Revenue shortfalls and why Wisconsin has another one

Obviously, today's big Wisconsin budget news is the release of today’s new revenue projections by the Legislative Fiscal Bureau. Honestly, the topline projections weren’t as bad as I feared they might be, even though they are by no means good.

Based upon our analysis, we project the closing, net general fund balance at the end of this biennium (June 30, 2017) to be $70.2 million. This is $94.3 below the $164.5 million balance that was estimated prior to our review. The $164.5 million balance includes all bills enacted to date in this legislative session (through 2015 Act 126).

The $94.3 million reduction is the net result of: (1) a decrease of $158.2 million in estimated tax collections; (2) an increase in departmental revenues of $6.3 million; (3) a decrease of $87.1 million in sum sufficient appropriation expenditures; and (4) a $29.5 million decrease in estimated lapses to the general fund.

That $70.2 million left over at the end of the budget means that for now there is no need for a budget repair bill (even if Year 2 of the budget has a deficit of around $149 million). When I saw GOP Senate Leader Fitzgerald say that revenues were looking to be off $150 million, I thought he meant THIS year,which would have likely triggered a future budget repair bill. This is not the case.

I want to speak a second on the expense side of this report. The LFB gives 3 “significant factors” for the $87 million decrease in sum sufficients (generally unknown amounts for mandatory spending and tax write-offs whose totals can be spent above or below this amount without extra legislation being required)

1. $18.8 million in lowered debt payments (thanks to the Fed delaying a rise in interest rates until December).
2. $19.5 million in lower-than-expected Homestead credits
3. $4.9 million in lower-than-expected Earned Income Tax Credits (EITC)

The Homestead and EITC credits overwhelmingly go to the working-class Wisconsinites, were notoriously reduced in Scott Walker’s first budget in 2011, and as the Wisconsin Budget Project notes, have not been increased for inflation since then, causing more of their value to be eroded. So this $24.4 million in “savings” is really $24.4 million that isn’t going to low-income workers, causing them to slip further behind.

The $29.5 million in reduced lapses still isn’t much of a help, as it still leaves $1.06 BILLION more that needs to be lapsed for the 2 years in the budget, with over $726 million of that coming after July 1. If revenues stay at their current reduced levels, it means that you can expect many in-year cuts and/or furloughs for state services coming after that time (likely after the November elections).

Now, onto the reasons behind the revenue projection changes. I’ll keep to the numbers on this one, and go more into what I think it portends for the future in an upcoming post. The biggest factor driving the revenue changes is a reduction in projected income taxes, by $48.5 million in this Fiscal Year, and $188.2 million in FY 2016-17. This goes along with the below-budget trend we have seen so far – income taxes needed to go up by nearly 7.3%, and it hasn’t been hitting that in the Department of Revenue’s monthly releases, (including the December figures they snuck out this afternoon).

The LFB adds that the recently tax cuts from Congress also will take a bite out of the state’s revenues, and the gap would be even larger except that there is expected to a one-time bump in the coming months…in a form that you probably won’t like.

Based on the preliminary collection information through December, 2015, individual income tax revenues for the current fiscal year are 5.1% higher than such revenues through the same period in 2014-15. A higher rate of increase (7.9%) is anticipated over the next six months largely because fewer refunds are expected for 2015 tax returns than were processed for 2014 tax returns. A lower level of refunds will occur this year because the withholding table change that took effect in tax year 2014, affected withholding levels for nine months in the 2014 tax year, but all 12 months in the 2015 tax year. Because withholding changes do not affect individuals’ tax liabilities, lower withholding levels result in lower tax refunds.

What that means is that if the 7.9% increase in individual income taxes isn’t showing up by May (when tax refund season is mostly paid out), we have big-time problems.

The LFB also says they anticipate a pickup in sales tax growth for the next 6 months (to 3.9% from the current 2.3%), so they did not change their projections for sales tax revenues for this year or next year. However, the DOR's December report gives a big flashing warning sign, as sales taxes were only up 0.1% vs 2014, in a month with huge amounts of retail spending for the Holidays, and a month with record warmth that should have allowed people to stay out and about and keep on spending. Uh oh.

Corporate taxes were slightly revised down for this fiscal year, but up by more than $29 million for 2016-17. The LFB says they expect profits to pick up this time next year, which explains why they’re bumping up the totals. In fact, they say it’d be even higher, except for the DC tax cuts and that the Manufacturers and Agriculture giveaway tax credit is being used more by “individuals” than corporations.

Lastly, the LFB says there’s one other intriguing bit of support to tax revenues.

Excise tax revenues over the next biennium are estimated at $706.4 million in 2015-16 and $705.1 million in 2016-17, which represents increased revenue of $26.9 million in the first year and $28.3 million in the second year compared to prior estimates. Excise tax estimates have increased largely due to higher year-to-date cigarette tax collections, which are currently 2.2% higher than collections over the same period in 2014.

In fact, cigarette taxes were expected to fall by $18.6 million this year and another $5.5 million next year instead of going up. So THANK YOU SMOKERS, I guess! (I rarely see people smoking here in Madison, so is it really picking up elsewhere? I could use some insight here)

The LFB also gives a cautionary note that economic forecasts for the U.S. and the state were taken before the oil and stock markets had its huge drop, and it is noteworthy that the LFB quotes a survey from Global Insight which expects 2.4% real GDP growth for 2015, while the Congressional Budget Office just suggested a 2.0% growth rate in its estimates this week. That little bit of difference could go a long way as we move forward with our current budget.

I have one last issue to clear up, and as you’d imagine, it involves typical WisGOP lying about these figures. Both Assembly Speaker Robbin’ Vos and Governor Walker called the $135.2 million projected ending balance a “surplus.” (Walker is especially weaselly in how he spins the numbers).

Here’s the reality.

Ending 2014-15 balance +$135.6 million
Projected ending 2016-17 balance $135.2 million
Change in balance -$366,300.

That’s not a surplus, that is technically a DEFICIT. And the $148.7 million DEFICIT in Year 2 of this budget means a structural deficit near $300 million for the next 2 years…before the increased tax credits and mandatory extra spending kicks in that will both be a part of those budgets.

So stop it, Republicans. While these LFB figures weren’t as awful as some of the hints indicated they might be, we still are worse off, and they certainly do not vindicate the disastrous direction that Gov Walker and WisGOP have put the state on. And as I’ll go into detail later, it’s likely that these budget figures will get worse, and not better.