Monday, March 3, 2014

Tomorrow's tax cuts still aren't needed today

   The State Senate is set to discuss and possibly pass the Walker tax cuts tomorrow. The Joint Finance Committee passed an amended version of those cuts, and I wanted to give an update on where the bill stands now, and to look at it light of recent data.

  First of all, the Legislative Fiscal Bureau's report on the updated tax cut bill notes a few differences from the original. The biggest is that a proposed deposit of some of the excess revenues into the budget stabilization (or "rainy day") fund has now gone away. This was to alleviate concerns by some GOP Senators over the large structural deficit in the next budget, and the LFB notes that the current bill drops the structural deficit by around $175 million, to $658 million.

 But this is largely a cosmetic change, as the rainy day fund is also lower than it would have been, and is less of an option to use in case of an economic downturn or other fiscal constraint. It also sets into law the $406 million in added tech college-related property tax relief, the expanded tax credits for businesses, and the lower income tax bracket. If circumstances change and a fiscal concern comes up, it requires more legislation to undo these changes, since there is no sunset to them.

  And things may be getting tighter in the near future than we originally thought. I'll take you back to the original LFB revenue estimates from mid-January, and note what economic forecasts were saying at the time.

Real (inflation adjusted) GDP is now projected to grow 2.7% in 2014 and 3.2% in 2015. These estimates are similar to Global Insight's May, 2013, forecast, in which real GDP had been expected to increase by 2.8% and 3.2% in 2014 and 2015, respectively. But the early economic reports have been chilled in January and February. We saw retail sales slip badly, going down 0.4% in January. New auto sales were also down in January, while the LFB was predicting an increase in 2014, and housing starts were down 16% that month vs. January 2013.

More recently, we saw 4th Quarter 2013 GDP be revised down to 2.4% on Friday, meaning that we're also starting off from a lower level, and need to rise higher to make up the difference. Even what seemed to be good personal spending news from earlier today  turned out not to be so good.
Spending rose 0.4 percent in January after a 0.1 percent gain in December the Commerce Department said Monday. The December figure was revised down from a 0.4 percent increase....

The overall spending increase in January reflected a 0.8 percent jump in spending on services, the effect of higher heating bills. It was the biggest increase in spending on services since October 2001.

Spending on durable goods such as autos fell 0.3 percent. And spending on nondurable goods, covering things like clothing and food, dropped 0.7 percent.

"Spending looks great but is not," said Ian Shepherdson, chief economist at Pantheon Macroeconomics. Without an 11.3 percent surge in spending on utility bills, Shepherdson said consumer spending would have been close to flat.
And the January chill was reflected in the Wisconsin Department of Revenue's report for January, which showed income tax revenues were down 4.4% for January 2014 vs. January 2013. On its face, this may not be so worrying, as income taxes could drop 5.4% vs. 2013 through June and still live up the LFB's projections. But the problem is that this drop was before income tax refunds from the state started to be handed out, and those should be higher than they were last year. The reason is that the Koo-Koo tax cuts weren't withheld last year, even though they were technically law for the entire year, which means revenues drop further. Theoretically some of that will be spent and raise sales taxes, but given the huge increases in heating costs that Wisconsinites have had to take on, the tax refunds might not get spent out as much as originally thought.

I'm not saying the sky is falling or that we're heading into recession- I don't think it's THAT bad. But it's also not as good as we thought in mid-January, and with that in mind, I'd recommend holding off on a number of these Walker tax cuts until we're convinced that things are back on track economically and that the extra costs resulting from this extraordinary winter can be covered. Sadly, I don't see that happening with this group of WisGOPs, and as a result it'll just be a matter of time before the state's General and Transportation Fund deficits hamstring Wisconsin's finances, and our economic potential.

Then again, hamstringing the state's fiscal flexibility might be what a lot of the WisGOPs and their funders want. Which is yet another reason to vote "NO" on this tax cut bill.


  1. The adjusted withholding for January 2014 vs January 2013 was up 0.6%, so that's a disappointing month for capital gains (down about 16%).

    While sales tax receipts were up 4.6% year-on-year in January, in February the two taxes sort of switched places with year-on-year adjusted withholding up 3.9% and sales tax receipts up just 0.5%.

    The LFB projected that FY14 sales tax receipts would be 5.2% higher than FY13's. The first half of FY14 went well, but February had better not be a trendsetter in this regard (or January, if it's been covered up by gas bills in this frigid weather we've been having).

  2. Couple of things on that, Geoff. 1. Are capital gains usually reported by the month that they occur, or is it usually saved up for tax time? The brutal January in the markets could lead to that drop (which rebounded in February).

    2. Flat sales taxes is a really bad sign, given that Amazon is adding to the coffers, and Wisconsin retail has taken a ton of hits recently (American TV, JC Penney)

    1. 1. As far as I am aware, all the tax receipt reports by month are for the month that the DoR actually receives the money (the exception being the personal income tax adjustments, which are for when people receive their pay the next month for work they did the previous month owing to weekends/holidays). I'll double-check that.

      2. D'oh! I forgot about Amazon again. That means that February's taxable sales were pretty darn negative in real terms (somewhere between -1.0 and -1.5 percent). I wouldn't read too much into that - it is just one month after all and singular bad months are far from unprecedented - but watch this space.

      The UI stats for February's reference week were awful too. The February employment situation report is out on the 27th so it's a good bet that it'll reek.