New rules for stimulus funds means less $$$ for Wisconsin, with tax cuts on the table

Yesterday, the US Treasury Department released rules for the new stimulus program that will give billions to Wisconsin’s state and local governments. And it had quite a few items that are worthy to dig into, as it will cause some changes in how this will be carried out, and likely have a real effect on the upcoming state budget debate.

First, the new rules clarify what the money can be used for, and it boils down to 4 main ways.

These provisions give force to Congress’s clear intent that Fiscal Recovery Funds be spent within the four eligible uses identified in the statute—(1) to respond to the public health emergency and its negative economic impacts, (2) to provide premium pay to essential workers, (3) to provide government services to the extent of eligible governments’ revenue losses, and (4) to make necessary water, sewer, and broadband infrastructure investments—and not otherwise. These four eligible uses reflect Congress’s judgment that the Fiscal Recovery Funds should be expended in particular ways that support recovery from the COVID-19 public health emergency. The further restrictions reflect Congress’s judgment that tax cuts and pension deposits do not fall within these eligible uses. The Interim Final Rule describes how Treasury will identify when such uses have occurred and how it will recoup funds put toward these impermissible uses and, as discussed in Section VIII of this Supplementary Information, establishes a reporting framework for monitoring the use of Fiscal Recovery Funds for eligible uses.

And to add on to the question of “providing services to the extent of revenue losses”, the new rules say that state and local governments can count on a decent rate of growth to fill those “losses”.

For purposes of measuring revenue growth in the counterfactual trend, recipients may use a growth adjustment of either 4.1 percent per year or the recipient’s average annual revenue growth over the three full fiscal years prior to the COVID-19 public health emergency, whichever is higher. The option of 4.1 percent represents the average annual growth across all State and local government “General Revenue from Own Sources” in the most recent three years of available data. This approach provides recipients with a standardized growth adjustment when calculating the counterfactual revenue trend and thus minimizes administrative burden, while not disadvantaging recipients with revenue growth that exceeded the national average prior to the COVID-19 public health emergency by permitting these recipients to use their own revenue growth rate over the preceding three years.

And from what I can tell, Wisconsin averaged revenue growth slightly above that amount for the 3 years measured. So we may have plenty of leeway to show revenue “loss” for FY 2020 or FY 2021, giving an ability to use a certain amount of stimulus funds to backfill spending, which is likely something WisGOPs will try to do as the budget goes forward.

They can't wait to get their hands on it.

As for another item on the WisGOP wish list, you may know that the stimulus bill had a provision put into it that prohibited states from using the federal funds as a reason to cut taxes instead of actually do something with the money (not surprisingly, ALEC/GOP states are suing to be given the chance to blow stimulus money on tax cuts). But the new rules set out by the Treasury Department give some clarification to those limits, and may open the door for WisGOPs.

The Interim Final Rule implements these conditions by establishing a framework for States and territories to determine the cost of changes in law, regulation, or interpretation that reduce tax revenue and to identify and value the sources of funds that will offset—i.e., cover the cost of—any reduction in net tax revenue resulting from such changes. A recipient government would only be considered to have used Fiscal Recovery Funds to offset a reduction in net tax revenue resulting from changes in law, regulation, or interpretation if, and to the extent that, the recipient government could not identify sufficient funds from sources other than the Fiscal Recovery Funds to offset the reduction in net tax revenue. If sufficient funds from other sources cannot be identified to cover the full cost of the reduction in net tax revenue resulting from changes in law, regulation, or interpretation, the remaining amount not covered by these sources will be considered to have been offset by Fiscal Recovery Funds, in contravention of the offset provision. The Interim Final Rule recognizes three sources of funds that may offset a reduction in net tax revenue other than Fiscal Recovery Funds—organic growth, increases in revenue (e.g., an increase in a tax rate), and certain cuts in spending.

In other words, if the state already had a budget surplus before there was a dime of federal stimulus money coming in, or if some kind of spending reduction was going to happen without stimulus funds, then taxes can be cut. And we know Wisconsin is likely to have a sizable amount of money to carry over into the 2021-23 biennium.

