Tuesday, January 20, 2015

December revenues widen Wisconsin's budget hole even further

Another month, and another subpar report on Wisconsin tax figures from the state’s Department of Revenue. This time, it shows that income and corporate taxes collected are going down even faster, and even sales tax growth slowed some. The state’s overall tax intake also on the decline.

Wisconsin tax revenues, Dec. 2014 vs Dec. 2013
Income taxes -3.2% vs Dec 2013
FY 2015 Year-To-Date -6.4% vs FY 2014 YTD

Sales taxes +3.7% vs Dec 2013
FY 2015 Year-To-Date +4.7% vs FY 2014 YTD

Corporate taxes -11.2% vs Dec 2013
FY 2015 Year-To-Date -8.0% vs FY 2014 YTD

Excise taxes -2.1% vs Dec 2013
FY 2015 Year-To-Date -2.6% vs FY 2014 YTD

Total taxes collected -2.6% vs. Dec 2013
FY 2015 Year-to-Date -2.6% vs FY 2014 YTD

To control the damage from that report, the DOR quickly followed with this document, which tries to indicate that revenues are doing juuuuust fine, and that there’s nothing to worry about. However, a quick look inside the numbers shows that there is plenty to fear from what our current and future budget numbers are likely to hold.

Let’s start with the income tax figures, since those make up the majority of the state’s General Fund revenues. These figures have been down compared in Fiscal Year 2015 compared to Fiscal Year 2014 in no small part due to two rounds of Koo-Koo tax cuts, and the moving of withholding tables in April 2014 that have reduced the amount of money that was coming in to the state (what, you didn’t notice the extra $10 a paycheck you got?). The Legislative Fiscal Bureau estimated this change in withholding tables to be equivalent to about $55 million a month (as noted under Provision 16 on Page 10 of this PDF). As a result, it is only fair to adjust the income tax figures accordingly, to make an apples-to-apples comparison, which means that we should add $330 million to the income tax totals for FY 2015 at this time.

Adjusted income tax revenues YTD, FY 2015 vs FY 2014
FY 2014 YTD $3.617 billion
FY 2015 YTD $3.714.8 billion (+2.7%)

A 2.7% increase in income taxes looks good on first glance, and that $330 million in added revenue also means the adjusted overall tax revenue increase is just under 2.3%. But this hides a second concern that will become more apparent in the coming months, because what goes down must come back up when it comes to adjustments for this. And the LFB spells out how that’ll happen.
In 2014-15, withholding taxes will be reduced for twelve months, which will be partially offset by lower refunds (and larger remittances) paid in the Spring of 2015. However, the lower refunds will reflect only nine months of reduced withholding taxes in calendar year 2014 (from April through December), which means there will be a second one-time loss in 2014-15. Beginning in 2015-16, the reduced withholding taxes will be offset by lower refunds and higher remittances during the tax filing season [in Spring 2016].
That’s right, we’re looking at lower tax refunds for this year, so I hope you didn’t blow all of that $10 a paycheck already.

As a result, income tax collections should go up compared to 2013-14 solely on the basis of these lower tax refunds. Here’s my crude calculation of how that adjustment will work:

Jan ‘15 adjust -$55 million due to lower withholding vs 2013-14
Feb ’15 adjust -$55 mil for withholding, +$165 mil for lower refunds
Mar ’15 adjust -$55 mil for withholding, +$165 mil for lower refunds
Apr ’15 adjust NONE for withholding, +$165 mil for lower refunds
May- June 2015 no adjustments either way.

So now that we know the adjustments for income taxes, let’s go back to the DOR projection of revenues, and see what needs to happen to hit the target by the end of June.

Jan-June 2015 change needed to hit DOR income tax target
Adjusted income tax change needed +9.9%
Current adjusted income tax change FY 2015 +2.7%

We can do the same analysis for the other 3 main taxes in Wisconsin as well, and you’ll notice corporate taxes are especially lagging (calling Dr. Morbius!).

Jan-June 2015 Sales tax change needed to hit DOR target
Sales tax change needed +3.7%
Current sales tax change FY 2015 +4.7%

Jan-June 2015 Corp. tax change needed to hit DOR target
Corp tax change needed +16.1%
Current corp tax change FY 2015 -8.0%

Jan-June 2015 Excise tax change needed to hit DOR target
Excise tax change needed +3.7%
Current excise tax change FY 2015 -2.6%

I’ll be generous and assume all of the remaining minor taxes add up to the DOR projections, so based on these four categories, here’s what we get.

