit calculations suggested. (See, for example, this March 3rd Budget Project Blog post.)

The mistake that Wisconsin lawmakers made once again was to rely on projected revenue increases, without an adequate contingency plan for a slower rate of economic growth.  The last tax cut bill suspended a state statute that says that when tax collections increase faster than previously expected, half of the increase shall be deposited into the Rainy Day Fund.  And the 2013-15 budget bill once again postponed a statute requiring an increase in the budget balance the state must aim to have at the end of each fiscal year.

The Fiscal Bureau’s new calculations won’t be the last word on the 2015-17 structural deficit; I assume the new figures will be updated after the state has new tax and spending projections for the current fiscal year and final tax and spending numbers for FY 2013-14.  For now, the LFB is simply assuming that tax growth in the second year of the biennium will fall short of previous estimates by the same amount that growth in the first year fell short: $281 million (which is roughly the same assumption that we made in this blog post on Friday.)

What the LFB calculations mean is that if current trends continue, Wisconsin will need nearly $1.8 billion of revenue growth and/or spending cuts to balance the 2015-17 budget.  Some people who derided structural deficits in the past are now arguing that this isn’t a big deal because the state can grow its way out of this problem.  That’s true in a sense, but also very misleading.  Assuming tax collections increase as expected to about $14.4 billion in the current fiscal year, growth of 4% per year in 2015-17 would close the budget hole if total spending is frozen.  But keep in mind that the spending needed for a status quo or “cost to continue” budget typically increases almost as fast as revenue – because of inflation and population growth.  Thus, freezing spending in 2015-17 at the current level would not be a painless exercise; it would require significant cuts in areas like Medicaid, K-12 and higher education, and the corrections system budget.

It’s also important to keep in mind that the current structural deficit calculations focus only on the General Fund and assume that in 2015-17 the state will stop transferring dollars from the General Fund to the Transportation Fund.  In light of the problems in state and federal financing for transportation, there will be significant pressure to continue to make those transfers.

The other thing that is almost inevitable when the state finds itself facing a budget hole going into the next biennium is that lawmakers postpone making the long overdue increase in the state’s budget balance.  I expect that to happen again next year, which is exactly why it’s important to build budget reserves when the economy appears to be strong – rather than locking in tax cuts or spending increases before projected revenue growth actually materializes.

by Jon Peacock

From www.wisconsinbudgetproject.org.

Photo by reynermedia released under a Creative Commons license.

Budget Shortfall in Wisconsin Shows Downside of Risky Approach to Tax Cuts

By: WI Budget Project Wednesday September 3, 2014 1:25 pm

From www.wisconsinbudgetproject.org.

Last week we learned that state tax revenues in Wisconsin fell far short of projections for the budget year that just ended. The shortfall means that next year the state is likely to face another round of budget cuts — cuts that slow economic growth and reduce investment in education, health care, and our state’s workforce.

The irony is that not too long ago, state lawmakers were trumpeting Wisconsin’s budget surplus, which neared $1 billion over two years. But instead of using those resources to build up a meaningful budget cushion, state lawmakers rushed to pass tax cuts. Legislators were in such a hurry to cut taxes that they passed a $100 million property tax cut last October in just four days, leaving little time for public debate. Lawmakers also passed two other major tax cut packages in 2013 and 2014.

The three big tax cut packages hurt the state’s bottom line, but they didn’t do much to lower taxes for Wisconsin’s lowest-wage workers. The 20% of Wisconsin workers who earn the least – a group with an average annual income of $14,000 – received an average tax cut of only $48 in 2014 from these three large tax cut packages. In comparison, taxpayers in the top 1% of earners in Wisconsin, who had an average income of more than $1.1 million, received a tax cut of $2,518 on average.

The tax cuts also didn’t do much to create jobs. Private sector employment in Wisconsin continues to grow more slowly than the national average, and in general, the rest of the Midwest has been out-performing Wisconsin in job creation.

The tax cuts didn’t do much to cut taxes for people with modest incomes, and didn’t help create jobs – but they did make it harder for the state to balance its books. The most recent of the tax cut bills suspended a statutory requirement that when revenue is growing faster than expected (which appeared to be the case in January), half of the increase must be set aside in the state’s rainy day fund.  In addition, the governor and state legislators have repeatedly delayed a statute requiring an increase in the budget balance the state must aim to have at the end of each fiscal year.

For now, the state’s fund balance for the 2014 budget year is enough to cover the revenue shortfall. But Wisconsin has a two-year budget, and next year the fund balance probably won’t be enough to cover the budget hole. The Wisconsin constitution requires that the state’s budget be balanced, meaning that new budget cuts may be needed to make up for lawmakers’ unrestrained approach to tax cuts.

The bottom line is that recent budget surpluses offered lawmakers an opportunity to get the state’s budget on a sound footing, but lawmakers instead chose to enact large tax cuts. The state’s current budget difficulties could have easily been avoided if lawmakers had shown restraint in cutting taxes.

Despite Calling Medicaid Expansion Funds Unreliable, Wisconsin Lawmakers Rely on Other ObamaCare Funds

By: WI Budget Project Wednesday September 3, 2014 6:26 am

In the Wisconsin debate about whether to accept federal funding for expanding BadgerCare, there has been little attention paid to a significant inconsistency used in the arguments made by many opponents of using those funds. They contend that it would be risky to pay for newly-eligible childless adults with the increased federal Medicaid funds set aside by the Affordable Care Act (ACA) for that purpose; however, their alternative plan (which is much more expensive for state taxpayers) relies on another source of ACA funds.

