Thursday, January 19, 2017

Further digging shows LFB "surplus" estimate shaky as hell

When you dig further into yesterday’s revenue estimates from the Legislative Fiscal Bureau, the evidence they use to support their higher revenue projections for the next Wisconsin state budget becomes even more questionable.

Let’s start with the largest part of General Fund taxes, the individual income tax. The LFB admits that a few accounting tricks and (ab)uses of Walker/WisGOP tax cuts will reduce total income taxes that come in, but that the economy will do so well under Trump that it won’t matter!
Although individual income tax collections are currently 4.6% above 2015-16 collections on a year-to-date basis, collections are estimated to increase 3.5% in the rest of 2016-17 and end the year 4.0% higher than 2015-16. A lower growth rate in the second half of 2016-17 reflects some taxpayers accelerating estimated payments in December, 2016, as opposed to January, 2017, and an increase in refunds in the Spring months due to law changes.

The law changes include increasing the standard deduction for married filers, federalizing exemption amounts under the alternative minimum tax, the final year phase-in of the manufacturing and agriculture credit, and the capital gains exclusion for Wisconsin assets. The capital gains provision was enacted as part of 2011 Wisconsin Act 32 (Walker’s first budget), but its initial impact will occur in tax year 2016 due to a five-year holding period requirement. Law changes will also affect future collections as their impact, relative to 2015-16, is expected to grow from -$77.7 million in 2016-17 to -$123.6 million in 2017-18 and -$150.7 million in 2018-19. Otherwise, individual income tax collections are expected to increase over the coming biennium, reflecting the continuation of the national recovery from the 2008-2009 economic downturn.
WHOA! So not only is the bump in December income tax revenues a one-time fluke due to (mostly rich) people paying now to increase their refunds next year, but there are a number of new tax cuts that kick in that’ll reduce revenues by another $350 million between now and June 2019. Even scarier is that the LFB admits this is guesswork because we haven’t seen a tax year with provisions like the capital gains one on the books- that revenue loss could well be more than $350 million (much like what happened with the M&A cut).

And yet the LFB anticipates a “Trump Boom” will more than make up for this, and raise individual income taxes by 3.9% in Fiscal Year 2018 and 4.2% in Fiscal Year 2019? Give me a break. Another questionable prediction from LFB comes from their thoughts on corporate taxes, whose collections have crashed in the first 6 months of Fiscal Year 2017- down over 20% according to the LFB, and over 19% according to the Wisconsin Department of Revenue. The LFB’s claims the drop in corporate taxes is due to a handful of companies getting huge refunds, and says the coming Trump Boom will turn this year’s projected loss will turn into corporate tax growth of 4.4% in FY 2018, and 1.1% in FY 2019.
However, collections this year have been affected by certain large one-time refund payments (for what? Sure ain’t job growth!). According to IRS Marki!, growth in both economic profits and adjusted before-tax book profits are expected to be higher over the remainder of the state fiscal year as compared to the six-month year-to-date collection period. Similarly, IRS Markit's national measure for state and local income taxes is expected to reverse from a small year-to-date contraction to moderate growth over the next two quarters. Projected corporate income/ franchise tax revenues for 2017-18 and 2018-19 reflect the forecast for adjusted before-tax book profits through the remainder of the forecast period, as well certain state tax law changes that are anticipated to have an impact on future corporate income/franchise tax revenues.
Again, color me skeptical. Let’s assume the Trump Boom doesn’t happen, and we merely continue with the decent-but-not-great US GDP growth and lagging state job growth that we’ve seen in the last year, and we continue to grow revenues at the same 2.69% rate that LFB is now projecting for this Fiscal Year. Here’s how much difference that makes to the estimates.

Revenue “miss” from LFB at 2.69% growth
FY 2017-18 -$112.8 million
FY 2018-19 -$267.1 million

So much for the revenue “gain” that was touted yesterday. And there’s a flip side to the rosy scenario that LFB went along with that few have mentioned- rising inflation. Take a look at this part of the revenue estimate analysis (note, in this section, the “year” is actually the State Fiscal Year, so “2016” really means July 2015 - June 2016).
The consumer price index (CPI) increased by 1.3% in 2016. IHS Marki! expects the CPI to increaseby 2.5% in 2017, 2.1% in2018, and 2.5% in 2019. Although a strong dollar is expected to depress the price of imports, the CPI is nevertheless expected to slightly increase due to higher oil prices and wage inflation from a tighter labor market. Overall, the rate of core (excluding food and energy) inflation, which was 2.2% in 2016, is forecast to remain steady at 2.2% in 2017, 2.1%in2018, and 2.2% in 2019. Food prices, which grew only by 0.3% in 2016, are expected to increase by 1.2% in 2017, 2.4% in 2018, and 3.0% in 2019. Energy prices, which fell by 6.3% in 2016, are expected to grow by 8.1 % in 2017, 1.3% in 2018, and 4.0% in 2019.
Now here’s the budget trick that Scott Walker, the Wisconsin GOP, and most of the media aren’t telling you- most budget requests that Walker asked for had 0% inflation for Fiscal Year 2018 and 2019! This is even accounting for energy costs for fleet vehicles and state buildings, and pretty much everything else that didn’t have to deal with program growth. But the CPI prediction in these revenue estimates says that prices by June 2019 will be up a good 5-6% compared to today.

In other words, don’t allow Walker folks to pull a trick where they 1. claim a revenue boost related to the hopes of a Trump Boom without 2. adding expenses from inflation that is part of such a Boom. I have a strong suspicion they will try to pull this kind of double-standard when the Governor’s budget is released in the coming weeks, and we need to be ready to call BULLSHIT on it when it does happen, and remind people that projecting costs to stay the same for 2 years will likely be a sizable cut in the real world.

Let's see how things develop over the next month, and then the 4 months of deliberations after that, and assess whether my prediction of a budget hole and/or sizable unmentioned cuts still crops up once you make an adjustment for real life. Bet it does.

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