Projected budget revenue pace vs DOR projections, FY 2015
Income tax -$247.5 million
Sales tax +$26.3 million
Corporate tax -$118.4 million
Excise tax -$24.6 million

And remember, the DOR estimated a $132 million budget shortfall for this fiscal year even with their rosy revenue projections, so add $367 million onto that, and you are right at $500 million that has to be made up in the next 6 months. And with another $735 million or so that must be added onto the $2.2 billion deficit for the next budget, because the revenue shortfall means a lower base to start from, you're looking at a looming 2015-17 deficit near $3 billion.

Yep, we're still in the ditch, and no matter how the Walker appointees try to spin it, we’re going to stay there, barring some miraculous boom in revenues between now and the end of June. And as Sunday's Packer debacle reminded us, the only miracles in these parts recently seem to be the negative kind.


  1. The thing is, FY14 ended with a General Fund balance of $517m as of June 30th last year, so if we're on course to be $500m under water as of June 30th this year then we'd expect the General Fund to run out of money on or around January 2nd.

    Tax revenue (especially income tax revenue) doesn't tend to come in evenly (January receipts tend to run high), but it would seem that Huebsch will have to start using extraordinary measures to keep state government running in the next few weeks (if he hasn't already).

  2. Thank you for the shout out Jake, very kind of you. I agree with your analysis of the decline in general, but would like to point out a possible alternate scenario (which of course involves something about in-the-trenches tax practices).

    The numbers you show could also reflect this:

    That high-income individuals are reducing their withholding (and, more likely, their quarterly estimated payments) while some lower-income taxpayers are accepting their additional $10.00 a week. But that many others of the latter group have been told by their tax practitioner to increase their withholding so that they get the same-sized refund check (the reason for this is that your tax clients tend to judge you by the size of the refund check—strange but true) resulting in a modest decline in income tax collections. This decline could become decidedly greater. The proof, one way or another, comes in January-March, which is tax refund season for the DoR. If I’m right, the refunds will be larger than anticipated and the current year deficit will grow. So we’ll see.

    But it is the M&A credit that I think is driving the staggering drop in corporate taxes. According to the DFI, over 31,000 LLCs were formed in 2014, versus nearly 2,600 corporations. Contrast that figure to the nearly 6,000 fewer LLCs formed in 2010 with the nearly the identical number of corporate formations. I think this is consistent with business entity reorganization to take advantage of the M&A credit against personal income taxes. As corporate business operations are transferred to pass-through entities the associated corporate revenue stream (in a time of robust corporate earnings) simply is drying up. LLCs do not pay taxes, and make no estimated payments to Wisconsin.

    The other anomaly, is the dip in excise taxes (in Wisconsin that equals taxes on alcohol and tobacco—there is no other significant excise source) while sales tax revenue grows. While some of the fall off in excise taxes is no doubt due to the aging of the state population, some of it represents income limitation. So why are sales taxes gaining? The major source of sales taxes are those levied on automobile and truck sales—you cannot avoid these sales taxes by buying on the internet as you must register your vehicle and prove sales tax payment. So google “sub prime auto lending” and see what pops up. The use of sub-prime financing for auto and truck loans has taken on alarming proportions. My conclusion is: an unsustainable bubble in car sales founded on sub-prime financing driving an increase in sales tax collections. More bubble inflation of tax revenues.

    Months ago I said that I could see the state facing a $3 - $3.5 billion deficit in the next biennial budget. Now, with Walker maintaining “there is no budget problem” that needs a budget repair bill (translation: we are going to use accounting devices to push that deficit into the next biennium and then announce that the state has “a spending problem”) I feel more and more assured of that initial estimate.

    Dr. Morbius

    1. Doc- Interesting thought on people adjusting their withholdings, which would certainly explode the in-year and future deficits if that was done (and be a much bigger problem). My wife encouraged me to do that on the federal side (by $20 a paycheck), and I'd imagine richer people would be more sensitive to such a thing.

      The next 3 months of returns are certainly the key, as they were last year when the revenue shortfall showed up (after taxes were cut, conveniently)

  3. As for "accounting measures" to push off the current-year budget deficit- the problem is that many of the aids to localities (a huge part of the budget) have already had 3/4 of the aid payments already go out, and the calendar 2015 payments are already baked in the cake. Maybe lower gas prices and interests rates give a short-term help, but there's honestly not all that much you can cut in the next 5 months other than furloughs and/or shutdowns in services