Over the next week, the Wisconsin Budget Project will be highlighting a different piece each day from our larger publication Breaking with Tradition: How Wisconsin Lawmakers Have Shortchanged a Legacy of Investment in the State’s Future. You can access the full report on our website.
TAXES AND BUDGETING
Wisconsin lawmakers have passed dozens of tax cuts since 2011, many aimed at people who earn the most. Low income taxpayers have received much smaller tax cuts, and some may even be paying higher taxes than they did before 2011. The emphasis on tax cuts has thrown the state’s upcoming budget out of balance, contributed to rising debt, and diverted money that would otherwise go to the state’s rainy day fund to cushion the blow of the next economic downturn or some other unforeseen event.
Many tax cuts, but those with the lowest incomes miss out
Wisconsin lawmakers have cut taxes 43 times since 2011, draining $1.9 billion in revenue for education and other priorities over that period.1
Among the largest tax cuts were:
- An income tax rate reduction, included in the state’s two-year budget that passed in 2013, which reduced revenue by $648 million over two years;
- A 2013 property tax cut of $100 million; and
- A 2014 tax package that further cut income tax rates and also included another property tax cut. The combined package reduced revenue by $507 million over two years.
Those three tax cuts didn’t do much to lower tax bills for Wisconsin’s lowest-wage earners. The 20% who earn the least – a group with an average annual income of $14,000 – received an average tax cut of only $48 in 2014. 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.2
Fully half the value of the three large tax cuts went to the top 20% of taxpayers by income, and the remaining 80% of taxpayers shared the other half. The bottom 20% of taxpayers by income received only 4% of the value of the three large tax cuts.
It’s also important to note that Wisconsin taxpayers with the lowest incomes pay a larger share of their income in state and local taxes than do taxpayers with the highest incomes. In other words, under our state’s tax laws, those who can least afford it devote a bigger share of their income to pay for services such as schools, roads and bridges, and public safety.
It’s also important to note that Wisconsin taxpayers with the lowest incomes pay a larger share of their income in state and local taxes than do taxpayers with the highest incomes. In other words, under our state’s tax laws, those who can
least afford it devote a bigger share of their income to pay for services such as schools, roads and bridges, and public safety.
Tax hikes on working families and seniors
Policymakers raised taxes on working families and low-income seniors.
In 2011, the Governor and Legislature made significant cuts to two tax credits: one aimed at helping working parents lift their families out of poverty, and one that keeps property taxes affordable for people with low incomes, particularly seniors. Those cuts effectively raised taxes by reducing tax refunds for people who qualified for the credits. Combined, these tax increases resulted in an additional $170 million in taxes paid over the last four years by working families and people with low incomes.3
Rising debt levels
By borrowing money, the state can spread out the costs of big road, building, and other capital projects over many years. But if the state issues too much debt, future repayments will rise, it will be more difficult to balance future budgets, and high debt repayment costs will leave fewer resources for making other investments in Wisconsin.
In 2011, state lawmakers delayed debt payments and pushed those borrowing costs into the future. As a result of decisions like that over the last four years and even earlier, debt repayments reached a record high in 2014. The state has traditionally tried to keep principal and interest payments under 4.0% of tax revenues, but in 2014, they consumed 5.26% of General Fund tax revenues.4
Some progress, but state’s budget cushion still too low
Over the past four years, Wisconsin has made significant progress toward establishing a meaningful budget reserve, but levels are still too low. Lawmakers used money that would normally be deposited in a budget reserve to fund tax cuts.
The state’s budget reserves act like a family’s emergency savings fund – cushions that can protect against unexpected events. When the state has a surplus, half the extra money is supposed to go into a reserve. The Legislature can use proceeds from reserves in the event that revenues are lower than expected (for instance, during a recession) or spending levels exceed projections.
Since the end of the recession, lawmakers have made several deposits into reserves when revenues have exceeded projected amounts. Wisconsin rarely made deposits into reserves prior to 2011.
Lawmakers have made a good start towards building up a meaningful budget cushion. But in their eagerness to provide tax cuts, in 2014 they pushed aside a law aimed at encouraging budget responsibility and took $443 million that would have gone into reserves and used it for tax cuts instead. In addition, lawmakers keep postponing the date that a new law would take effect requiring a larger budget balance at the end of each fiscal year. As a result, Wisconsin’s budget cushion is still too low – enough to cover only about 10 days of general operations.5
Digging a budget hole
One positive aspect of the 2011-13 budget bill was that it brought revenue and spending into line, thereby allowing the state to start the following biennial budget without having to climb out of a budget hole. Unfortunately, the same can’t be said for the 2013-15 budget. Thanks in part to the size of the new tax cuts, Wisconsin will begin the 2015-17 budget period needing at least $640 million in General Fund revenue growth simply to provide flat funding for its current obligations. That budget challenge is likely to grow in the coming months because tax revenue was well below the anticipated level during the first five months of 2014.
State lawmakers have also caused a mismatch between revenues and spending in the state’s Transportation Fund. In the next budget, revenues are projected to fall $224 million short of the amount needed to maintain existing roads and bridges and fund other transportation projects at current levels.6
Wisconsin has closed larger budget gaps in the past, often by using budget gimmicks and one-time pots of money to support ongoing costs, which is considered a risky practice. While recent budget surpluses offered lawmakers an opportunity to get the state’s budget on a sound footing, lawmakers instead chose to enact large tax cuts that have opened up a hole in the state’s next budget.
“Tax Law Changes Since January 2011,” Legislative Fiscal Bureau memo, April 30, 2014.
2“Missing Out: Recent Tax Cuts Deliver Little to People Who Earn the Least,” Wisconsin Budget Project, June 3, 2014.
3Legislative Fiscal Bureau staff.
4“State Debt Related Questions,” June 25, 2013 and “State Level Debt Issuance: Informational Paper 78,” January 2013, both from the Legislative Fiscal Bureau.
5The Government Finance Officers Association recommends that “governments, regardless of size, maintain unrestricted fund balance in their General Fund of no less than two months of regular General Fund operating revenues or regular General Fund operating expenditures.” A related footnote goes on to explain that a “significantly lower” level “may be appropriate for states,” but does not specify what that level might be. Wisconsin has a budget stabilization fund, which serves many of the same functions as a fund balance, in addition to the actual balance in the state’s General Fund. State statutes require half of budget surpluses to be transferred to the budget stabilization fund, although lawmakers overrode that provision in 2014. Wisconsin currently has a balance of $279 million in the budget stabilization fund, and another $165 million projected as a FY 2015 year-end balance in the General Fund, for combined budget reserves of $444 million.
6Legislative Fiscal Bureau memo, January 16, 2014.