Evers vetoes biggest GOP tax cuts, as he should. But could he sign it with Medicaid expansion?

I was wondering when we'd find out what Governor Evers would do with the billions in tax cuts the GOP Legislature sent up to his desk. And we found out today.

.@GovEvers today vetoed three GOP income tax bills, including one to expand the income covered by the state's second-lowest income tax bracket.

See the release:https://t.co/rpG6OH8QYb

— JR Ross (@jrrosswrites) March 1, 2024

The three bills vetoed would have cut the tax rates from 5.3% to 4.4% for married Wisconsin couples making taxable incomes between $38,000 and $150,000 (and everyone above that would have also gotten that tax cut, by the way), exempted income for senior Wisconsinites up to $75,000 single/$150,000 married couples (which sounds good until you realize Social Security and military pensions are already exempted from state income taxes), and increase the tax credit for married couples (to offset the "marriage penalty" in the state's tax code) from a maximum of $480 to $870.

Here's how Evers explained his vetoes.

Gov. Tony Evers today vetoed three Republican-backed bills, which, if enacted, would set Wisconsin on a path toward insolvency, leaving the state unable to meet its basic duties to provide adequate funding for programs and services provided by the state, including education, healthcare, child care, public safety, and aid to local governments in the 2025-27 biennium and beyond. If enacted, together, the three bills would reduce revenues by such a margin that it would likely force the state, even with ordinary revenue growth, to partially or fully drain the Budget Stabilization Fund—also known as the state’s ‘rainy day’ fund—just to provide bare minimum inflationary adjustments to key programs in the 2025-27 biennium.

“I have been proud to sign several income tax cuts during my time in office, including keeping—and, in fact, well exceeding—my promise to provide a ten percent, middle-class tax cut targeted to Wisconsin’s working families,” noted Gov. Evers in his veto messages. “During my first term in office, I proudly signed one of the largest tax cuts in Wisconsin state history, which provided $2 billion in individual income tax relief over the biennium and approximately $1 billion annually going forward. Through this historic tax cut, combined with the tax cuts I signed during my first year in office alone, 86 percent of Wisconsin taxpayers have seen an income tax cut of 15 percent or more, with 2.4 million taxpayers receiving relief. Through the income tax cuts I have already signed into law during my time in office, Wisconsin taxpayers will see $1.5 billion in tax relief annually, primarily targeted to the middle class.

Evers is correct on the assertion that signing all 4 of these tax cuts would not only get rid of most of the $3.15 billion cushion that we have in this current budget, but also screw up the next budget that starts in July 2025.

And especially given how we are just at the start of tax-filing season, it seems prudent to make sure we don’t have revenues disappointing even more than they already have been.

Not too surprising, although I thought the expansion of the married couple credit might make it (it gets larger in order to catch up to inflation on the "marriage penalty"). And keeping the child care tax credit seems like something that makes everyone happy, and doesn't cost all that much (around $161 million a year). Well, at least I THINK Tony will keep it since he didn't veto it. Maybe he's waiting for some press event next week or something.

But Evers made another statement in the press release announcing the veto that grabbed my attention.

In addition to threatening the state’s fiscal health moving forward, if enacted, the bills could result in the state having to repay billions of dollars in federal relief funds it received under the American Rescue Plan Act of 2021. This would completely reverse the progress made in the last five years to improve the state’s fiscal condition even under the best of economic circumstances, jeopardizing critical investments to expand high-speed internet, bolster the state’s workforce, build healthcare infrastructure, support law enforcement and public safety, and address the child care crisis, among other high-priority needs across the state.

I'm familiar with the idea of the state having to be cautious on tax cuts in the possibility of having to give back ARPA stimulus funds, but is that still a relevant concern in 2024?

Here’s how the Legislative Fiscal Bureau described the "ARPA and tax cuts" situation for Wisconsin last Summer.

....[I]f certain law changes reduce revenue compared to inflation-adjusted 2018-19 baseline revenues by more than a de minimis amount (1% of the baseline revenues), then the net reduction in tax revenues are considered to be in violation of the offset provision unless the state identifies countervailing increases in revenue or spending reductions. Under the rule, the amount of SFRF monies [sent to states in the ARPA bill] to be recouped is limited to at the lesser of: (a) the reduction in net tax revenue (measured as the difference between the baseline and actual revenue as of the end of the reporting year); or (b) the aggregate amount of reductions in tax revenues caused by covered changes minus the sum of: (i) reductions in spending compared to the inflation adjusted 2018-19 baseline (net of SFRF funds); and (ii) increases in revenue from other covered changes in law.

DOA is responsible for reporting SFRF-related expenditures under ARPA to Treasury. In a memorandum dated June 2, 2023, DOA informed the Governor and the DOA Secretary that "the state may reduce taxes and fees by $256 million in fiscal year 2023-24 and $458 million in fiscal year 2024-25 before any federal SFRF monies may be subject to possible recoupment" under current estimates.

13. Based on the DOA estimates, any covered law change that reduces state tax revenues by more than $256 million in fiscal year 2023-24 or $458 million in fiscal year 2024-25 could potentially be subject to recoupment under ARPA unless the state can identify a similar-sized change in law that increases state revenue or decreases spending relative to the inflation-adjusted 2018-19 baseline. The DOA memorandum did not indicate baseline expenditures for 2018-19, which are needed to determine amounts that could be subject to recoupment.

