Monday, January 22, 2018

$138 mil more to play with, but it's not really because revenues are booming

Last week, we found out that there is a bit more breathing room in the current Wisconsin budget, as the Legislative Fiscal Bureau said that there would be an extra $137.5 million in the state's bank account, bumping the state's cushion up to $385 million for the next 17 months.

First, how did the projected $137.5 million appear? The LFB document indicates that it’s a combination of slightly better revenue figures, and savings from refinancing more debt as a result of changes in tax law.
The $137.5 million is the net result of: (1) an increase of $76.3 million in estimated tax collections; (2) an increase of $1.7 million in departmental revenues (non-tax receipts deposited into the general fund); (3) a decrease of $97.7 million in net appropriations, and (4) a transfer of $38.2 million to the budget stabilization fund.

The majority ($77.8 million) of the $97.7 million net appropriation reduction is due to reestimates of the amounts necessary to fund general fund debt service. General fund debt service savings are primarily attributable to three 2017 general obligation bond refinancing transactions and partly the result of a slower pace of bond issuance compared to earlier issuance assumptions. Recent changes to federal tax law have an effect on municipal bond refunding transactions. Effective in 2018, interest on a bond issued to advance refund another bond is no longer tax-exempt. This change prompted the state to advance refund bonds before the end of 2017, that were originally scheduled for advance refundings in 2018.
Of course, the problem with doing those refinancings/refundings ahead of time is that many of those new bonds have to be paid off at later dates with future budgets. But it works well in the short-term, and the bond premiums seem to have allowed for a slight reduction of total debt.

As for the total revenues, there’s a slight bump which the LFB credits to slightly faster-than-anticipated economic growth in 2018 and 2019 (real growth of 2.7% and 2.6%), reflecting minor stimulus from the tax plan that got through Congress. The higher growth levels are reflected by the LFB increasing their sales tax estimates, which have another $138.1 million in them, with healthy increases of 4.6% in FY 2018 and 3.4% in 2019.

But interestingly, the LFB says the tax bill also will reduce collections in Wisconsin due to certain income tax provisions intended to match the federal tax code.
Based on preliminary collection information through December, 2017, individual income tax revenues for the current fiscal year are 5.3% higher than such revenues through the same period in 2016-17. These amounts include adjustments for pass-through withholding and for collections that occurred in January, but can be attributed to December because the month ended on a weekend. A lower rate of increase (3.3%) is anticipated over the next six months because refunds and final payments for tax year 2017 are expected to be affected by higher estimated payments at the end of 2017 by individuals anticipating the effects of the federal Tax Cuts and Jobs Act. It is believed that the $10,000 limit on itemized deductions for state and local taxes under the Act, which will take effect in tax year 2018, has induced some taxpayers to accelerate federal deductions for state income taxes into tax year 2017.

Several provisions of the Act related to Section 179 expensing, AMT exemption levels, and the historic rehabilitation tax credit will automatically take effect for state tax purposes in tax year 2018 and reduce future state individual income tax collections, estimated at about -$10.0 million in 2017-18 and -$20.0 million in 2018-19. However, recent growth in collections has created a stronger base than previously estimated that should allow growth in collections that offset these reductions.
It’s worth noting that the state provisions that are getting tax cuts such as the AMT exemption seem to help richer Wisconsinites over typical ones. Interestingly, the LFB report does not go into how much state taxes might go up on everyday people as they file their 2018 taxes as the personal exemption and other deductions go away from the federal side. That's an analysis I'd like to see as we go forward, to see if something can/should be adjusted, since we see richer people catching a break at the state level already.

The other warning sign to me comes from the projections of increased US income growth that the LFB used to base some of its estimates on of better spending and income taxes.

LFB Estimates, personal income 2016-2019
2016 +2.4%
2017 +3.1%
2018 +4.4%
2019 +5.2%

We haven’t seen 4-5% income growth like that in recent years, and given that the lower corporate tax rates will encourage more wage suppression and layoffs, I’m not sure why wages would go up if they weren’t going up before.

Most of the other categories of revenues had slight declines in their projections, particularly in cigarettes and Public Utility taxes (the latter reflects less energy usage in the state). But those were tiny changes compared to the lowered debt costs and counting on the current expansion continuing for its 9th and 10th years. Of course, this $138 million in extra available funds is 0.4% of a General Fund budget that has a combined $33.9 billion in costs over these next 2 years.

Given the proposals out there to add funding to rural schools, the replacement of Lincoln Hills, pothole-filled roads, and now Scott Walker’s new (cynical) embrace of Obamacare, that new money would be gone immediately, even without any economic drawbacks. And that to me is the real story and questions that will develop from these good revenue estimates.

Because the money is apparently there, if we truly care to take steps to solve these problems. Will any of this $138 million be used in the last 2 months of this session, or will it be “banked”, with the needs still needing to be taken care of in the next budget (and possibly a new governor)?

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