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Can Wisconsin Grow Its Way out of a Deficit in the Next Budget?

10:09 am in Uncategorized by WI Budget Project

Perhaps, but Further Budget Cuts Are Likely to be Part of the Solution

The underside of the Wisconsin Capitol Dome

The Wisconsin Legislature is about to pass a new tax cuts bill.

It appears that the Wisconsin Legislature is on the verge of passing a slightly amended version of the Special Session tax cut bill, which uses the projected state surplus in a way that leaves the state with a “structural deficit” of about $700 million at the beginning of the next session.  The good news is that the way the Fiscal Bureau calculates structural deficits doesn’t make any estimate of revenue growth in the next biennium. The bad news is that it also doesn’t account for any spending growth, and it depends on fairly strong revenue growth over the next 15 months, which is by no means guaranteed.

Proponents of the proposed tax cuts contend that tax growth in the next biennium can be expected to surpass the amount needed to close the structural deficit.  That’s likely to be true — provided that the economic recovery doesn’t slow over the next three years, and if policymakers are prepared to once again freeze many appropriations or cut them below the levels needed to keep up with population growth and inflation.  Although fiscal conservatives congratulated themselves in 2012 for eliminating the structural deficit, many seem not to mind starting a new biennium with a potential hole in the budget, which I surmise is because they aren’t bothered by the possibility (or likelihood) of having to eliminate that hole by making deeper spending cuts.

Over the past few days there have been several pieces of economic, fiscal and international news that I think should serve as reminders that assuming significant revenue growth in the current biennium and the next one could be problematic.  At the federal level, the Bureau of Economic Analysis said Friday that real GDP growth dropped to just 2.4% in the last quarter of 2013, which compares to prior projections of 3.2% for the last three months of the year and was far below the 4.1% growth in the third quarter.  At the state level, new tax figures released Friday by the Department of Revenue show that the adjusted General Fund tax collections in January fell 2.2% compared to January 2013.

Those two pieces of news strike me as warning flags, not as alarm bells. A number of economists have suggested that the weaker figures for the federal economy were primarily the result of short term factors, such as the weather.  And because January 2013 was a strong month for Wisconsin tax collections, the comparative decline in January of this year isn’t a major surprise.  I think the more worrisome news comes from the international developments in the Ukraine and elsewhere – considering the potential economic implications of rising tensions and global instability.  In any event, all of these recent events should serve as reminders that even the Fiscal Bureau doesn’t have an infallible crystal ball, and there are risks in using projected budget balances for new tax cuts or spending increases.

Fortunately, the structural deficit that the Fiscal Bureau projects for the 2015-17 budget is smaller than numerous others in the last two decades. However, it should be remembered that some of those structural deficits increased between this point of the biennial budget and the start of the legislature’s next biennial session. And the time to take steps to reduce structural deficits is when you have higher than expected revenue projections.

Some of the other states with surpluses are taking a more cautious and responsible approach. In California, for example, Governor Jerry Brown has recommended putting much of the anticipated revenue increase into paying off state debt and building up reserves. Wisconsin lawmakers should proceed with similar caution.

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Not a Dime For Wisconsin Rainy Day Fund Despite Nearly $1 Billion Surplus

3:00 pm in Uncategorized by WI Budget Project

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A broken piggy bank with an IOU note inside

The Wisconsin rainy day fund remains underfunded despite a budget surplus.

In their eagerness to provide tax cuts, Wisconsin lawmakers have pushed aside a law aimed at encouraging fiscal responsibility that requires half of state surplus revenue be set aside for a rainy day.

When the budget surplus of nearly $1 billion over two years was announced earlier this year, it seemed likely that Wisconsin’s rainy day fund would get a much needed boost. State law requires that when revenues exceed budgeted amounts, half the additional revenue must be deposited into the state’s rainy day fund, which is used to cushion against future economic downturns. In the absence of a tax cut package, the projected level of surplus would result in an additional $443 million transferred to Wisconsin’s rainy day fund over the next two years.