DOA's estimate does not adjust baseline revenues after 2018-19 to account for the phase in of fiscal effects of exempt law changes that are not covered under the ARPA recoupment provision for various reasons, such as being enacted prior to the covered period or federalizing state law. In January, 2023, this Office sought clarification from Treasury whether baseline revenues should reflect exempt changes in law, but Treasury has not yet responded.

Basically, any tax cuts need to be offset by

1. Extra revenue resulting from growth beyond inflation.
2. State spending cuts that go beyond the amount of federal ARPA money that may be used to “fill in” the difference.
3. Tax increases in other areas.

Wisconsin’s 2018-19 tax revenues were a total amount of $17.341 billion. Then add in a relatively high amount of inflation in the 4 ½ years since June 2019, and (based on CPI changes) that ”baseline” ends up being just over $21.04 billion today, with 5 more months of inflation left until the end of the 2024 Fiscal Year.

At the time of the LFB’s publication, it was estimating revenues of around $21.4 billion for June 2024, so I can see where those numbers come from. Then state revenue estimates for the 2024 Fiscal Year were lowered to $21.055 billion in January, so in theory there is little to no cushion to be had without risking some clawback of ARPA funds.

But would the Treasury actually do that? I doubt it, based on events of the last year. For example, in January 2023, an Appeals Court in the South ruled that states didn’t need to worry about any tax cuts being clawed back.

A provision of the American Rescue Plan Act which would have prevented states from using pandemic relief funds to offset new tax cuts cannot be enforced, a unanimous panel of the 11th Circuit ruled on Friday.

The Atlanta-based appeals court found that the rule barring states from using relief funds to offset a decease in their net tax revenue through the end of 2024 violates the spending clause of the U.S. Constitution. The language of the provision is too ambiguous and leaves state governments unable to ascertain the conditions imposed on their acceptance of the money, the 42-page ruling explains.

“The Rescue Plan’s offset provision has affected the states’ sovereign authority to tax by binding them to a deal with ambiguous terms and placing them on the hook for billions of dollars in potential recoupment actions,” U.S. Circuit Judge Andrew Brasher wrote on behalf of the panel.

That ruling also offers a great example of Confederate thinking, with “state sovereignty” references, and a belief in allowing red states to take huge amounts of federal dollars (which disproportionately come from blue states), and then use the cushion of DC dollars to cut their state's taxes.

That Appeals Court ruling came after the US Supreme Court chose earlier in that same month not to deal with an attempt from Missouri and other states to get the ARPA tax cut provision thrown out. I'll note that Missouri's argument that the Feds couldn't do this wasn't outright rejected, but lost because the case was a hypothetical, and not a real situation at the time.

A federal district court dismissed Missouri's case, finding the state lacked legal standing to challenge the tax mandate, and its suit was premature. The U.S. Court of Appeals for the 8th Circuit affirmed, finding that the state hadn't alleged "any intent to engage in conduct" forbidden by the tax mandate on its face, or Treasury Secretary Janet Yellen's interpretation of the provision.

Missouri, according to the 8th Circuit, needed to allege that tax cuts under consideration by its legislature would reduce net revenue, and that the state would fail to offset that reduction through allowable means. Missouri's failure to do so meant it "has only alleged a conjectural or hypothetical injury, not one that is actual or imminent. It has also not alleged a future injury that is certainly impending or even likely to occur," the appeals court found.

As a reminder, APRA funds need to be fully set aside by the end of calendar year 2024, and spent out by the end of 2026. But these numbers are tracked on a yearly basis, so in theory the amount of ARPA money that would need to be clawed back from a tax cut would be funds used in 2024, and I can't think that much state-level ARPA money will be used in the 2024 or 2025 Fiscal Year. So I’d say the risk that we’d have to pay anything back is very small.

But I do know of one way to make sure the budget stays in a good place AND allow room to cut taxes.

Would #wiright trade tax cuts for Medicaid expansion?

GOP income tax cut costs $750 mil a year, Medicaid expansion saves a similar amount. @GovEvers should call the bluff, and make that offer.

Let's see if Robbin' Vos ends a 10 1/2 month paid vacation for that. Or not.#wiunion https://t.co/pR0VINqT82

— JakeEdwards (@JakeMadtown) February 29, 2024

That’s right, we could pay for these tax cuts if we stopped being the only non-Confederate state east of the Mississippi to take the ACA’s Medicaid expansion. In the most recent budget, Governor Evers’ administration estimated that taking Medicaid expansion would save $1.62 billion over 2 years, which just happens to be similar to the ongoing cost of $752 million a year for the GOP’s plan to cut the 5.3% tax rate to 4.4% for middle-class and upper-middle class income levels.

Seems like it would be a good idea for Evers to call the Legislature off of their paid vacation with a special session with a simple ask "Give me Medicaid expansion, I'll give you the rate cuts." It allows for Wisconsinites to see higher take-home pay as early as July 1, due to the adjustment of withholding tables (a one-time expense we can afford), and Wisconsinites would still get a sizable tax refund in early 2025, due to the first 6 months of higher withholdings.

Who says no? It gives more medical coverage to working-class Wisconsinites, gives a tax cut for the middle and upper classes, and keeps our budget in good shape. This seems like the right way to do it, if GOPs and Governor Evers actually want to get it done.