The new Treasury guidelines also say that if the stimulus bill cut taxes at the federal level, then states can match those rules at their level. Some of that has been done by the WisGOP Legislature and signed into law by Governor Evers, but one particular tax cut for 2020 wasn’t adopted at the state level, much to the chagrin of Dem State Senator Tim Carpenter.

“Yesterday, the Wisconsin State Senate Republicans turned their backs on the Wisconsinites who had lost work through no fault of their own by refusing to provide a temporary tax break on up to $10,200 of unemployment compensation benefits received in 2020 and 2021, similar to what Congress and President Biden have provided at the federal level. This was the last chance that we had before the extended income tax filing deadline on May 17th to provide this to those of our neighbors who lost their work through no fault of their own during the pandemic.

“In February, my colleagues wasted very little time in providing a tax break to the businesses who relied upon loans and grants from the federal government to weather the economic effects of COVID-19, which was also done to mirror the actions of Congress and the President. That action reduced state revenues by approximately $500 million over four years. I first proposed that we provide a similar tax break for employees who lost work through no fault of their own as an amendment to that bill which provided a blanket tax exemption on the PPP loans that businesses received.

“The legislation to provide something similar to individuals who lost their source of income was estimated by the Legislative Fiscal Bureau and Department of Revenue to cost the state less than $121 million in each year, and would have provided an estimated average return to the recipients between $250 and $500 in addition to reducing their overall state income tax burden by $10,200, possibly helping them become eligible for additional tax credits.

Those are some interesting curveballs, but the bigger one may have been the Treasury finalizing how much money is going to come out, and how it’s going to be doled out. It didn’t work out in Wisconsin’s favor.

Wisconsin receiving $700 million less than expected from federal stimulus https://t.co/93Noy3RQKE via @MSpicuzzaMJS

— Molly Beck (@MollyBeck) May 11, 2021

An estimate from the Congressional Research Service at the time of the American Rescue Plan's passage projected that Wisconsin would get $3.2 billion in state recovery funds.

But under the allocation announced this week by the U.S. Department of Treasury, Wisconsin will receive $2.5 billion in funds — and the money is set to be sent in two payments one year apart.

Gov. Tony Evers and Sen. Tammy Baldwin called the news "problematic."

"This will significantly reduce the funding that will be available for Wisconsin's current pandemic response operations and to continue to meet immediate needs and restore economic well-being," Evers and Baldwin wrote in a letter Tuesday to U.S. Treasury Secretary Janet Yellen.

So why is Wisconsin getting fewer Federal funds? Because we’ve rebounded from the COVID-19 recession better than most places. Here’s the Treasury Department explanation.

The Secretary has determined to provide in this Interim Final Rule for withholding of 50 percent of the amount of Fiscal Recovery Funds allocated to all States (and the District of Columbia) other than those with an unemployment rate that is 2.0 percentage points or more above its pre-pandemic (i.e., February 2020) level. The Secretary will refer to the latest available monthly data from the Bureau of Labor Statistics as of the date the certification is provided. Based on data available at the time of public release of this Interim Final Rule, this threshold would result in a majority of States being paid in two tranches.

Wisconsin was at 3.8% unemployment in its last jobs report, which isn’t all that different from the 3.3% rate we were at in Feb 2020, so we are far under that 2% numnber.

Now, a lot of people have left the work force and there are nearly 150,000 fewer jobs, but that’s not what the Treasury is looking at. And so Governor Evers will only have $1.265 billion of stimulus to send out between now and mid-2022, with the second payment arriving in 12 months. Quite a bit less than $3 billion all at once.

Both of these items are going to change the calculus on how much can be available for the next state budget. And I didn't even mention the possibility of using additional federal and state aid to schools as a way to cut property taxes that go into those schools (which is allowed, as I read it). Keep following the money and seeing where it flows, as it's still going to have a big impact, even if we aren't going to get as much (or as fast) as we thought.