More money for Wisconsin....but not because of a strong economy.

Over the weekend, I mentioned that the Legislative Fiscal Bureau was likely to have good revenue projections when those figures were released this week. But what they had to say today exceeded what I was expecting.

Based upon our analysis, we project the closing, net general fund balance at the end of this biennium (June 30, 2021) to be $620.2 million. This is $451.9 million above the balance that was projected at the time of enactment of the 2019-21 biennial budget, as modified to incorporate the 2018-19 ending balance (2019-20 opening balance) as shown in the Annual Fiscal Report for 2018-19.

The $451.9 million is the net result of: (1) an increase of $818.2 million in estimated tax collections; (2) an increase of $20.0 million in departmental revenues (non-tax receipts deposited into the general fund); (3) a decrease of $22.8 million in net appropriations; and (4) a transfer of $409.1 million to the budget stabilization fund.

Wow, that’s pretty good budget news for sure.

So how did we get here with all this extra revenue? As I’ve mentioned before, it’s largely due to a jump in corporate taxes paid to the state, which started in FY 2019, and is projected to continue over the next 2 fiscal years.

Jan 2020 rev projections vs 2019-21 budget

2019-20
Income taxes +$26.9 million
Sales taxes +$52.7 million
Corp taxes +$329.5 million
Public Utility taxes -$8.0 million
Excise taxes -$3.6 million
Others -$2.0 million
TOTAL INCREASE +$395.5 MILLION

2020-21
Income taxes +$93.0 million
Sales taxes +$49.5 million
Corp taxes +$299.6 million
Public Utility taxes -$2.0 million
Excise taxes -$12.6 million
Others -$4.7 million
TOTAL INCREASE +$422.7 MILLION

And as I have mentioned before, you shouldn’t feel too bad for Wisconsin corporations, because the LFB notes that the increase in corporate taxes is largely due to the corps and their CEOs reorganizing their companies and moving around tax payments to get a major windfall under the GOP Tax Scam in DC.

Several factors contributed to unprecedented growth in corporate income/franchise tax collections in 2018-2019 and the first half of 2019-20, which are anticipated to moderate in 2020. First, the pass-through election to file under the entity-level tax caused an estimated $193.8 million increase in collections in 2018-19, accounting for 21.7 percentage points of growth in collections compared to 2017-18. As discussed above, pursuant to 2017 Act 368, S corporations, partnerships, and limited liability companies may elect to be taxed at the entity level beginning in tax year 2019, (except that S corporations can make the election beginning in tax year 2018). DOR records these payments under the corporate tax, rather than the individual income tax. As such, these payments reduce individual income tax collections and contribute to substantially higher growth in corporate income/franchise tax collections because the payments would otherwise be made by individual shareholders, partners, and members for tax owed on the income passed through by the entity on their individual returns. If such an election is made, it is likely that the election to pay at the entity level will actually increase the amount of state taxes owed by the taxpayer because: (a) the corporate income/franchise tax rate of 7.9% is higher than the graduated rates for individual income tax brackets in 2019 of 3.86%, 5.04%, 6.27%, or 7.65%; (b) tax credits cannot be claimed by the entity (except for the credit for taxes paid to another state); and (c) the entity cannot claim a net operating loss from another year. Nevertheless, it may be advantageous to make the election because income taxed at the entity level for state tax purposes may be a deductible business expense for federal tax purposes (where under TCJA, beginning in tax year 2018, the federal income tax itemized deduction for state and local taxes is limited to no more than $10,000 per year for individuals).

Overall, the May forecast expected payments from pass-through entities under the corporate tax to decrease in 2019-20. Because Act 368 was enacted in December, 2018, S corporations remitted entity level tax payments for tax year 2018 in March, 2019 (the last month to do so without incurring interest charges). Thus, in addition to receiving estimated payments from pass-through entities for the first half of 2019, collections for 2018-19 were enhanced by a one-time payment of $124.4 million owed by S corporations for tax year 2018. Due to the short amount of time to file and the safe harbor from interest charges, it was expected that pass-through entities would overpay the 2018 entity-level tax owed and later normalize their payments by either seeking refunds or remitting lower estimated payments throughout 2019-20. However, based on collections data, it now appears that in 2019-20 refunds are lower than previously estimated and that entity-level estimated tax payments are higher than previously estimated.

Guess it’s a good thing the state is getting more of those corporate taxes in these years, because there’s a good chance that the large deficits resulting from the GOP Tax Scam will likely mean there will be less money coming from the Feds in the near future, so the states better have money to make up the difference.

The LFB also pointed out that amount of available funds could be even higher than $620 million. And that’s because of the lack of activity at Foxconn.

… 2019 Act 9 [the 2019-21 state budget] estimated the refundable credits at $0 in 2019-20 and $212.0 million in 2020-21. Under the EITM zone tax credit program, the Wisconsin Economic Development Corporation (WEDC) certified three Wisconsin corporations that are affiliated with Foxconn as eligible to claim a payroll tax credit over 15 years for up to an aggregate amount of $1.50 billion and a capital expenditure credit over seven years for up to an aggregate amount of $1.35 billion. The Act 9 estimate assumed that Foxconn would have sufficient payroll and capital expenditures by the end of the 2019 calendar year to receive the $212 million of refundable credits that would be paid in the 2020-21 fiscal year. Based upon reports of the project's progress to date, and assumptions regarding payroll and capital expenditures, preliminary estimates suggest that it is likely that the credits paid to Foxconn in 2020-21 will be in the range of $50 million to $75 million, rather than the amounts contained in Act 9.

Before claiming EITM zone tax credits from the Department of Revenue, the Foxconn entities must receive a verification letter from WEDC. Before issuing such a letter, WEDC must first review Foxconn's annual report and a verification report from a nationally recognized certified public accountant. Pursuant to the contract, the Foxconn entities' next scheduled report is due on April 1, 2020, after which the accountant would have up to 45 days to complete its review before WEDC begins the verification process to calculate the amount of credits the Foxconn entities are eligible to claim. Further, upon receiving a verification letter from WEDC, the Foxconn entities would have up to 14 days to object to the calculation of tax credits. Given these steps, the amount of the credit to be paid in 2020-21 will likely not be known until after the end of this fiscal year.

That’s a nice bit of change that we will likely gain, since the Fox-con project won’t be nearly what was projected at this time (although it’s infuriating to be giving away $50-$75 million for the type of economic development that usually costs taxpayers a fraction of what we have given and will give to Foxconn).

That being said, it’s pretty obvious that the projected increase in tax revenues has little to do with an economic boom - income and sales taxes are each projected are up by less than 1% vs the last projections, and the LFB says the state is on track to collect fewer income taxes in this Fiscal Year than in 2019 due to tax cuts that were part of the state budget (you haven't noticed them yet? Wait till you file).

Instead, the extra money is mostly due to corporate tax tricks that are the result of the GOP Tax Scam that will prevent many Wisconsinites from writing off their own state and local income taxes (which will likely reduce your Federal tax refund). So taxes and refunds from one level of government are likely to go up, while taxes and refunds from another level of government is likely to go down

That being said, having more money in the state’s bank account and its rainy day fund (which is projected to grow by $410 million under this projection) beats being in the red, and it offers some opportunities to put that extra money to use. So what should be done? Let’s examine that in another post.