New estimates released this week project that the state of Wisconsin will be wallowing in unexpected general fund dollars through the end of the 2014 fiscal year – what might be considered a Happy New Year holler from the Legislative Fiscal Bureau, which released the estimate – and the debate is on about what to do with the money.
If early remarks are any indication, the projected bounty of $912 million will become a stage upon which political parties and interest groups will arrange their 2014 campaign rhetoric, beginning with Gov. Scott Walker’s State of the State address next Wednesday night.
Already the themes are familiar. Republicans are calling for tax cuts to give the money back to taxpayers, while Democrats are calling for the state to spend the money on government programs. The right sees a “tax refund” as a big dividend of recently enacted budget reforms; the left sees an opportunity to “invest” in what they see as worthwhile government initiatives they say the Republicans gutted.
From there it gets murkier. For one thing, there are competing stakes within the left and right. For the right, the question is, which taxes shall be cut? For the left, which government programs should be a priority?
Then, too, others suggest a third way to look at the good fortune, and that is to use it to fix past budgeting irresponsibilities, the negative consequences of which remain to this day. To cite just one example, the state is still strapped with a structural deficit.
According to the LFB, the closing, gross general fund balance at the end of the biennium on June 30, 2015, will just top $1 billion, at $1,041.6 million. That’s $911.9 million above the $129.7 million balance the agency had previously estimated. The $129.7 million balance took into account all bills already enacted in this legislative session, the LFB stated.
So where is all this money coming from?
Most of it, or $892.7 million, is coming from increased tax collections, the LFB states. The LFB also projects an $18.4 million decrease in departmental revenues, a $21.6 million decrease in appropriation expenditures, and a $16 million increase in estimated lapses to the general fund.
The decrease in departmental revenues is being driven primarily by two factors, the agency says.
“Estimated tobacco settlement revenues have been reduced by $13.3 million in 2013-14, primarily due to litigation that will likely not be resolved in that fiscal year,” the report stated. “Second, tribal gaming revenues have been reduced by $6 million to reflect a decline in amounts generated under the gaming compacts.”
Beyond that, the estimate continues, net appropriations are projected to decrease by a net of $37.6 million.
“Significant factors in this estimate include a reduction in homestead tax credits for the biennium (-$23.3 million) and earned income tax credits (-$8.2 million),” the report states. “In addition, it is projected that cigarette and tobacco product tax refunds will increase by $9.1 million in 2013-14 due to a delayed payment from the prior year. Debt service is projected to be $19.5 million lower than previously anticipated.”
The LFB estimate includes two cautionary notes. One, while it incorporates the fiscal effects of all bills enacted so far in this legislative session, it does not reflect the impact of any bills pending before the Legislature. Two, it does not reflect any appropriation change to the medical assistance program.
The latter asterisk could be significant.
“In the December 30, 2013, report, DHS projected that the MA biennial general fund appropriation of $4.8 billion could potentially face a $92.6 million shortfall in the 2013-15 biennium,” the LFB stated. “Much of this is due to a reduction in the 2015 federal matching rate from the preliminary estimate of 59.19% to 58.27%. This downward revision would result in a loss of approximately $52 million in federal MA matching funds in 2014-15.”
Still, even in that worst-case scenario, the state’s bonanza would be substantial.
From the right
With the report’s release, Republicans at all levels wasted little time in calling for an array of tax cuts. While conservatives differed in the approach to tax reduction, they all echoed Gov. Scott Walker in saying the money came from taxpayers and so should be returned to them.
Walker used the numbers to tout what he believes are the successes of his policies.
“When we took office in 2011, we pledged to do away with the failed policies of the past and confront the fiscal and economic crises we faced,” Walker said. “We made tough but prudent, decisions over the last three years, and now our bold reforms are producing bold results for the people of Wisconsin. The additional revenue should be returned to taxpayers because it’s their money, and my administration will work with the Legislature to determine the most prudent course of action.”
Walker has indicated he will call for a combination of property tax cuts and income tax cuts.
On the income tax side, the governor has called for a decrease in the amount of income tax withheld from employee paychecks, which would put money in workers’ pockets on the front end rather than at the backend as a tax refund. The Walker administration can unilaterally change tax withholding tables to do so.
Other Republicans focused more on property-tax relief.
“The Legislature has practiced fiscal discipline over the past three years and we keep seeing the benefits,” Assembly assistant majority leader Jim Steineke said. “Wisconsinites will have more of their hard-earned money returned to them. It is my hope that these new revenues will be given back to the taxpayer through additional property tax relief.”
While they did not rule out a mix of tax cuts, the co-chairwoman and co-chairman of the Legislature’s budget-writing Joint Committee on Finance, Sen. Alberta Darling (R-River Hills) and State Rep. John Nygren (R-Marinette), compared property-tax relief under the Republican and the previous Democratic administrations.
“In contrast, every year under the Doyle administration property taxes were increased by 4 percent,” Darling and Nygren said in a statement. “Every year under the Walker administration, property tax bills on the average home have gone down. In 2009, Gov. Doyle delivered a state economic stimulus bill that included a $1.2 billion tax hike; under Gov. Walker, we will be cutting taxes for the third time in a year. It’s no wonder that 94 percent of job creators say we are on the right track.”
Assembly speaker Robin Vos (R-Rochester) also liked the idea of most of the money going to property tax relief.
“In the coming days, many ideas on how to provide this tax relief will come forward,” Vos said. “It is my hope that most of the surplus dollars will go toward property tax relief.”
State Sen. Paul Farrow (R-Pewaukee) alluded to the many ways lawmakers might want to use the surplus and didn’t rule anything out, except to say the state needed to hold the line and not repeat the bad budgeting practices of the past.
