Monday, January 10, 2022

In 2021 - Wisconsin had changing tax mix, booming revenues...and lower GDP?

There is a lot that doesn't fit together when we look at certain economic statistics in Wisconsin. For example, monthly jobs reports indicate that Wisconsin is still down more than 104,000 jobs from our pre-COVID peak in February 2020, but tax revenues have skyrocketed, leading to a multi-billion dollar surplus.

That surplus was used to cut income taxes in the 2021-23 budget, and most Wisconsinites should be seeing higher take-home pay and tax refunds due to these two factors in the first part of 2022. But the higher revenues led to an interesting observation from the Wisconsin Policy Forum - Wisconsin's state tax burden went up in the last fiscal year, but for "the good reason".
For the first time in a decade, the state taxes paid by Wisconsin residents and businesses in 2021 grew as a share of income in the state. Yet the historically low levels of federal and local taxes in recent years have meant that the overall tax burden – and related spending on public services – have kept dropping for Wisconsinites.

The increased state tax burden did not result from higher tax rates, but instead reflected factors such as a surge in economic activity as the state emerged from the worst of the pandemic. In fiscal year 2021 (the 12 months ended on June 30), state sales tax revenues rose by more than 9% – the most in 37 years. Corporate income and franchise tax collections rose by 59.2% – the most in our records going back to 1960. Individual income tax revenues for the state rose by 6.2% – the most since 2013. In fact, total state tax collections from all sources grew 9.2% in 2021, the largest annual increase since 1984....

Not surprisingly, the growth in state tax collections outpaced the 5.2% increase in personal income in Wisconsin in calendar year 2020 (the most recent year available). The figures on personal income include wages and salaries, interest and dividend income, and transfer receipts to individuals from the government – a major factor during the pandemic. As a result, state taxes grew to 7% of personal income in 2021, up from 6.7% the previous year.
So much of that increased tax burden came due to Wisconsinites spending more, and corporations paying more due to their higher profits, which caused the percentage of taxes as a percentage of overall income to be higher.

The Policy Forum goes on to note that Wisconsinites continued to pay a lower tax burden when it came to local taxes. And then when you combine it with federal taxes, Fiscal Year 2021 featured Wisconsin having their lowest tax burden in decades.
As a share of income, property and other local taxes fell in 2021 to 3.5%, down from 3.6% the previous year to the lowest level since at least 1970. Overall, combined state and local taxes rose to 10.5% of income in Wisconsin in 2021, up from 10.3% in 2020 but still the fourth-lowest year in our records (see Figure 1).

The tax burden was even lower if federal taxes are considered. Federal tax collections from Wisconsin have fallen since 2017 due both to the passage of the Tax Cuts and Jobs Act in December of that year and the impact of the pandemic on the economy. At the same time, the incomes of state residents were propped up by multiple rounds of federal aid – with some unemployment insurance payments excluded from federal income taxes. The result, as we will discuss, has been a falling federal tax burden and the lowest level of overall taxation as a percentage of income for Wisconsin residents since at least 1970.
A lot of this will likely reverse in FY 2022. Unemployment claims and benefits have plummeted, and income tax cuts at the state level will likely translate into the state tax burden falling again.

The booming tax revenues are especially remarkable due to the fact that Wisconsin's GDP is still below its pre-COVID peak. In fact, the Bureau of Economic Analysis said Wisconsin saw inflation-adjusted GDP fall this Summer.

It's especially odd since tax revenues were still rising in Q3, jobs were still coming back (+7,100) and unemployment was falling from 3.9% to 3.4%. But then you dig into the report, and you realize that this was because of reductions in stimulus measures more than any kind of economic weakness, and where higher retail sales were pushed forward into the Spring and then reverted back toward the norm in the Summer.

Change in Wisconsin GDP, Q3 2021
Agriculture -1.13%
Retail trade -0.95%
Every other sector +2.28%

And yet tax revenues have stayed strong in Wisconsin, with sales and income taxes growing well above last year's already-large numbers. And even though corporate taxes are lower, remember that it's off a year that they went up by nearly 60%.

Change in Wis tax revenues, July-Nov 2021 vs July-Nov 2020
Income tax +12.5%
Sales tax +12.9%
Corporate tax -9.0

That's well above the rate of inflation so far, but the income tax cuts and higher refunds are going to kick into the revenue numbers in the coming months, so it seems likely the growth won't end up being that high. Still, it seems well above what the GDP and even employment numbers would tell you, which makes it difficult to figure the true situation of our state's economy in 2022.

Is it possible that we are already at capacity in Wisconsin, and that the COVID era has caused that much of a decline in available workers/population? Or is there is some other reason that tax burdens went up solely due to higher economic activity driving more profits and spending in Fiscal Year 2021?

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