A $2 billion structural deficit? It didn't need to happen

Well this seems concerning.

A new analysis shows Democratic Gov. Tony Evers would face a nearly $2 billion shortfall heading into his second budget.

The Legislative Fiscal Bureau released an analysis Monday that shows the state would face a $1.9 billion imbalance in the general fund heading into the 2021-23 fiscal year if the state maintains all the spending commitments in current law, such as honoring tax credits for Foxconn Technology Group, as well as in Evers' 2019-21 budget, including funding two-thirds of K-12 education costs.

The shortfall would be the largest since the general fund started with a $2.5 billion imbalance heading into the 2013-15 biennium.

So where is this coming from? It’s derived from a document the LFB regularly produces that looks at what the budget bill would do for not only that 2-year cycle, but the next one as well. This is how we get the “structural deficit/surplus” we have talked of many times in the past.

And what it shows is the effect of Evers’ plans to add more spending in year 2 of the budget (most of it in K-12 education and Health Services), because that is assumed to carry over into the future. What’s doubly damaging from a budget standpoint is that Evers’ budget is projected to run a surplus in year 1, but the LFB projects that the next 3 years will have spending exceed revenues by more than $800 million in each of the next 3 years.

Among the increased spending items that the LFB assumes is $545 million to be spent on Foxconn incentives between FYs 2021 and 2023, which would be $94 million above what would spent at the $211 million-a-year projected to be spent in Evers’ budget. That amount is not likely to happen, but what’s also not likely is that $107 million in extra tax revenue will come in from Foxconn, which the LFB also counts on, based on the original Foxconn projections from 2017. Uh oh.

(Side note, these increasing and ongoing expenses are yet another reason that cutting a one-time check to Foxconn for $100 million to have them go away would make us much better off in the long run.)

Another reason the structural deficit blows up beyond 2021 is that tax cuts Evers plans to give for lower-income individuals have a slightly higher price tag in 2021-2023. The biggest of which is the assumption that there will be no carryover of TANF funds to continue to pay for Evers’ proposed expansion of the Earned Income Tax Credit (EITC), since it is TANF block grant money that’s paying for that reform more than state tax dollars.

Here are the main ongoing costs that would have to dealt with in Evers’ second budget in early 2021, if you assume the current laws along with Evers’ proposed budget changes.

Change in costs, 2021-23 LFB projections
TANF funding EITC, other items +$212 million
Additional Foxconn incentives +$94 million
Requiring 2/3 school funding +$50 million
2% wage increase for employees +$42 million
Debt cost increases $30 million
Homestead Credit Indexing +$26 million
Milwaukee voucher schools +$24 million
Expanded Research Tax Credit +$14 million
Forestry Tax replacement +$12 million
Other misc. adjustments -$15 million
TOTAL EXTRA COSTS $489 million

I’ll also remind you that if some of these programs go away by 2021, all of their current funding and the extra costs for 2021-23 would be subtracted from the structural deficit. That Forestry Tax shell game is an obvious place to target - it was a gimmick for WisGOPs to say they cut property taxes, but is projected to cost $199.5 million in the upcoming budget, and more in 2021-23. Another is the $40 million a year in tax dollars that are being thrown into the Lottery to make that tax break higher, an expense no longer needed with major jackpots leading to big lottery ticket sales (including the $768 million winner sold in New Berlin last week).

While there are some added revenues in future years (mostly due to Foxconn assumptions and the federalizing of certain tax cuts for high-income people), it isn’t very much in the big picture. So the LFB sums up the final numbers as such

Table 5 shows that, for 2021-22, the general fund would have an estimated imbalance of -$847 million after meeting commitments under current law and the provisions of 2019 AB 56/SB 59 and maintaining the required statutory balance. In 2022-23, an imbalance of -$1,113 million (above the 2021-22 imbalance of -$847 million) would occur.

And that number of $1.96 billion can easily be turned into “a $2 billion structural deficit” in the media, which creates an easy target for WisGOPs to complain, and allow them enough public space to try to reverse everything Evers wants. That removal by Republicans would throw out a number of good ideas and needed changes in Wisconsin priorities that is part of the budget.

This is the tragedy of Evers over-asking in his first budget. While I like the ambition Tony has to show the possibilities of a better Wisconsin than the regressive garbage Walker and WisGOP have left us with, sometimes it’s better off to leave some items for later as opposed to asking for everything at once. Items such as Medicaid rate increases and school aid bumps could have worked as a two-step plan, where spending increases take 3 years to fully phase in, with the last increases timed to hit with the Federal Fiscal Year in September 2021. This would keep the full increase from driving up the 2020-21 deficit, would raise the carryover amount/cushion in the current budget, which lowers the overall structural deficit reported in the next budget. It also would be harder to remove in the next budget, because the increases would be "baked in" and counted on by school districts, health providers and local governments.

Instead, you’ll hear GOPs shed crocodile tears about “tax-and-spend Dems putting us in a hole” and they’ll have enough numerical evidence that some people might buy it. Yes, Evers and his staff likely knew they won’t get much of what they asked for whatever they proposed, so they figured “Why not go big?” But trying to get it all at once also makes it more likely that they would get nothing without having to force the Republicans to justify why they wouldn’t go along with a relatively moderate proposal that wouldn’t have major budgetary issues in the future.

This is the difference between the wish list you develop as a department making a budget request, and the political battle that you have to prepare for as governor when you put together all the departments in a giant budget. The average voter isn’t smart enough to know the difference, and I worry this LFB structural deficit information will cause some damage to a good, voter-backed agenda that didn’t need to happen.