We learned about two weeks ago that expanding BadgerCare to 87,000 additional low-income adults and accepting federal Medicaid funding would have saved state taxpayers $206 million in this biennium, and could yield even larger savings in the next biennium. The Milwaukee Journal Sentinel used that news in a strongly worded editorial criticizing the Governor for “sacrificing good policy on the altar of expedient politics” when his budget bill turned down the increased federal Medicaid funding provided by the Affordable Care Act (ACA).

The editorial captured the most important reasons for accepting the increased federal funding (see also WCCF’s Top Ten List of reasons), and it explains the key flaws in the arguments for turning down the Medicaid funds. However, it didn’t mention the logical inconsistency that I find particularly maddening – when opponents of the expansion argue that states can’t count on the federal government.

GOP governors in many other states have realized that rejecting the increased Medicaid funds would be unwise and inconsistent. For example, last week Pennsylvania became the 27th state to expand Medicaid eligibility for adults and the 8th state with a GOP governor to do so.  In Wisconsin, the inconsistency (some might call it hypocrisy) of rejecting this particular source of funding is made clearer when one remembers that the Governor’s alternative plan relies on the federal Marketplace for insurance.

In lieu of taking federal Medicaid funds that would pay the full cost of childless adults in BadgerCare, the budget bill offsets some of the cost of covering newly-eligible childless adults by cutting in half the eligibility ceiling for parents, with the goal of moving them into subsidized coverage provided through the new insurance Marketplace.  The existence of federal subsidies for private plans provided through the Marketplace is a key part of the Governor’s rationale for capping BadgerCare eligibility for parents and childless adults at 100% of the poverty level – while nonetheless striving to cut in half the number of uninsured state residents.

Those choices make it ironic that supporters of the Governor’s budget would justify their far more expensive BadgerCare plan on the basis that we can’t necessarily count on continuation of the increased federal Medicaid funding, particularly when we consider the following factors:

  1. The risk of the increased Medicaid funding being repealed or reduced is very small, as the Center on Budget and Policies recently demonstrated (and that risk is essentially nil while Obama is in office).
  2. Legislation proposed by House Republicans to repeal the ACA would end the Marketplace subsidies as well as the increased Medicaid funding.
  3. It now appears that the federal subsidies for Marketplace coverage are probably at greater risk than the Medicaid funding because of the pending litigation that challenges the use of subsidies in states like Wisconsin that aren’t operating their own health insurance exchanges. (See this Capital Times article about that litigation.)

The bottom line is that Wisconsin is counting on ACA funding to help adults above the poverty level get access to health insurance.  State lawmakers chose to accomplish that objective with the Marketplace subsidies rather than the increased Medicaid funding.  I think we need to ask those lawmakers what, if anything, they will do to protect the parents formerly covered by BadgerCare, in the event that the ACA is repealed or pending litigation blocks the Marketplace subsidies.

The 58,000 Job Question for Wisconsin

By: WI Budget Project Tuesday September 2, 2014 1:20 pm

New Report Takes Comprehensive Look at Weaknesses, Strengths of Wisconsin’s Labor Market

Broken piggy bank with IOU inside

“Many workers don’t have the security they need to get ahead.”

Wisconsin’s economy is adding jobs at a slow pace, wage growth has stalled, and many workers don’t have the security and opportunity they need to get ahead, according to a new Labor Day report released from the Center on Wisconsin Strategy (COWS).

The report, “The State of Working Wisconsin, 2014,” provides a thorough examination of Wisconsin job numbers, wages, poverty, and job quality.

The information on Wisconsin job growth that is included in this report is helpful in deciphering the claims of political candidates who have helped bring a great deal of attention to jobs figures. The report notes that in many ways the hardships for Wisconsin workers mirror the troubles in the national economy. But beginning in 2011, rates of job growth in Wisconsin have fallen behind the national average:

“From January 2011 to June 2014, Wisconsin gained 109,200 jobs, posting growth in the labor market of 4.0 percent. Over that same period, the national economy grew by 6.2 percent. If Wisconsin had simply kept pace with national growth, we would have added 167,622 jobs. That difference – 58,422 missing jobs in Wisconsin – suggests that over the last four years, every time Wisconsin added two jobs, the national economy added three.”

Other serious challenges to economic well-being in Wisconsin include:

  • Wisconsin needs 130,400 jobs today to get back to the 2007 level of employment, taking into account jobs needed to accommodate population growth since then.
  • 175,000 Wisconsin residents are searching for work and unable to find any.  Rates of long-term unemployment in Wisconsin have improved little since the worst days of the recession.
  • The hourly median wage grew a paltry $0.50 between 1979 and 2013, taking inflation into account.
  • Wisconsin women earn just $0.82 for every $1 a man earns.

The Wisconsin economy is not without a few bright spots. Wisconsin residents participate in the labor force at rates much higher than the national average, and Wisconsin’s strong technical college system helps workers get the degrees they need to achieve higher wages.

The outlook for jobs and wages in Wisconsin has improved over the last few years, but too many Wisconsin workers can’t find a job, or are stuck working at low-wage employment without opportunities for advancement. There is plenty of room for improvement, and policymakers can begin by increasing the minimum wage and strengthening our higher education and worker training systems.

Read more in the State of Working Wisconsin, 2014.

Wisconsin State Tax Collections Fall Far Short of Projections

By: WI Budget Project Friday August 29, 2014 12:14 pm

$281 Million Revenue Shortfall in 2013-14 Will Mean a Big Jump in the Structural Deficit

A dollar bill cut into shreds, with a calculator

New revenue figues show a major shortfall in Wisconsin.

Wisconsin 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 Wisconsin’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.