COVID recession leads to a big budget hole for April

We know that the state of Wisconsin's budget situation is going to deteriorate, but we've had to wait on data from April to see what a full month of COVID 19-related lockdowns would do. And we found out today from this report by the Legislative Fiscal Bureau.

It's not a revenue estimate, like we get every May in odd-numbered years. But it's illuminating all the same, as the numbers are big.

Preliminary information on taxes collected by the Department of Revenue (DOR) for the month of April, 2020, is now available. As anticipated, due to the coronavirus pandemic and its impact on the economy, the April report indicates a significant reduction in collections. Tax collections in the month of April, 2020, were $1,145 million. This is $870 million below collections of April, 2019. And, for the 10 months of the current fiscal year, collections are $313 million below those over the same 10 months of 2018-19.

The reduction in April, 2020, collections reflects two things. First, the coronavirus pandemic has severely impacted the state's economy and tax collections. Second, the extension of income and franchise tax filing deadlines from April to July 15 in 2020 has affected collections. It is important to note, however, that income and franchise tax returns and estimated payments filed by July 15 will accrue to state fiscal year 2019-20 under the state's budgetary cash and modified accrual method of accounting.

Yeah, that a big drop, although some of that likely reflects the higher refunds that resulted due to the income tax cuts in the 2019-21 state budget. Ironically, those higher refunds were part of the reason why the original state budget expected total tax collections to fall by $38 million in this fiscal year vs 2018-19), until those numbers were revised higher in the LFB’s pre-COVID 19 revenue projections from January.

So let's look at what happens in a few scenarios. I'll include the original budget revenue total for this year, and the higher revisions in January. Then I'll use the 2.4% Fiscal Year-to-Date decline in revenues and have that same decline for May and June, and lastly I'll assume that tax revenues drop by 10% vs 2019 in May and June.

That "10% shortfall" scenario would put us $1.1 billion behind where the LFB projected us to be in January. Guess it’s a good thing that we didn’t blow the extra tax revenues that never showed up, eh?

And that last sentence from LFB answers a question I had, indicating that tax filings that hit after July 1 will still count in the 2019-20 fiscal year. That decreasing the chances that there will be any need to repair this year’s budget through extra borrowing or legislation, or else that 2020 revenue shortfall may become much higher. LFB notes that a lot of Wisconsinites still need to file their state taxes, and it’ll likely mean a needed influx of tax dollars when a lot less will be coming in from paychecks.

Individual final payments were $82 million in April, 2020, compared to $445 million in April, 2019, a reduction of $363 million from a year ago. This partly reflects lower final payments due to the income tax rate reductions for tax year 2019 enacted under 2019 Acts 9 and 10, but is also skewed by the delayed filing date for individuals. According to DOR, between April 5 and May 2 of 2020, income tax returns filed with the Department were 271,000 fewer than comparable weeks in 2019 (a 39% decline). Final payments and refunds for tax year 2019 will not be known until after the July filing date.

The LFB also gave an indication on how COVID 19 shutdowns have changed Wisconsinites’ spending habits, which was reflected in a drop of April sales tax revenues (which generally reflect sales in March, meaning May’s drop will likely be higher). It also gave this revealing tidbit on which types of businesses had been hit hard, and which were doing better.

Based on preliminary sales tax data provided by DOR, the economic impact of the coronavirus pandemic and the Safer-at-Home order has impacted retail industries differently. Taxable retail sales were lower in March of 2020 compared to March in the prior year by 46% for clothing and clothing accessories stores, 38% for food services and drinking establishments, and 27% for motor vehicle and parts dealers. Conversely, March taxable sales in 2020 were higher at nonstore retailers (including remote sellers and marketplace providers) by 49%, food and beverage stores by 21%, and building material and garden equipment and supplies stores by 9%.

The LFB adds that this “nonstore retailer” effect might translate into a notable change in another tax.

Under 2019 Act 10, individual income tax rates will be reduced to offset the increased sales and use tax collections attributable to remote sellers and marketplace providers. For tax year 2020 and taxable years thereafter, the tax rate reduction is based on the sales and use tax collected from remote sellers and marketplace providers during the 12-month period from October 1, 2019, to September 30, 2020. To the extent that the coronavirus pandemic results in increased taxable sales made by remote sellers and marketplace providers that would have otherwise been in-person taxable sales at physical stores located in Wisconsin, the sales tax revenue used to offset individual income tax rate reductions for tax year 2020 will have a larger fiscal effect than the $119 million income tax reduction estimated under Act 10.

That “larger fiscal effect” would translate into a bigger income tax cut for 2020, which will increase refunds for Wisconsinites when they file the next Spring (much like how this year’s income tax cut did). But because those higher refunds won’t come in until early 2021, it raises the amount of money coming in to the state for this fiscal year while taking it away in Year 2.

However, legislators might want to find ways to hold on to dwindling revenues in order to reduce the amount of the budget that needs to be adjusted in the next 14 months. One of the ways you could do that is by putting off the corresponding income tax cut for a year, and most Wisconsinites that aren’t budget nerds wouldn’t ever notice.

But the everyday Wisconsinite would certainly notice spending cuts that hit in the next 12 months, and they'd notice a tax increase that might be put in to allow services from collapsing. So maybe avoiding automatic tax cuts like this one might be a good strategy to soften the pain that would come from having to take even more money out of the budget.

Lastly, the drop in revenues won’t leave as much of a hole as you might expect in this fiscal year, and ironically, it'll be because revenues won’t go over their budgeted amounts. $189 million of those extra revenues were supposed to be sent into the state’s Rainy Day Fund, and instead that money will stay in the budget for the 2020 fiscal year. The down side is that there’s less in the Rainy Day Fund to plug our budget holes for 2021 and beyond, but it also means the state won't run out of money (and need a budget repair bill) until a little later.

And that timing is important, because if we don't end up in a deficit before the 2020 fiscal year ends in 8 weeks, then it is left up to DOA Secretary Joel Brennan to decide if/when we would need to repair the budget for FY 2021.

However, if the Secretary of DOA concludes that the level of GPR appropriations will exceed the level of revenues expected to be available in the current or forthcoming fiscal year by more than 0.5% of the amount of total GPR appropriations for the respective fiscal year, the Secretary may not take any action to reduce agency spend-ing authority. Rather, the Secretary must notify the Governor, the presiding officer of each house of the Legislature, and the Joint Committee on Finance of this fiscal emergency situation.

And that could become a high-stakes poker game, as 115 of the 132 members of the State Legislature are facing re-election this November, but Governor Evers is not.

Then throw in questions as to what assistance (if any) might be coming from DC to fill in the budget holes of states, and there's a lot to stay aware of in Wisconsin budget news in the coming months.