State Tax Collections Come Up Short

State policymakers got some disappointing budget news last week, when the Department of Revenue (DOR) released state tax collection figures late Thursday. The revenue shortfall doesn’t pose imminent budget problems, and I’m somewhat relieved that the shortfall wasn’t larger, but the drop in the 2015-16 tax revenue might pose a problem in the second half of our biennial budget, particularly if the drop is repeated this year.

The new DOR figures show that revenue growth for the last fiscal year (ending on June 30) was $85 million (0.6%) short of the amount projected by the Legislative Fiscal Bureau (LFB) back in January. That January estimate had already been lowered by $29 million below the amount anticipated when the 2015-17 budget bill was enacted a little over a year ago.

There are a couple of reasons why the disappointing revenue numbers don’t pose an imminent problem. First, the Fiscal Bureau projections released in January indicated that the state would finish the 2015-16 fiscal year with a gross balance of $284 million. Second, spending was probably significantly less than anticipated – thanks in part to the Walker administration’s deferral of some debt payments. Putting aside the question of whether moving those payments into the future was advisable, that action does give the state a larger margin of error during the current biennial budget.

The worrisome part of the reduced revenue is that it complicates the already difficult task of keeping the budget in balance in the current fiscal year (2016-17). The January LFB projection was that the gross balance would be only $135 million at the end of that fiscal year, so an $85 million shortfall could be somewhat problematic, especially if we don’t have a big revenue bounce this year from the lower-than-expected starting point.

The LFB had projected in January that tax revenue would grow 4.4% in 2015-16 and 3.2% this year. But because the growth in the first year fell short of the expected amount by 0.6%, reaching the amount of tax revenue projected for this year will now require 3.8% growth. Anything less than that will add to the past year’s $85 million shortfall.

Commentators often make statements to the effect that a shortfall on the order of 0.6% isn’t much and is within the usual margin of error for revenue projections. That’s a very valid point, and it might be a source of consolation in the majority of states, where revenue volatility is taken into account when lawmakers set aside significant budget reserves. Unfortunately, Wisconsin lawmakers typically don’t set aside much in the way of reserves to provide a cushion against budget shortfalls. As a result, even relatively modest revenue shortfalls in Wisconsin can lead to deeper budget cuts and the deferral of debts into the future, and occasionally can even lead to tax increases.

We’ll get a somewhat better picture of the state’s budget situation in mid-October when the annual fiscal report from the Department of Administration reveals last year’s spending. And the challenges for the next two-year budget will start to come into clearer focus in late November when revenue projections for 2017-19 are released.