Friday, January 22, 2016

Why I think WIsconsin's revenue shortfall will only get bigger

I wanted to jump back to yesterday’s revenue estimates from the Wisconsin Legislative Fiscal Bureau, because I think there are a few assumptions in that document that may not quite work out. And it if they don’t work out, we will likely have much worse to worry about than yesterday’s revenue shortfall (detailed in this post).

The first item of concern comes from the LFB’s national economic data, which already was downgraded from what was assumed in last year’s estimates.
Economic growth in 2015 was somewhat slower than projected last January. Real (inflation-adjusted) growth in U.S. gross domestic product (GDP) is now estimated at 2.4% in 2015, which is lower than the projection of 3.1% for that year.
The LFB also estimated 2016’s GDP growth at 2.7% and 2017 at 2.9%. This helped lead to some of the reasons behind the downgrade in revenues, as future income growth was estimated down as well. However, I even find those subdued expectations of GDP growth to be questionable, as the Congressional Budget Office came out with lower estimates when it gave its federal budget projections earlier this week.
CBO expects that the economy will grow more quickly in 2016 and 2017 than it did in 2015, when real (that is, inflation-adjusted) GDP grew by an estimated 2.0 percent. The agency anticipates moderate economic growth in subsequent years, constrained by relatively slow growth in the labor force.

The Economic Outlook for 2016 Through 2020
If current laws governing federal taxes and spending generally remained in place, by CBO’s projections, real GDP would grow by 2.7 percent this calendar year and by 2.5 percent in 2017, as measured by the change from the fourth quarter of the previous year…
Now you may say that a 0.4% difference in the first year isn’t much, or that another shortfall in GDP in 2017 wouldn’t be a big deal. But you put all 3 of those years together, and you end up at $136 billion in lowered real GDP. Wisconsin’s share of that would be just over $2 billion of that reduced activity, and obviously that would work its way down into lowered revenues.

The LFB also noted that IHS Global Insight (who they rely on for their estimates) had reduced their profit growth estimates from last year’s forecast. But those figures still counted on profits to spring back for this year and next year.

Global Insight corporate profit projections
2015 -1.6%
2016 +4.0%
2017 +2.8%

But even those mediocre numbers for 2015 and 2016 may be too high. Take a look at what this article out today from Reuters has to say on the subject.
Fourth-quarter 2015 earnings for S&P 500 companies are projected to have fallen 4.5 percent from a year ago, with a decline of 3.5 percent in revenue expected. Earnings fell 0.8 percent in the third quarter of 2015, Thomson Reuters data shows.

In the past week, first-quarter 2016 earnings estimates have fallen by more than 1 percentage point, flipping the year-over-year outlook for the quarter to a decline of 0.4 percent from a gain of 0.8 percent.
It would take quite a bounce-back in corporate profits in the second half of this year to reach those 4.0% estimates of annual profit growth, let alone the questionable nature of a decline of only 1.6% for 2015.

Those are the macro threats to fulfilling the LFB’s revenue estimates, but there are also concerns about the LFB’s assumptions of revenue growth being strong for the first half of 2016. The first deals with income tax collections, which LFB already revised down by nearly $46 million in this Fiscal Year and over $188 million in 2016-17. But the scary part is that these lower figures still include a fiscally positive assumption for the next 6 months.
Based on preliminary collection information through December, 2015, individual income tax revenues for the current fiscal year are 5.1% higher than such revenues through the same period in 2014-15. A higher rate of increase (7.9%) is anticipated over the next six months largely because fewer refunds are expected for 2015 tax returns than were processed for 2014 tax returns. A lower level of refunds will occur this year because the withholding table change that took effect in tax year 2014 affected withholding levels for nine months in the 2014 tax year, but all 12 months in the 2015 tax year. Because withholding changes do not affect individuals’ tax liabilities, lower withholding levels result in lower tax refunds.
But what if that presumption of a lower amount of refunds doesn’t hold, and income tax collections stay at the 5.1% (actually 5.07%) rate of increase that we’re at right now? We end up $113 million below the projections that just came out. That type of shortfall wouldn’t necessarily trigger a budget repair bill, but eliminates the miniscule cushion we have, and would require using all $726 million in lapses built into our budget, which likely means furloughs and in-year cuts.

In addition, the lower amount of tax refunds makes me skeptical that the state of Wisconsin can reach the LFB projections on another type of revenue.
….Sales tax collections through December, 2015 are 2.3% higher than the same period in 2014 and are projected to accelerate to 3.9% for the remainder of the 2015-16 fiscal year.
So the LFB is counting on sales taxes to pick up in the next 6 months? Despite the fact that Wisconsinites will be seeing fewer tax refunds, and have less money in their pockets to spend on items that generate sales tax revenue, the LFB thinks the rate of growth will pick up?

That’s not the direction that was indicated in December’s report from the Wisconsin Department of Revenue. In a month where a lot of shopping takes place, Wisconsin sales taxes went up all of 0.1%, and since gasoline isn’t susceptible to Wisconsin sales taxes, the drop in gas prices didn’t reduce that total at all (in fact, it should have driven it higher, since people would have had more money to spend on sales tax-generating items). Yesterday’s awful Wisconsin jobs report said that the retail sector dropped 4,500 seasonally-adjusted jobs last month, which indicates that the state’s stores aren’t counting on more spending coming. So I’d be very surprised if we see that nearly 4% increase in sales tax collections that we need to cover that projection.

Lastly, the stock market dive of the last few months may put a damper on Wisconsin revenues. 2015 was the S&P 500’s first down year since 2008, and it’s dropped another 6.7% in the first 3 weeks of 2016. Selling stocks at a loss reduces overall incomes, which means there could be another hit to revenues coming in the near future. The LFB admitted at the end of their revenue report that the 2016 declines in the stock market were not taken into account, and if that decline continues, it seems quite possible that this becomes another source of a revenue shortfall.

Now, don’t take this as criticism of the LFB themselves- they’re probably the best agency around when it comes to analysis and giving information, which is why it is critical for them to remain as the independent organization that it has always been (with the eradication of civil service by the ALEC crew in the Capitol, we need as much independent analysis as we can get). But I am saying that recent state data and the declining national outlook on the economy may prove their estimates to be too rosy vs what we could see over these next 18 months. Which means that an already-bad budget situation stands a strong chance of becoming much worse. 


  1. Great post. You make a persuasive case that the next revenue forecast could be considerably worse than this one.
    One other thing I'm very worried about is that Congress might add to Wisconsin's budget problems. Our state currently gets roughly $120 million per year from applying the sales tax to Internet services, but that could be in jeopardy because Congress is seriously considering a bill that would prohibit states like Wisconsin from continuing to collect that tax. Enactment of such legislation would create substantial budget problems for WI in coming years.

    1. Thanks Jon- I hadn't heard about Congress trying to prevent states from charging sales tax on internet items. That's a horrid giveaway that gives an advantage to those companies, and would also be a major budget hit, as you note.

      I appreciate the kind words, and keep up the great work at the Wisconsin Budget Project (read it, folks).