More questions as state budget nears

New figures from the Department of Revenue (D0R) may raise more questions about the upcoming 2017-19 state budget.
Tax collections from July to November 2016 grew just 1.2% over the same period in 2015. That figure is lower than the 2.3% growth recently projected for the entire fiscal year. If the trend continues with no offsetting actions, the state would risk running a budget deficit for the current fiscal year, which ends in July.
Estimates of state revenues have been moving steadily downward. Initially, the state budget called for collections of $15.21 billion in fiscal 2016 and $15.79 billion in 2017.
In January 2016, the nonpartisan Legislative Fiscal Bureau lowered those estimates to $15.17 billion and $15.65 billion, respectively. DOR reported in November that collections for fiscal 2016 were actually $15.09 billion. Revenues of $15.44 billion were projected for fiscal 2017.
Wisconsin isn’t the only state facing potential budget strains. The National Association of State Budget Officers (NASBO) reported in December that revenues came in under-budget in 25 states in fiscal 2016 – the most since the Great Recession – and many expect the declines to continue into fiscal 2017.
As of December, 24 states reported that general fund revenues were coming in below forecast for 2017, the highest number since fiscal 2010.
Unlike Wisconsin, however, 29 other states reported continuing contributions to their “rainy day” funds. Wisconsin has made no contribution to its Budget Stabilization Fund since 2013. The state is projecting to end the 2017 fiscal year with a balance of about $104 million – or roughly enough funds to operate for two days.

Gov. Scott Walker (R) is expected to release his budget in February, setting the stage for nearly four months of budget deliberations by the Legislature.

 

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Clouds on the state budget horizon?

A recent report from Wisconsin’s Department of Administration highlights the major challenges Gov. Scott Walker (R) and state legislators face as they begin work on the 2017-19 state budget.

The so-called “November 20 report,” which summarizes the state’s financial conditions as the governor begins work on the biennial state budget, shows the following potential trouble spots:

  • Projections for general fund tax collections continue to lag. Revenue growth for 2016-17 was initially projected at 3.8%, but has now been reduced to 2.3%. The 2017-19 forecast projects growth of at most 3% annually.
  • The ending balance for fiscal year (FY) 2017 is $104.8 million, or just 0.6% of net appropriations. This is equivalent to roughly two days’ worth of state spending.
  • Although the report notes that the $330 million opening balance (or surplus) this year was “the fourth-largest opening balance in 16 years,” a better measure would be to compare surpluses to spending. As a share of total expenditures, the projected ending balance is the smallest in seven years.
  • FY 2017 expenditures are projected to outpace ongoing revenues by $226 million. The gap does not include an accounting “trick” that pushes funding of about $100 million in school levy credits into the next fiscal year.
  • As for the pending 2017-19 budget, two agencies account for nearly all of the new spending requests: $447 million, mostly school aids, from the Department of Public Instruction and $336 million from the Department of Health Services.
  • The November 20 reports also touts the status of the state’s Budget Stabilization (“or rainy day’) fund, which should be viewed with caution. The fund has $280 million in it, but no new deposits have been made in the past three years.

A new report from the National Association of State Budget Officers also points to more clouds on the horizon for state budget-makers nationally. Revenue growth slowed in 2016, and half of the states have suffered revenue shortfalls since the start of the fiscal year. Nineteen states have already enacted mid-year budget cuts in response.

The NASBO report adds that, unlike Wisconsin, even in the face of increased budget pressures for health care education, and infrastructure, “most states continue to strengthen their rainy-day funds, with 29 states making deposits into these funds in fiscal 2016 and 26 states projecting increases for the current fiscal year.”

Click here for a free copy of full WISTAX analysis of the upcoming budget challenges.

Click here to read a summary of the NASBO report.

 

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On sales tax holidays

On Wednesday, Governor Walker said he would include in next year’s state budget a sales tax holiday on school supplies. State residents may be unfamiliar with them, but in 2014 WISTAX wrote about a similar proposal. Important excerpts are reproduced below; the entire text is here ().

The case for a sales tax holiday

The lead assembly author of AB 108 calls it a “no-brainer.” In a recent letter, a lobbyist representing the state’s largest retailers offered a number of specific claims in support of a holiday:

  •  First, it would provide “an economic boost in these tough times.”
  •  Second, it would provide “welcome tax relief for working families.”
  •  Third, it is popular and common. As mentioned, a number of states had one or more sales tax holidays in 2013.
  •  Fourth, “revenue collections to the state are not negatively impacted due to increased economic activity surrounding tax holidays,” according to a study of a 2010 Florida holiday commissioned by the Retail Foundation there.
  •  Finally, the holiday “would encourage customers from surrounding states to come to Wisconsin,” while at the same time encouraging Wisconsinites to “shop locally.”

The case against a holiday

Opposition comes from a range of philosophically diverse groups whose comments, in no particular order, are much abbreviated below.

  •  Tax Foundation: “Rather than pro-viding a valuable tax cut or a boost to the economy, sales tax holidays impose serious costs on consumers and businesses without providing offsetting benefits.”
  •  Heritage Foundation: “[they] do not increase demand for anything . . . [and] discriminate between products covered by the exemption and those not covered.”
  •  Institute on Taxation and Economic Policy: “a boondoggle” and “too poorly targeted and temporary to meaningfully change the regressive nature of a state’s tax system.”
  •  Citizens for Tax Justice: “[they] end up benefiting wealthier taxpayers, who have more . . . flexibility to shift timing of their purchases.”
  •  Heartland Institute: “Tax holidays attempt to mask the wider problems in a sales tax system . . . rather than fixing the actual problem.”

Independent research

Few dispute that sales of exempted items jump during tax holidays. But, if advocates’ claims are true, new economic activity and tax revenue would rise annually, and families of modest means would see tax relief. In addition to Florida research mentioned, studies from New York tax officials (NY), the University of Michigan (UM), Georgia State (GSU), and the Chicago Federal Reserve (ChiFed) shed light on these issues:

Economic stimulus? NY found that a 1997 clothing holiday did not boost annual sales but rather delayed them until the holiday. UM used 2007 in-store scanner data to find that timing shifts (not new sales) explained a major part of holiday computer sales in these states: SC (90%), GA and NC (both 82%), MA (42%), and NM (37%).

More telling for economic growth, the ChiFed team used 1997-2008 daily household consumption data to conclude that tax holidays did not generate “any statistically significant response to consumption of either food for home use or non-exempt items.” Indeed, they found evidence of reduced consumption of these items during holidays.

Added revenue? The above studies all suggest lost revenue from sales tax holidays. GSU confirms that using 1986-2010 tax collections and controlling for other factors. Researchers estimated state revenue loss from a four-day holiday at $36m to $50m, “substantially larger” than had been estimated for the 2010 legislature.

Tax relief? In comparing non-holiday and holiday shopping periods over 12 years, ChiFed researchers also found that it was “only the wealthiest households that take statistically significant advantage of STHs [sales tax holidays].” In fact, there was “no statistically significant change in consumption for the lowest-income households.”

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