Steven Walters: Drop in tax collections fuels deficit worries

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Steven Walters
Monday, July 21, 2014

Within weeks, we may know whether Republican elected officials have tax cut their way into the next potential state budget deficit.

Late in August, the state Department of Revenue will release the preliminary total for general-fund tax collections for the 12 months of fiscal 2014, which ended June 30.

General-fund taxes include personal and corporate income, sales, utility, beer, liquor, cigarette and other miscellaneous taxes. They pay for all state programs except highways and other transportation systems.

Here's why the year-end numbers coming in August are important:

— The preliminary total for the first 11 months (July 2013 through May 2014) showed general-fund taxes actually dropped 0.4 percent compared to the same period in the previous year.

— State government needs higher tax collections to pay for the cash promises Capitol politicians make to schools, local governments, the poor, elderly and disabled who rely on Medicaid for health care, and to UW System students, their parents and staffers.

— Bad news in the year-end budget numbers would create one new major campaign issue in the gubernatorial election. Republican Gov Scott Walker hopes to win a second term Nov. 4.

When the legislative session ended in May, the Legislative Fiscal Bureau cut its predicted one-year growth in tax collections to 1 percent. The lower prediction reflected a third tax cut proposed by Walker, and enacted by Republicans who control the Legislature, and Walker's order to have less income taxes withheld from paychecks.

Walker and GOP legislators made tax-code changes that totaled $1.9 billion over a four-year period. He also issued an order changing income-tax withholding tables, giving workers a few more dollars in their paychecks.

Every 1 percent increase in general-fund tax collections is worth $140 million. That means, if fiscal 2014 tax collections only equal the previous year, state government starts the next year with $140 million less than it budgeted.

But that also can create much bigger long-term budget problems—and a potential budget deficit by mid-2015.

Todd Berry, president of the nonprofit Wisconsin Taxpayer Alliance, offered this explanation of how a one-year drop in tax collections can snowball into deficits:

“If revenue estimates get reduced in year N, that provides a lower base off which to drive for N+1, etc. So, in the out years, it's possible that one is hit both by a lower past base and a lower future growth trend.”

Translation: If tax collections didn't grow at all in fiscal 2014, there is very little chance they will increase in 2015 by the 3.4 percent the fiscal bureau predicted in May. That means state government could collect hundreds of millions less in taxes than expected—depleting or even wiping out the “rainy day” fund—when the two-year budget ends June 30, 2015.

That pattern—elected officials spending all they can only to have economic slumps jeopardize that spending—has forced governors and legislators from both parties to confront billion-dollar deficits over the past decade.

The campaign of Mary Burke, the expected Democratic challenger to Walker in the Nov. 4 election, is closely monitoring tax-collection totals, sensing a potential new campaign issue.

“Mary Burke was right: Walker's election-year spending spree based on rosy assumptions was irresponsible,” said Joe Zepecki, Burke campaign spokesman.

Before the July-through-May drop in tax collections was announced, the fiscal bureau had warned of a potential deficit by mid-2017 of about $642 million, Zepecki noted.

To fight deficits, Walker and top aides have used these options in the past: Freeze hiring. Cancel major purchases. Refinance state debt, which might bring cash immediately but worsen the long-term fiscal picture.

But Jocelyn Webster, the governor's communications director, said Walker is not worried.

“Given the recent changes to the withholding tables, we expected individual income tax revenue collections, a large component of (general fund) collections, to go down compared to last year, since people are not sending as much of their paychecks to Madison,” Webster said, adding:

“We're confident in our ability to finish the biennium with a balanced budget. We want to continue growing our economy, and the way to do that is to continue putting money back into the hands of hardworking taxpayers and job creators, so they can stimulate our economy.”

Steven Walters is a senior producer with the nonprofit public affairs channel WisconsinEye. Contact him at stevenscwalters@gmail.com.

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