Lower revenue estimate makes it harder for new WisGOP tax cuts to fit in

A certain corner of state government watchers always earmark a day in January when the Legislative Fiscal Bureau releases their annual revenue estimates. That day came (on Wednesday), and it turns out Wisconsin’s surplus isn’t as big as we thought it would be when the state budget was signed last July.

The Legislative Fiscal Bureau today projected the state will now finish the 2023-25 biennium with a surplus of $3.25 billion, nearly $800 million less than what was expected when the budget was signed last year.

The drop was largely driven by two factors: a decrease in the projected growth of tax collections and the deal Assembly Speaker Robin Vos, R-Rochester, struck with UW officials to curtail DEI positions that included additional funds for the system. The latter includes $423 million in state money for building projects on the UW campuses, among other things…..

On the tax front, LFB is now projecting $422.3 million less than previous estimates, a dip of about 1%. That’s largely driven by new projections that the state will take in $237.6 million less in individual income taxes over the two-year period than what had been expected and $181.6 million less in corporate taxes.

LFB attributed the lower projections to various changes in state and federal laws. For example, the 2023-25 budget decreased the lowest two income tax brackets beginning in tax year 2023. Meanwhile, withholding tables were last updated Jan. 1, 2022. While the taxable income covered by the brackets is adjusted each year for inflation, the withholding tables aren’t. LFB wrote in the memo the impact of that means wages that have grown with inflation will create higher refunds than previously expected when taxpayers file their returns for 2023.

It’s nice to know that many Wisconsin taxpayers will have higher refunds when we file with the state some time in the next 2 ½ months. But it also makes it more complicated for a Wis GOP tax cut plan that was finalized this week.

Wisconsin Republicans announce $2.1 billion tax cut package aimed at low and middle earners https://t.co/98sRKuBTUe

— Journal Sentinel (@journalsentinel) January 23, 2024

Republican lawmakers who control the state Legislature are proposing a $2.1 billion tax package that would significantly expand the state's second-lowest tax bracket to include more than 1 million Wisconsin residents earning between $19,000 and $150,000 per year.

GOP leaders announced on Tuesday they would be releasing four bills that would overhaul the state's tax system by also exempting up to $75,000 of retirees' income and expanding tax credits for married filers and for filers with children.

Altogether, the measures would cost $2.1 billion in the 2024-25 fiscal year and $1.4 billion every year afterward, according to a nonpartisan analysis from the Legislative Fiscal Bureau. The measures would reduce the state's total income tax revenue by $2 billion per year in fiscal 2024-25 and $1.4 billion per year after that, according to the Legislative Fiscal Bureau.

A $2 billion tax cut would reduce the surplus to $1.25 billion, which still seems like a good spot to be in. That is, until you realize that this number also means we run a deficit of around $2.45 billion for the 2025 Fiscal Year alone. Then add in the LFB estimate of an ongoing cost of $1.4 billion a year after 2025, we’d be looking at a budget deficit for the next state budget, as well as a long-term sizable structural deficit (remember when GOPs cared about structural deficits?).

Those numbers don’t mean I don't think some kind of tax cut shouldn’t be pursued. On the surface, I like a few of the items listed in the WisGOP series of bills. Here’s a graphic breakdown of the costs of these items, based on LFB estimates:

I would argue that the $390 increase in the max Married Couple Credit (which is intended to remove the "marriage penalty" in the tax code) and the increase in the max Child and Dependent Care Credit (to $10,000 for one child and $20,000 for multiple kids) might have the most bang for the buck, and would have the best chances of keeping the budget in line for future years. But it's not so great for unmarried Wisconsinites, and especially those without kids in need of being taken care of.

That might make the 4.4% bracket expansion a better idea, but as you can see, it has a sizable price tag that could hamper future budgets. The withholding table changes wouldn't have ongoing costs, which is helpful, and the jump in inflation since the start of 2022 means there would be a noticeable impact in take-home pay for Wisconsinites, but also lowers the refunds they'll get in early 2025.

The retirement income exclusion is the easiest one to discard, because it has huge tax breaks for richer retirees (the average tax cut is $3,500 for people with incomes of $125,000 to $150,000, and $4,648 for those with incomes of $500,000 to $1 million). And especially because a lot of retirement income is already tax exempt, as the LFB tells us.

Under current law, the following retirement income categories are excluded from Wisconsin AGI: (a) Social Security benefits; (b) payments from the U.S. military employee retirement system and U.S. government retirement payments received by members of the U.S. Coast Guard, the Commissioned Corps of the National Oceanic and Atmospheric Administration, and the Commissioned Corps of the Public Health Service; (c) income from certain public retirement systems if the individual was a member of, or retired from, that system prior to 1964; and (d) up to $5,000 of retirement income for taxpayers aged 65 or over with federal AGI of less than $15,000 per filer or less than $30,000 for married-joint filers. Together, these provisions are estimated to reduce individual income tax revenues by nearly $950 million in tax year 2024 under current law (the exclusion for Social Security benefits accounts for an estimated $900 million [95%] of this total).

So the $642 million in year 1 of this new retiree tax break is on top of the $950 million of more universal incomes that are already tax-exempt. So why would we want to give this older age group even more of a tax benefit than they already get?

Ah, that explains a lot.

Now that the revenues and price tags of the GOP's tax cuts are known, let's see how much can be fit in. And see if there is an ability to get some kind of compromise that gives relief to those in need of it, while not breaking the state's bank in future years. This doesn't have to be an "all or nothing" scenario, if all parties choose not to make it so.