Wisconsin’s rainy day fund has long been underfunded. In fact, for years that fund was nearly completely empty. Since the end of the recession, the state has been regularly depositing money into the rainy day fund when revenues have exceeded projected amounts, and Wisconsin’s rainy day fund currently has a balance of $279 million.

It is encouraging that lawmakers are finally setting aside money in this reserve fund. However, the balance in the fund is still too low to provide much of a budget cushion. There are no hard and fast standards for how much a state should have set aside in its rainy day fund, but the Government Finance Officers Association recommends that states have at a minimum of 5% to 15% of annual general revenues set aside. For Wisconsin, those guidelines mean that we should have somewhere between $750 million and $2.25 billion set aside in budget reserves – several times the amount that Wisconsin has set aside currently.

Plans for the surplus have proposed diverting most of the money that would have otherwise been deposited into the rainy day fund, and using that money for tax cuts instead. The Governor’s tax cut proposal did include a $117 million deposit in the rainy day fund over two years, but the Legislature has proposed eliminating that deposit and inserting language into the bill to exempt itself from the statutory requirement to make such a deposit. The newest version of the tax cut package, which has been passed by the Legislature’s budget committee and seems likely to be agreed upon by both houses of the Legislature, does not put any money into Wisconsin’s rainy day fund at all. Instead, lawmakers want to keep that $117 million in the state’s main account. Keeping the money in the state’s main account reduces the size of the hole in the state’s upcoming budget, because of the way that budget hole is calculated.

Keeping that $117 million in the state’s main account rather than depositing it into the state’s rainy day fund does still provide some protection against an unexpected drop in revenues. It also has the advantage of giving lawmakers an easier option for plugging a $93 million hole in the Medicaid budget, if state officials don’t find another way to close that budget gap. But it would be more fiscally responsible for lawmakers to reduce the size of the tax cuts so they don’t have to choose between adding to the rainy day fund and providing a healthier budget balance to carry into the next biennium. (Read more here about the state’s continued delays in building up the required budget balance.)

The budget surplus represents an opportunity for lawmakers to build on the progress Wisconsin has made in recent years in building up the rainy day fund. Setting aside money now, when revenues are higher than anticipated, could help the state avoid painful spending cuts or tax increases during the next recession. Instead, policymakers seem set on a course of cutting taxes without heed to setting aside money for future needs.

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Before Implementing New Tax Cuts, First Roll Back Recent Tax Increases

2:40 pm in Uncategorized by WI Budget Project

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Governor Walker and state legislators have said that cutting income taxes is high on their priority list for Wisconsin’s next budget. But before implementing new tax cuts, state policymakers should consider rolling back the tax increases in the last budget –tax increases that largely hit working families and seniors on fixed incomes.

There haven’t been any specific proposals for income tax cuts yet – those will likely come when the Governor’s budget proposal is released in the next few weeks. But both Governor Walker and State Representative Robin Vos (R-Rochester) who is Speaker of the State Assembly, have said they favor cutting income taxes. The income tax is the single biggest source of revenue for the state’s General Fund, and substantial income tax breaks could spur a new round of painful budget cuts.

Policymakers have their eyes set on new tax breaks in the coming budget period, but they have been mostly silent about the possibility of rolling back two substantial tax increases that were introduced in the previous two-year budget. Those tax increases were:

  • A $56 million cut over two years in the state’s Earned Income Tax Credit, which resulted in higher taxes for modest-income working families with children. This cut took more than $500 a year out of the pocket of a single working mother trying to support her three children on a minimum wage salary.
  • A $14 million cut over two years to a tax credit that helps make sure that seniors on fixed incomes and other people of modest means aren’t taxed out of their homes. In the most recent budget, the Legislature prevented the Homestead Tax Credit from being adequately adjusted for inflation, meaning that credit amounts will steadily decline over time, and seniors and others who receive the credit will pay more in taxes.

Legislators should proceed with caution in implementing new tax cuts, especially considering that there are a several new or expanding tax cuts that are already in the works. (Read our recent report on new tax cuts and credits here.) Before approving new tax cuts, the first priority of state policymakers should revisit recent tax increases, especially because those tax increases hit working families and seniors the hardest.

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