Will Lawmakers Use the Increased Revenue in Ways that Reduce the Structural Deficit or Exacerbate It?

Assorted denominations of US Dollars

How will Wisconsin lawmakers handle unexpected revenue?

State legislators working on the 2013-15 budget got some very good news today. A new paper from the Legislative Fiscal Bureau estimates that tax collections in the current fiscal year (which ends on June 30) will be $215 million more than previously anticipated. That stronger base of revenue is pushing up the amount anticipated in each of the next two years by $180 million, for a total (three-year) increase by the end of the 2013-15 biennium of $575 million.

Although today’s news could trigger fights about the best ways to use the increased revenue, the rosier revenue picture should nonetheless make it easier for the majority party to fashion a compromise that addresses the competing priorities of various Republicans, including adding to the meager K-12 education funding increase recommended by the Governor.

The biggest question in my mind is whether lawmakers use the added revenue in ways that reduce the $664 million budget hole (“structural imbalance”) that the Legislative Fiscal Bureau said the Governor’s budget would create for the 2015-17 biennium. Closing that gap is certainly a possibility and is a course that I would strongly recommend, but based on past history it’s not what I expect. When they have a balance at their disposal, legislators of both parties typically opt for short-term gratification rather than long-term fiscal responsibility. In other words, I think lawmakers will use the carry-over from this fiscal year for a combination of permanent tax cuts and spending increases that isn’t fiscally sustainable – thereby setting the stage for another round of spending cuts in the 2015-17 budget.

The simplest way to use the increased revenue in a way that creates a stronger foundation for future budgets is to increase the meager balance that the state is statutorily required to set aside. As we explained in a short issue brief released on May 6th, the Legislature decided about ten years ago to increase the statutory balance requirement to a modest 2% of General Fund spending. But this biennial budget bill, like each of the last four, postpones that fiscally responsible action.

The state’s current reserve requirement – $65 million – is less than 0.5% of spending, which is totally inadequate, and the budget bill proposes delaying an increase until the 2017-18 fiscal year. The new revenue announced today eliminates any excuses for not acting now to raise the budget balance to a much more reasonable level.

Taking a broader view of budget reserves – by looking at balances and rainy day funds together – most states set aside an amount equal to at least 5% of state spending, and that’s generally considered the minimum amount a state should have in reserve in normal economic times. Fortunately, Wisconsin’s small rainy day fund has been growing, and current statutes require half of this year’s $215 million tax growth to be set aside in that fund. That will bring the rainy day fund up to a somewhat more respectable level – $243 million at the end of the current fiscal year. However, if the Legislature approves the 2014-15 closing balance recommended by the Governor ($88 million), the combined funding in the budget balance and the rainy day fund will amount to only about 2% of annual spending, instead of the far more prudent target of 5%.

The higher revenue estimates announced today provide a golden opportunity for state policymakers to pass a budget that addresses important needs in areas like K-12 education, early education, and health care, without creating a substantial structural deficit in future years. Let’s not squander that opportunity.

For more, go to www.wisconsinbudgetproject.org

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