“I strongly encourage my colleagues on both sides of the aisle, in both the Senate and Assembly, to refrain from putting together ‘wish lists’ for this newly announced revenue,” Farrow said. “We must do what is in the best interest of Wisconsin’s taxpayers. After all, it is their money. We must continue to be good stewards of the public trust and not allow this $912 million to burn a hole in our pocket, as such knee-jerk reactions were what caused the fiscal irresponsibility of the past.”
Outside the Legislature, the Tea Party-aligned Americans for Prosperity joined in the call for a mix of tax cuts but also stressed the need to reform the tax code.
“It’s time again to pass a tax cut that will keep more money in the pockets of hard-working Wisconsin families,” state director David Fladeboe said. “.... The governor and Legislature have done great work to reduce our income and property taxes this session and I hope this will continue with the latest surplus numbers. We need responsible tax reform that simplifies our tax code and allows more people to keep the money they work hard for.”
From the Left
Democrats also sensed an opportunity – an opportunity to restore funding to cherished government programs that have sustained deep cuts since Walker was elected governor.
Assembly Democratic leader Peter Barca (D-Kenosha) said the surplus must ensure long-term economic security for the middle class by remedying Wisconsin’s lagging recovery
“Taxpayers need a balanced approach that rebuilds the rungs on the ladder of success and provides targeted tax relief and long-term financial security for the middle class,” Barca said. “The current Republican approach has dropped Wisconsin from 11th to 37th in job creation. Yet with a large surplus, Gov. Walker and speaker Vos have shown no interest in using any of it to help create jobs or restore funding Republicans cut from job training and public schools.”
Barca said Republican talk of tax cuts was simply code for more breaks to benefit the wealthy.
“Wisconsin still lags behind the nation on economic recovery and job creation,” he said. “To reverse that unacceptable trend, any surplus should be dedicated to things that are proven to have the biggest impact on turning around our economy to help working middle-class families.”
Tax relief for the middle class was justified, Barca said.
“It’s true that middle-class taxpayers are in need of relief after Republicans gave their hard-earned money away to unaccountable private voucher schools, tax breaks for the wealthy, special interests and a health care plan that unnecessarily costs Wisconsin taxpayers more and covers fewer people,” he said. “But simply doubling down on the same failed Republican policies will do nothing to help make 2014 a ‘Year of Action for the Middle Class’ here in Wisconsin.”
Barca said Minnesota, with a Democratic governor and Legislature, used a $1 billion surplus on public education and targeted middle-class tax relief. Minnesota is 15th in job creation, he said, compared to Wisconsin at 37th.
Sen. Tim Carpenter (D-Milwaukee) said that if any tax cuts are to be considered, at least 25 percent of the surplus should be directly applied to residential property tax relief.
“The property tax is one of the most regressive taxes and my constituents overwhelmingly support cutting property taxes before personal or corporate income taxes,” Carpenter said. “In 1970, 50.6 percent of the property tax burden was on residential property taxpayers. In 2011-12, 69.5 percent of the property tax burden falls on residential property taxpayers.”
Over the years, Carpenter said, Wisconsin governors and state legislatures have handed out dozens of property tax exemptions to special-interest groups to curry political favors at election time.
“The problem is, all these exemptions have just shifted the property tax burden over to residential property,” he said. “The typical middle/working class or senior citizen constituent of mine would not see a significant benefit to cutting state income or corporate taxes. This is why any tax cuts in response to our budget surplus priority should be targeted to residential property taxpayers.”
The left-leaning Wisconsin Budget Project said the money should be used to invest in Wisconsin’s future, not to make another round of tax cuts that would do little or nothing to boost the state’s economy.
“This is the best fiscal news we’ve had in a long time,” said Wisconsin Budget Project director Jon Peacock. “We can now afford to cover more of our existing costs and make a down payment on building a better Wisconsin for the next generation. Let’s fulfill those obligations before considering yet another round of damaging tax cuts.”
Peacock said the revenue should be used to make Wisconsin more competitive economically through investments in K-12 and higher education. He also said the state should boost its commitment to early education, which he said has shown to yield the greatest returns of any public investment by equipping youngsters for a lifetime of success as students and workers.
“We should seize this opportunity to develop a bipartisan, fiscally responsible approach that helps all Wisconsinites,” Peacock said. “That approach should close budget holes, undo recent tax increases on some of our state’s most vulnerable households, and invest wisely in Wisconsin’s infrastructure and its students, working men and women, and people struggling to get ahead.”
A third way
For its part, the Wisconsin Taxpayers Alliance called in a statement for a “good-government” use of unexpected tax revenues.
“Recent word of surprise tax revenues and higher-than-expected state surpluses are setting off the predictable fiscal feeding frenzy in the Capitol,” the statement said. “There is talk of further income or property tax cuts or, perhaps, long overdue updating of state income tax withholding tables.”
But the group said another idea should be considered.
“Over the past two decades, state budget problems prompted governors and lawmakers to use repeated accounting tricks to ‘balance’ what would otherwise have been unbalanced state budgets,” the alliance stated. “Some of these tricks involved changing the timing of state aid and property tax credit payments to local units of government – i.e., shifting costs from one fiscal year to the next.”
Given that, the group said, one good-government alternative for using new-found cash would be to ‘buy back’ or ‘undo’ some of those past accounting tricks.
“These gimmicks permanently increased deficits reported in official state financial statements prepared using general accepted accounting principles (or GAAP),” the group said. “Paying for some state spending items in the current fiscal year rather than delaying payment until the following year would reverse poor budgetary decisions of past years while permanently lowering the GAAP deficit, which has ranged from $1.7 billion to $3.0 billion in recent years.”
Richard Moore may be reached at email@example.com