Monday, March 2, 2015

Hidden in the union fight- Wisconsin budget slips further away

Now that I'm back in the state, I wanted to go into more detail on the newest Wisconsin revenue report, which was dumped as the State Senate Labor Committee debated the work-for-less bill last Tuesday. And there was a good reason they tried to hide it, as Wisconsin's revenues continue to badly lag, and the state's current and future deficits seem set to rise even further.

For January 2015, overall revenues were barely any larger than they were a year ago.

Year-over-year changes in revenue, Jan 2014 vs Jan 2015
Income taxes -1.1%
Sales taxes +6.6%
Corporate taxes -21.1%
Excise taxes -4.5%

Yes, the income tax drop was largely a result of an estimated $55 million in lower withholdings (they'd be up 4.4% if you include that), but the state needs to have major increases in revenues just to match the projections in the Legislative Fiscal Bureau's revenue estimates from January. Let me remind you of this passage.
Over the remainder of 2014-15, it is anticipated that collections will increase by 15.1% due to several factors. First, refunds for tax year 2014 will be significantly reduced and final payments will be increased because of the decreased amount of withholding taxes paid since last April. Also, beginning in April, 2015, growth in withholding collections should improve significantly because the current-year receipts will no longer be compared to collections that were based on the previous, higher withholding tables. In addition, it is believed that federal tax increases enacted late in 2012 induced taxpayers to realize additional investment income in that year, which otherwise would have been realized in 2013. This is believed to have artificially suppressed collections last Spring, which should lead to a "bounce-back" this year. These positive impacts will be partially offset by the effects of state tax reductions, primarily the decrease in the bottom marginal tax rate enacted in 2013 Act 145 and the continued phase-in of the manufacturing and agriculture credit. As noted, for the entire year, income tax collections in 2014-15 are expected to be 4.1% higher than in 2013-14.
In order for the state to match the LFB's income tax numbers, it needs to exceed 2014's figures from February-June by $521.6 million (21.3%). A rough estimate indicates that the state would make back $385 million due to lower tax refunds for 2015 (if you haven't done your taxes yet, you've been warned), but there still needs to be a nearly 6.0% increase in underlying income taxes to reach the LFB's numbers. If underlying income tax growth stays at January's 4.4% rate for the last five months, then income tax revenues would fall short by around $29 million, even with the bump resulting from the lower income tax refunds.

And the corporate tax gap is even larger. As you can see above, corporate tax collections were down more than 21% in January, and are down 8.7% for the first 7 months of Fiscal Year 2015. Somehow, the state has to increase its corporate tax haul by 2.4% in the last 5 months of FY 2015 to reach the LFB projections, and that's despite the loss of revenue due to added tax write-offs for corporations that were part of the second round of the Koo-Koo tax cuts. If the 8.7% loss of total corporate tax revenues were to hold, then collections would come up $52 million short of the declines that the LFB projected.

I'll remain positive and assume sales taxes stay in line for the rest of the fiscal year (they're up 5.0% for the Fiscal Year, and needs to be up 5.9% for the last five months to reach the LFB goals). Given the 6.6% increase in January, I'll say that's possible. Excise taxes could also come in line, despite being a bit short for the time being (they need to limit their decrease to 1.7% between now and June), and other taxes are relatively small and I'll assume they'll work out.

But that still means there is $81 million to make up somewhere, on top of the $283 million in deficits that the LFB said would have to be made up in January. Even with the $50 million in payments from the Potawatomi, Wisconsin still needs to find a way to make up $314 million in less than 4 months. We found out where the Walker Administration came up with $108 million of that amount last month, by skipping a debt payment and shoving those expenses into future years. But the Walker folks continue to come up short on the revenue side, and even though they are trying every trick in the book to avoid a budget repair bill, it is likely that one bad revenue report in the tax season months of February or March will guarantee that the current and future budgets must be formally fixed with leigslation.

If these guys were operating on any sort of semblance of fiscal responsibility, they'd bite the bullet and use this extraordinary session for fixing the budget while there's still some time to adjust, instead of gutting workers' wages and expanding inequality with work-for-less. But as Scott Walker himself admitted over the weekend in a major Freudian slip, he doesn't think of himself as the current governor of Wisconsin, and instead is using us Cheeseheads to show off to GOP oligarchs and grab their donations. However, I can't see how the imploding state budget in Wisconsin is something that'll make Scotty look good to any serious fiscal hawk, and unlike the takers on Wall Street, you'd think a lot of everyday GOP voters still do care about that reality.


  1. Jake,

    One of the schemes that Walker is using is the total freeze on hires and pay increases announced a couples weeks ago. The freeze is total, no new hires whatsoever and no pay increases for state workers (but not the UW) regardless of where in the process the increase was. In order words, if your increase hadn't hit your pay check, you won't be seeing any raise until further notice.

    Dr. Morbius

    1. As of now, I do know there isn't a hiring freeze, but yes, the salary and Comp Reserves line is basically frozen for the next 2 1/2 years. And I've heard rumblings of plenty of retirements happening again over the coming months. Ugh

  2. It is difficult to imagine corporate revenues recovering much when an additional phase of manufacturing and agriculture tax credits took effect January 1, 2015. Of course these credits also reduce individual income tax on owners of these businesses if they are in a form other than c-corp.

  3. I don't believe there is any hope of recovery for the corporate tax collections. December 15th was the deadline for the 2014 estimated corporate tax payments, so that cake is baked. With the full impact of the M&A credit upon us, the conversion incentive for C corporations to become pass-through entities is now overwhelming for any firm that that achieve recognition as a manufacturing entity (how can a non-manufacturer become a manufacturer you say? well you'll have to pay a tax expert to find out--but it can be done). And remember the Walker Budget requires a rebound to pre-M&A credit levels for corporate tax collections and then growth over that in the 2nd year of the biennium in order to "balance".

    Dr. Morbius