Friday, June 17, 2016

Income tax drop in May leaves Wisconsin budget in uphill battle

I had mentioned before that May's revenue report would tell us if the state had a good chance of meeting the Legislative Fiscal Bureau's revenue estimates for Fiscal Year 2016, or if we were looking at a shortfall. The inconclusive April revenue report made this especially crucial, because of a large upward "adjustment" in income tax revenues, anticipating that many of April's month-end income taxes would post on Monday, May 2.

Well, the Wisconsin Department of Revenue dropped those figures late Friday afternoon (uh oh) and while the DOR was right to anticipate a large posting on May 2, it wasn't enough to save the month. In addition, Fiscal Year 2015 had Memorial Day fall on the 31st, which meant that those revenues didn't show up until June 1, leading a large upward adjustment for that year, but not this year. The bottom line- May's income tax revenues sucked.

Adjusted income tax revenues, May 2016 vs May 2015
May 2015 $502.232 million
May 2016 $470.736 million
CHANGE -$31.496 million (-6.27%)

This is doubly interesting in light of the fact that the May jobs figures released yesterday showed Wisconsin jumping into the 20th place in the US for year-over-year job growth, the highest mark in Scott Walker's 5 1/2 years in office. But the lousy income tax figures draw the strong job numbers into question- either we really aren't adding that many jobs and these rosy numbers will be revised down, or the jobs that are being added are lower-wage ones and not adding much to income taxes.

The bad May income tax revenues also leave the state below the 6.61% growth rate that the Legislative Fiscal Bureau estimated the state would have back in January, as year-over-year income tax revenues are only growing at a 5.45% rate with 1 month to go. If that rate would hold for the June and year-end postings, it would mean an income tax shortfall of about $85.0 million for Fiscal Year 2016, and leave us a bit further in the hole for the new fiscal year that would start on July 1.

The DOR report showed that other taxes are generally in line with the LFB estimates (in fact, the trend indicates that all other taxes will be around a combined $10 million above estimates). But even in those stats is one worrying trend, and that's in corporate tax collections. In the first half of Fiscal Year 2016, corporate taxes were coming in 7.6% above the same time period in FY 2015. But then the calendar flipped to the actual year of 2016, and the accompanying tax season, and corporate tax collections have nose-dived in Wisconsin.

Corporate tax collections, Jan-May 2016 vs Jan-May 2015
Jan-May 2015 $341.014 million
Jan-May 2016 $298.972 million
CHANGE -$42.042 million (-12.33%)

In addition to a profit recession, you have to wonder if this is a direct effect of certain tax changes that have hit with the new year. And what's especially concerning is that the LFB projected corporate tax revenues to rise by 5.56% in the next Fiscal Year. That would be quite a turnaround from where we're going today.

We're not in immediate need a budget repair bill with this potential revenue shortfall- the sizable cushion put into the budget and Scott Walker's skipped debt payment of $101 million should keep the balance well above $0 for this year. But with a built-in deficit of $151 million for Fiscal Year 2017, and revenues more likely to be revised down than up as the year moves on (both due to the shortfall and the slowing US economy), an already-tenuous state budget may be getting even more tricky going forward.

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