Wednesday, January 30, 2019

Wisconsin gets a revenue shortfall, but also an expense shortfall. So now what?

The "Foxconn not making LCD panels in Wisconsin" story diminished another story that usually would be a big deal in Wisconsin, especially with a new Governor in office. That's the Legislative Fiscal Bureau's release of its revenue estimates for the 2019-21 budget.

The big headline here is twofold. The first is that the revenue numbers aren't as good as the Walker Administration claimed 2 months ago, as it was heading out the door.
Our analysis indicates that for the three-year period, aggregate general fund tax collections will be $282.0 million lower than those of the November 20 report (-$142.1 million in 2018-19, -$45.2 million in 2019-20, and -$94.7 million in 2020-21).
Oops! What's going on here? Part of it is new developments that have shown a slowing economy and revenue picture in the last 2 months, combined with a tax cut that WisGOPs passed in the Lame Duck session.
Compared to the November 20 report, the estimates are significantly lower for individual income tax collections, but are higher for general sales and use taxes and corporate income/franchise taxes in each year. The new estimates are based on the most recent national economic forecast and year-to-date tax collections data. The estimates incorporate all law changes enacted to date, including the 2017 Wisconsin Act 368 provisions regarding the election for pass-through entities to be taxed at the entity level and the automatic individual income tax rate reductions, beginning in tax year 2019, equal to the amount of increased sales and use tax collections following the U.S. Supreme Court decision South Dakota v. Wayfair, Inc. DOR's November projections were released prior to enactment of Act 368 and did not include the fiscal effects of the entity level tax or the individual income tax rate reductions...

Through November, 2018, year-to-date growth in individual income tax collections equaled 6.5%. In December, collections decreased 19.8%, compared to December, 2017, and year-to-date collections were at roughly the same level as for 2017-18. The December decrease is due to lower estimated payments and pass-through withholding, and preliminary data indicates that January collections in those categories will decrease relative to January, 2018. According to DOR, similar decreases are occurring in other states.
Looking ahead, the LFB says the economy will continue to grow for the next 2 years, albeit at a slower pace than we are seeing today (2.0% in 2020, 1.5% in 2021), which will slow down revenue growth in 2020-21, but keep it strong in 2019-20 (we'll see...).

But there's a good side to the LFB estimates as well, because despite the drop of $142 million in estimated revenue for this year, we actually end up projected to have $69 million more in the bank than Walker's Administration estimated in November, at $691.5 million. The big reasons why are because fewer people are on medical assistance these days, and (oddly) because of the revenue shortfall.
The net appropriation reduction of $193.7 million is primarily due to two items. First, the November 20 report estimates that $82.6 million will transfer from the general fund to the budget stabilization fund. We believe that this transfer will not occur. Second, our analysis projects that lapses to the general fund will be $103.7 million greater than those of the administration.

Pursuant to s. 16.518 of the statutes, if actual general fund tax collections in any year exceed amounts listed in the biennial budget act, one-half of the additional amount is transferred to the budget stabilization fund. Under the 2018-19 tax collections estimate of the November 20 report, the administration projects a transfer to the stabilization fund in that year of $82.6 million. There are two reasons why our analysis indicates that there will be no transfer to the stabilization in 2018-19. First, our tax estimate for 2018-19 is lower than the November 20 report, which reduces the amount of any potential transfer. Second, under 2017 Act 368 (enacted after publication of the November 20 report), any amounts attributable to increased sales tax collections under the Wayfair decision are to be excluded from the determination of transfer to the stabilization fund. When these two factors are considered, the 2018-19 tax estimate is below the amount estimated when the 2017-19 budget was enacted. Thus, no amounts are projected to be transferred.

Under our analysis, lapses to the general fund in 2018-19 will exceed those of the November 20 report by $103.7 million. The primary reasons for the additional lapse amount are as follows. First, the updated fund condition statement reflects an estimated GPR lapse from the Department of Health Services' medical assistance appropriations of $212.7 million, which is $63.7 million more than the lapse amount included in the administration's November 20 report. The current estimate is based on the Department of Health Services' MA quarterly status report to the Joint Committee on Finance from December, 2018. According to that report, MA GPR expenditures in the 2017-19 biennium are projected to be lower than the Act 59 budget by 3.5%.
And you know what would save taxpayers even more money with health care in the next budget? TAKING THE EXPANDED MEDICAID FUNDING, which makes the Feds pay 31% more of the bill for the same services.

You can expect the Wisconsin GOP to try to spin the $691 million carryover as a reason to blow it all on tax cuts without paying for it anywhere else. But the revenue shortfall indicates that this is a bad idea, especially given that the LFB is still counting on aggressive revenue growth in 2019-20 of 4.2%. Given the volatility in both DC and Wall Street combined with the buzz wearing off from the unfunded GOP Tax Scam, it seems like a much better idea to use any extra money to fill in the many holes that the 8-year of Fitzwalkerstan has created, and finally start reinvesting in the things that would lead everyday people to want to come to Wisconsin.

But now that we finally have a marker laid down for what will be available from the revenue side, those figures can now be incorporated in Gov Evers' first budget, which will be coming out within the next 30 days. Let the fun begin!

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