Tuesday, August 27, 2019

Wisconsin's extra revenues mean more cushion....and bigger tax cuts?

We already knew that Wisconsin was going to get a major infusion of one-time revenue for the 2019 Fiscal Year, but we found out on Monday that the state took in even more money than we thought we would.
Wisconsin collected $76 million more in taxes than anticipated last fiscal year, prompting lawmakers from both parties to claim credit for a sign of positive economic growth in the state.

The nonpartisan Legislative Fiscal Bureau on Monday announced general fund tax collections for the 2018-19 fiscal year, which ended June 30, were up 7.4% from the previous year.

The $17.3 billion collected in taxes was $75.5 million, or 0.4%, more than anticipated in May when the state was finalizing its 2019-21 budget.
About $31 million of the unanticipated money will be deposited in the Budget Stabilization Fund, a rainy day fund to be tapped in times of recession or fiscal emergency. The remaining $45 million will go into the general fund, which covers the majority of state expenditures.
This is in comparison to the Legislative Fiscal Bureau’s estimates from May, and the increases were pronounced in income and sales taxes, and built on top of big revisions that had already come in May.

It’s also worth remembering why the income taxes had already been revised up in May, because of changes in withholdings and payments as a result of the GOP’s Tax Scam at the federal level.
The reestimate for 2018-19 is influenced by one-time effects. At the end of 2017 (2017-18), there was a surge in estimated payments and pass-through withholding payments that was likely related to the TCJA and the federal limitation on state and local tax deductions beginning in tax year 2018. While a correction was expected in December, 2018, estimated payments and pass-through withholding payments decreased by a greater margin than anticipated. Because these payments reflect taxpayers' actual tax liabilities, the payments were expected to increase in 2019-20, when the collection pattern would normalize. However, this normalization appears to have occurred in March and April of this year. This collection pattern has been experienced by a number of other states.

In addition to realizing the additional estimated payments and pass-through withholding payments, the 2018-19 reestimate incorporates a somewhat higher rate of increase in withholding payments and growth in final payments. These factors result in a 2018-19 growth rate in individual income tax collections of 5.6%, compared to a 1.9% rate of growth assumed in January. This increase is followed by a smaller estimated increase of 1.6% in 2019-20, which is influenced by the implementation of the entity-level tax authorized under 2017 Act 368, resulting in some payments that had been previously recorded under the individual income tax to be reflected under the corporate income/franchise tax instead. For 2020-21, the payments under the individual income tax are estimated to increase by 3.5%.
It also shows how the Tax Scam encouraged some Wisconsin business owners to change their status to pass-through entities, because it gives a giant tax break at the federal level, which makes it more than worth it for them to pay a few more state taxes. I guess that works as a trade-off, since states can’t count on getting more aid from our deficit-wracked federal government.

It’s interesting that state income taxes continue to surprise to the upside, because the ‘gold standard” Quarterly Census on Employment and Wages (QCEW) says job growth in Wisconsin moved to the downside over the same time period, with wage growth being nothing to shout about. I want to see how that conundrum shakes out going forward.

The top two increases in this week’s revenue report are the two biggest sources of state taxes – income and sales taxes. That likely means there’s a smaller increase that’s needed in the next Fiscal Year to reach the estimates in this current budget, although the revenue estimates came before Governor Evers and the Legislature agreed to income tax cuts in the 2019-21 state budget (theoretically, the increased income taxes makes the tax cut bigger).

One other interesting part of the revenue picture was explained in an LFB publication that also discussed the $321.7 million that is to be deposited in the state’s rainy day fund.
On May 15, 2019, this office projected 2018-19 tax collections at $17,265.9 million. Of that amount, it was estimated that collections under Wayfair would total $45.0 million. As indicated, 2018-19 tax collections are $75.5 million above the May estimates and the Wayfair amount for 2018- 19 is estimated at $59.2 million, or $14.2 million higher than projected in May.
The Wayfair case required more online entities to pay sales taxes, and the year-end totals show that even more was collected than expected, likely as part of the shift people have made where they buy things via the Internet as opposed to actual stores.

But also, it seems that the higher online sales tax collections might portend an increase in a second income tax cut that was passed around the same time as the budget. This move clarified a bill passed in the lame duck sessions, but had the unfortunate title of Act 10 for this 2019-21 session.
The tax rate reductions in Act 10 are intended to offset the increased sales and use tax collections attributable to remote sellers and marketplace providers. Under provisions enacted as part of 2013 Wisconsin Act 20, and amended by 2017 Wisconsin Act 368, estimated sales and use tax collected from remote sellers during the 12-month period between October 1, 2018, and September 30, 2019, are to be offset by individual income tax reductions in tax year 2019. Under those acts, the income tax reduction would have been achieved through a proportional reduction in each of the four marginal tax rates based on the amount of gross taxes attributable to each rate. Under Act 10, the tax decrease will be divided into two equal components and targeted as rate reductions for the two bottom tax brackets. The tax year 2019 decrease is estimated at $60.7 million, resulting in an average reduction of $27 for taxpayers receiving a tax decrease.….

In tax year 2020, the rates for the two bottom brackets will be reduced under Act 10 in the same fashion as in tax year 2019. That is, the reduction will be calculated relative to the tax rates currently enumerated in the statutes, rather than the tax rates in effect in tax year 2019, as described above. Also, the amount of the tax decrease would be based on the estimated amount of sales and use tax collected from remote sellers and from marketplace providers during the 12-month period from October 1, 2019, to September 30, 2020. The tax year 2020 decrease is estimated at $120.5 million, resulting in an average tax reduction of $52 for taxpayers receiving a decrease.
If the amount of sales taxes under Wayfair and related measures continue to beat estimates, the state income tax would be reduced further for this year. You might not see it in your paycheck, but it’ll be reflected in a higher tax refund at the state level.

In all, this is a good fiscal situation to be in. But the one-time cushion is being spent out over the next 2 years, as we catch up in 2019-21 to the neglect in state services that happened under the Walker Administration. And if recession hits during that time period, our major increase in revenues and large carryover for Fiscal Year 2019 will become a distant memory, and that Rainy Day fund might have to be tapped sooner than later.

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