Wis budget should make it through 2020. August will let us know how short we are in 2021

Late this week, we got Preliminary information from Wisconsin's Legislative Fiscal Bureau on how the state's tax revenues looked at the end of the 2020 Fiscal Year on June 30. Not surprisingly, the numbers are running low in a time of double-digit unemployment.

Preliminary individual income tax collections for June, 2020, are $246 million (27.2%) lower than those collected in June, 2019. Year-to-date, individual income tax collections for 2019-20 are $936 million, or 11.0%, lower than the comparable 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, which helps explain the precipitous decline in June collections relative to the prior June. Taxpayers who make quarterly estimated payments are typically required to make one such payment on or before June 15 of each year.

Estimated payments and final payments that were otherwise owed in April and June are now due on July 15. Estimated payments year-to-date total $802 million, which are $588 million lower than the comparable period in 2018-19. Individual final payments year-to-date are $409 million, or $281 million lower than the same period a year ago. These reductions partly reflect lower tax payments related to the income tax rate reductions for tax year 2019 enacted under 2019 Acts 9 and 10, but are 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 15 filing date.

So what comes in by next Wednesday the 15th is going to be the critical factor. If the final payments and estimated payments are the same $870 million that they were in FY 2019, we’d see a total decline in FY 2020 income taxes by $66 million, which wouldn’t be far off of the $44.1 million decline in January’s revenue estimates. But the LFB notes that payments into the Wisconsin Dept of Revenue is likely to be lower due to the income tax cuts that were part of the 2019-21 budget. So don’t count on the shortfall being that small.

As for the other main source of state tax revenue, that was down a bit in June. But the LFB also says it was an improvement over the larger declines in the previous two months, reflecting how things were changing in May.

Preliminary state sales and use tax collections in June generally reflect taxes paid for retail sales occurring in May. The coronavirus pandemic resulted in the Safer-at-Home Page 4 order, which took effect on March 26, 2020, and remained in effect until May 13, 2020. Sales tax collections for June, 2020, reflected approximately half a month of increased economic activity due to the expiration of the Safer-at-Home order. While June, 2020,sales tax collections were lower than June collections in the previous year by $9 million, or 1.7%, such collections have improved relative to comparable year-over-year sales tax collections in May (10.1% decline) and April (9.9% decline). Sales tax collections through June, 2020, are $91 million above collections in the comparable 12- month period in 2018-19, representing 1.8% growth year-to-date.

If the year-end adjustments also end with us up 1.8% in sales tax growth, that would only be about $130 million short of January’s estimates.

But within the sales tax figures, there are wild variations that reflect the changes in consumption habits that COVID-19 have caused.

Based on preliminary sales tax data provided by DOR, the economic impact of the coronavirus pandemic and the Safer-at-Home order continued to impact retail industries differently. Taxable retail sales were lower in May of 2020 compared to May in the prior year by 52% for clothing and clothing accessories stores and 38% for food services and drinking establishments. Conversely, May taxable sales in 2020 were higher at nonstore retailers (including remote sellers and marketplace providers) by 110%, building material and garden equipment and supplies stores by 22%, and food and beverage stores by 12%. In contrast to declines of 27% in March and 28% in April of 2020, taxable sales for motor vehicle and parts dealers were higher by 3% in May.

And with Wisconsin now breaking records for new COVID cases, it doesn’t seem like this change in where people are spending their money will end any time soon.

With non-store retailers seeing sales more than double, the LFB notes that this will likely also mean that much of the added sales tax revenue that’s keeping the budget afloat will be given back in the form of another income tax cut in the coming months.

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.

And that income tax cut won’t be realized for most Wisconsinites until they file their taxes in early 2021, meaning an even larger budget hole for this biennium may appear at a time when there is very little time to make up the rest.

Given the $1 billion cushion we had in the FY 2020 budget, there should be a decent amount of money left to carry over, even with a revenue shortfall. But it’s year 2 that the troubles hit, as the budget was already slated to spend $447 million more than it took in, with the assumption of no drop in revenues. Since we’ll be starting from a lower number, and will likely be plagued with high unemployment that was not foreseen at the time of January’s revenue estimates, that likely means the FY 2021 revenue shortfall will be sizable, barring some huge bailout package from DC.

Joint Finance Co-Chair John Nygren reacted to the LFB budget update with this partisan garbage bin of a statement that seemed to indicate that the Marinette Insurance Guy was licking his chops at the prospect of having to force Evers to accept budget cuts as a result of this COVID-19 induced recession.

“This latest memo continues to provide evidence that the Governor needs to do more to reduce state spending,” said Rep. Nygren. “Most of the Governor’s cuts to state spending have fallen on UW System. His claim of a 5% state operations cut wasn’t even close. He exempted 25 agencies including his political friends.”

“The new information again underscores the hypocrisy of Governor Evers and Democrats as the Governor delayed debt payments after being critical of that in the past,” said Rep. Nygren. “Democrats called it a ‘gimmick’ and a ‘fiscal mistake’ when it occurred under the Walker administration. Governor Evers called it ‘racking up debt on our state’s credit card.’”

Hey Johnny, you are aware Walker did that “scoop and toss” during an economic expansion to fill in a budget hole caused by stupid tax cuts that you and the other WisGOPs signed onto. Kind of a different situation than record job losses caused by a killer pandemic.

How dumb do you think we are?

But that also reiterated to me that Governor Evers should jump to action next month, and use the year-end revenue figures to make a determination as to how far in the hole we might be. And call the bluff of John Nygren by repairing the budget through the ACA’s Medicaid expansion, which would save a lot more money now than the hundreds of millions it would have saved in the last budget, because there are nearly 100,000 more people on Medicaid than there were 3 months ago.

The other thing Evers can do to fill in budget holes without cutting spending is by simply delaying the automatic income tax cut for online sales tax revenues to take place on July 1, 2021, or even “double up” with the cuts for 2020 and 2021 at once, in October 2021. The average Wisconsinite wouldn’t see a dime of difference in 2020 (it was only going to increase tax refunds for Spring 2021), and it would make it much easier to get by between September and the end of the biennium on June 30, 2021.

Then, if/when Nygren and the rest of the GOP tries to shoot down Medicaid expansion and the delayed tax cut, they end up being the ones having to NAME THE CUTS right before a 2020 election that doesn’t look very good for Republicans right now. It would cement into a lot of voters’ minds as to who is standing in the way of good changes, and could lead to enough of a wave that breaks the GOP’s gerrymander ahead of 2021's redistricting.

The fiscal side of Wisconsin politics might be tranquil for the next 6-8 weeks, but it needs to heat up right after that, if we truly want to restore some balance to our policies after a decade in Fitzwalkerstan.