Yes, Wisconsin has a revenue shortfall. But we might slip by for a while

As unemployment stays high in Wisconsin, the Legislative Fiscal Bureau gave an awaited update on May's state tax revenues. And it didn't take long for the co-chair of the Joint Finance Committee to snark his response.

@GovEvers needs to do more to reduce state spending. @GovEvers 5% state operations cut was actually 2.5% and just over 1% if UW System, which absorbed a majority of the cut, is not included. He also exempted 25 agencies from any cuts including the @LGMandelaBarnes office.

— John Nygren (@rep89) June 10, 2020

If only the co-chair of the Joint Finance Committee could do something about budget cuts. If only....

Let's read the LFB memo for ourselves and see what it really means. Not surprisingly, income tax revenues stayed low in a time of increased unemployment. But the big drop off seems to be related more to tax returns being delayed until July 15.

Preliminary individual income tax collections for May, 2020, are $4 million (0.7%) lower than those collected in May, 2019. Year-to-date, individual income tax collections for 2019-20 are lower by $690 million, or 9.0% lower than the comparable 11-month period in 2018-19. Most of the decline in tax collections year-to-date is likely caused by the delayed filing dates for estimated payments and final payments. It is assumed that many individuals have taken advantage of the filing date extension and will wait to make payments closer to the July filing date.

Estimated payments and final payments that were otherwise owed in April are now due in July. Year-to-date estimated payments are $713 million, which are $448 million lower than the comparable period in 2018-19. Individual final payments year-to-date are $348 million, or $320 million lower than the same period a year ago. This partly reflects lower tax payments related 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. Final payments and refunds for tax year 2019, and April and June estimated payments for tax year 2020, will not be known until after the July filing date.

In fact, the LFB said that the state's Department of Revenue was not being hit from fewer taxes being withheld from (fewer) paychecks Preliminary withholding tax collections for May were 2.1% higher than the same month in the previous year. Adjusting for the $36.5 million withholding deposit that occurred last May relating to the individual who won the lottery, withholding collections would be higher by 8.4% for the current month. Year-to-date, withholding collections are higher by 3.5% compared to the same 11-month period in 2018-19. According to media reports, certain large retailers have increased hiring and have raised hourly pay for current employees, which could be mitigating, to some extent, the decline in withholding collections that would otherwise be expected from the current high levels of unemployment. As discussed later in this memorandum, continuing claims for unemployment benefits have declined weekly since April 18, which suggests that some individuals are returning to work.

It seems like Wisconsin's income tax revenues have actually held up better than I would have expected, given that tens of thousands of new unemployment claims are still being filed every week, and the fact that the largest communities in Wisconsin still had many types of businesses shut down until the final week of May.

So how did withholdings increase compared to May 2019, despite hundreds of thousands of fewer people working? A theory I have is related to who has lost jobs in Wisconsin, which has been heavily tilted toward the leisure and hospitality sector, which is largely made up of bars, restaurants, hotels, and entertainment businesses. That sector had an unemployment rate near 36% last month, or nearly 3 times what the US has as a whole.

In Wisconsin, nearly 60% of the jobs in the leisure/hospitality sector were lost in Wisconsin through April due to COVID 19 and the related Safer at Home restrictions (we have yet to see May's numbers from the state). That's 165,000 fewer jobs, and many of them have a low base pay because they rely on tips for a majority of their income. Tips are supposed to be reported in total, but we know that isn't the case and much of that tip income is likely not hit by withholdings, as the income tax gets paid later by the individual (if it's reported at all).

Other lower-sector jobs like retail were subjected to a lot of job losses in Wisconsin (44,000 as of April), but LFB notes that big-box stores and groceries hired more and some paid more by May. In addition, higher-paid positions are more likely to be able to work from home and not lose any income at all, and laid-off workers likely had income tax withheled from the $600 enhancement on unemployment checks that came in for May. We'll know if my theory is correct if the retail and leisure/hospitality sectors have some of their jobs come back in the next 2 months, but the withholdings don't spring back with it.

On the sales tax side, the LFB said that those numbers declined, although the month-over-month drop wasn't as much as first feared, and was heavily concentrated in a few sectors. In fact, some sectors did much better in May due to so many people having to stay at home.

Preliminary state sales and use tax collections in May generally reflect taxes paid for retail sales occurring in April. The coronavirus pandemic resulted in the Safer-at-Home order,which took effect on March 26, 2020, and remained in effect until May 13, 2020. Sales tax collections for May, 2020, reflected a full month of reduced economic activity during the Safer-at-Home order. Such collections were lower than May collections in the previous year by 10.1%, or $46 million. Sales tax collections through May, 2020, are $100 million above collections in the comparable 11-month period in 2018-19, representing 2.2% growth year-to-date.

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 April of 2020,compared to April in the prior year, by 74% for clothing and clothing accessories stores, 53% for food services and drinking establishments, and 28% for motor vehicle and parts dealers. Conversely, April taxable sales in 2020 were higher at nonstore retailers (including remote sellers and marketplace providers) by 83%, building material and garden equipment and supplies stores by 23%, and food and beverage stores by 18%. Growth in total taxable retail sales at these three retail sectors were $403 million, or 38% higher, in April, 2020, than in April of the previous year.

Even if June sales taxes stay down by 10%, the shortfall in sales taxes would be around $240 million less than what LFB projected back in January.

Likewise, if we assume that people send $320 million to the Wisconsin DOR with their tax filings, like they did in 2019, and then figure the last month of 2020 ends up being the same (which is a real loss with inflation), then we'd "only" be down around $370 million from the LFB estimates. Put that together with the income tax decline, and it's a shortfall of around $610 million. Given that we had a projected carryover of around $1 billion in those revenue estimates, we would likely be able to make it through the end of the Fiscal Year without having to repair the budget.

The problem is that we still have to wait for Wisconsinites to file their taxes and get those numbers in a couple of months. While it seems likely that we have enough money to pay the bills, that cash won't come in until July. That uncertainty is likely a reason behind the Evers Administration pulling a Walker-ish "scoop and toss" to avoid paying off debt for a couple of years, as the LFB revealed in their memo.

The administration recently re-amortized variable rate debt that otherwise would have been paid off in fiscal year 2019-20, and instead scheduled it for repayment over a five-year period starting in the 2021-22 fiscal year. This variable rate debt re-amortization will reduce GPR debt service payments by an estimated $66 million in 2019-20.

While the circumstances are different - Evers did it because taxes weren't being filed until later during a pandemic, while Walker did it merely to avoid having to deal with a budget deficit caused by his own reckless tax cuts - Nygren took glee in pointing out the Evers Administration's moves on debt, and sneeringly cried "hypocrisy!"

Nygren's act is why once the state's final budget revenues are known in August, I would like to see Governor Evers call a special session of the Legislature to modify the budget, fill in budget holes, and make it more sustainable. This would give more time to implement any budget cuts for Fiscal Year 2021 that might be needed, making the pain less severe, and I would have the money-saving measure of Medicaid expansion be a centerpiece of that repair. It not only puts GOPs on the spot before a November election that Tony Evers is not running in, but it makes the GOPs NAME THE CUTS THEY WOULD MAKE TO BALANCE THE BUDGET (we know they won't raise taxes to do so).

Naming the cuts is something John Nygren and the rest of the WisGOP whine brigade badly want to avoid revealing in public. Which is exactly why Evers and other Dems should make them do it in a few months.