Todd Hubler
Few lawmakers on either side of the aisle could resist the siren call of the tax cut.
If he were that kind of guy, Jon Peacock would have every right to say "I told you so."
But the director of the Wisconsin Budget Project is typically restrained when making note of the recent news that state revenue collections have fallen (PDF) hundreds of millions of dollars short of predictions.
Peacock says what makes the state's new budget challenge "so disappointing" is that it could have been avoided had state officials responded more prudently to projections of revenue growth last fall and earlier this year. Rather than set aside any funds for an "adequate budget cushion," Peacock says, Gov. Scott Walker and state lawmakers rushed to use it all on "election-year tax cuts."
"This is a classic case of legislators counting their chickens before they've hatched," says Peacock. "In election years, they are so anxious to use every cent of potential growth for tax cuts that they often jump the gun."
It was just about 11 months ago that Walker unveiled his plan to deliver property tax relief by using a projected $100 million surplus to increase aid to schools over the next two years. Property owners did not receive a refund, but the governor promised savings of up to $680 to the typical homeowner over four years. Later analysis found the typical homeowner would save $13 in 2014 and $20 in 2015.
In his executive order (PDF) calling for a special session of the Legislature to consider his proposal, Walker attributed the surplus to Wisconsin's "growing economy and new job creation" as well as "leadership and prudent fiscal management" in state government. These "fiscal facts," Walker concluded, "afford an opportunity to provide much-needed property tax relief to Wisconsin families, seniors and small businesses."
Peacock, at the time, urged caution.
"The biggest thing that contributes to structural deficits is building up a substantial surplus and then using it quickly for permanent new tax cuts or spending," Peacock told Isthmus. "Where does that leave you in the next biennium? It leaves you with a hole."
Peacock was not the only one suggesting a tax cut could cause trouble in the not too distant future. The nonpartisan Legislative Fiscal Bureau estimated the structural deficit in the 2015-17 biennium would be $725 million if Walker's property tax relief plan were approved.
And Todd Berry, president of the Wisconsin Taxpayers Alliance, even suggested the whole scheme was politically motivated, noting that Walker's hastily called special session meant that the tax cut would make it into December's property tax bills. December, Berry told Wisconsin Public Radio at the time, "is the operative month because that's when property tax bills come out, and those are the last property tax bills before the [gubernatorial] election."
But few lawmakers on either side of the aisle could resist the siren call of the tax cut. The Joint Finance Committee approved it unanimously, and it passed both houses of the Legislature easily.
In mid-January, there were signs of even bigger revenue growth down the line, with the Legislative Fiscal Bureau projecting (PDF) an additional $911.9 million coming into the state's coffers.
Again, Peacock suggested in his blog that lawmakers and the governor "start by putting the state's fiscal house in better order by reducing debt and filling holes in current budget commitments" rather than issuing tax cuts. Peacock floated a couple of ideas, including using the increased revenue to pay down state debt or plugging the $93 million hole in the state's Medicaid budget.
But once again Walker proposed tax cuts. That round included a combined income tax and property tax cut package and changes in income tax withholding rates. The Legislative Fiscal Bureau projected (PDF) in February that the cuts would result in a $972 million reduction in the general fund balance, but lawmakers nevertheless approved the package in mid-March.
When asked to comment on the wisdom of the governor's tax-relief measures in light of the revenue shortfall, Walker spokeswoman Laurel Patrick said only that the governor's administration would "continue to manage the Wisconsin taxpayers' money well and keep the state's fiscal house in order."
"Our state will end the fiscal year with a significant positive fund balance, and we will finish the biennium with a balanced budget," Patrick wrote in an email. "The total revenue collections are less than 2% lower than estimates."
That 2% shortfall amounts to $281.2 million in tax revenue, according to the Legislative Fiscal Bureau, which noted in its Aug. 28 report that $13.95 billion in tax revenue had been collected through June 30, the end of the fiscal year.
The largest shortfall came in the areas of corporate income and franchise tax (-9.2%) and individual income (-2.5%). Cigarette and beer taxes came in lower than expected, down .3% and .4%, respectively, but liquor and wine drinkers did their part to keep the economy rolling, with tax revenue from these products exceeding estimates by 2.7%.
Peacock says the shortfall now sets up a "substantial jump" in the state's structural deficit and will likely usher in another round of painful budget cuts. The Fiscal Bureau most recently estimated (PDF) in May that the state would face a structural deficit of $659 million in 2015-2017. Structural deficits result from a gap between future revenue and future spending.
Walker's pledge through his spokeswoman to achieve a balanced budget is a given since he and lawmakers are constitutionally bound to deliver a balanced budget by the end of a biennium. The question is how it will be achieved. Choices include spending cuts, delaying costs and/or increasing taxes, says Peacock.
"I don't expect Walker and the Legislature to raise taxes, and I don't expect a miraculous jump in tax revenue that eliminates the budget deficit," he says. "Thus, I expect the Walker administration to use some combination of spending cuts and short-term gimmicks to get the budget in balance."
