Tax shortfall may threaten state servicesMADISON — Collections of the three most important Wisconsin taxes increased less than 1 percent in the second half of 2007 — falling far short of the 3 percent assumed growth needed to cover state expenditures this year and raising fears that deep spending cuts will be necessary.
By: By STEVEN WALTERS/Milwaukee Journal Sentinel, The Daily Telegram
MADISON — Collections of the three most important Wisconsin taxes increased less than 1 percent in the second half of 2007 — falling far short of the 3 percent assumed growth needed to cover state expenditures this year and raising fears that deep spending cuts will be necessary.
Preliminary state Department of Revenue totals show the personal and corporate income tax and the sales tax brought in $5.13 billion from July through December, an increase of only 0.8 percent over the same period in 2006.
Those three taxes account for $9 out of every $10 in general-fund taxes.
Every unexpected drop in collections from those taxes means state government will have $120 million less a year to spend. If tax collections don’t pick up, the shortfall would quickly wipe out the projected $67 million surplus Capitol leaders had hoped for this fiscal year and force reductions across state government.
Democratic Gov. Jim Doyle said he will warn of the economic downturn in his sixth “state of the state” message Wednesday. Many states are facing economic slowdowns, and California must fix a $14.5 billion shortfall, Doyle noted.
In his speech, Doyle said, “I’m going to talk pretty directly that this is a challenge that we have ahead of us, and we have to face up to it. Unless the national economy just totally goes into the tank, this is something we can manage and get through. But it’s going to be pretty tough.”
State spending could be pinched on two fronts, the governor said.
“As the economic activity slows down, you see sales tax revenue slow down, income taxes fall off and bigger demands on public services; Medicaid and other public services come under heavy demand,” he said, adding:
“When the economy slows like this, it’s going to be a real challenge. We’re going to be in a difficult time, and we’re going to ask people to make sacrifices, and do without some things and put some things off that we want to get done.”
It’s still too early to ask for spending cuts, because retail chains won’t report their year-end tax collections until the end of January, said state Revenue Secretary Roger Ervin and Legislative Fiscal Bureau Director Bob Lang.
Doyle said he will suggest targeted tax breaks, credits and exemptions to spur Wisconsin’s economy. It could be a challenge getting the Legislature to approve such a package by the time it adjourns in mid-March.
Doyle, however, could call a special legislative session to fix the current budget, if needed.
Shaky times expected
Economists said the 0.8 percent growth in Wisconsin income and sales taxes over six months was a bad sign.
“It’s expected to get worse as (consumer) consumption falls,” said Donald Hester, a professor emeritus of economics at the University of Wisconsin-Madison.
Tax collections “will be lower in the second half of the year,” said Hester. “We’re in a recession.”
Steve Stanek, a research fellow for the Chicago-based Heartland Institute, said high-tax states such as Wisconsin are especially vulnerable to economic slumps. The nonprofit think tank says it promotes “free-market solutions to social and economic problems,” such as school choice programs and privatization of public services.
Wisconsin elected officials have “been spending money big time,” Stanek added. The two-year budget that Doyle and legislators agreed to in October included a 6 percent spending increase, according to the Legislative Fiscal Bureau.
Asked what advice he would give Wisconsin’s elected state officials, Stanek said: “They need to control spending. They need to control taxes.”
Todd Berry, president of the nonprofit Wisconsin Taxpayers Alliance, said Wisconsin will have more problems dealing with slumping tax collections because governors and legislators have refused for decades to build up a “rainy day” fund.
“There were economic warning signs that the (Doyle) administration and the Legislature might not have been fully taking into account when they were budgeting” last year, Berry said in a statement.
He said economic forecasts are difficult, even for professionals, adding: “That’s why ‘smart states’ smooth out the cyclicality of revenues with regular and repeated ‘rainy day’ fund deposits throughout an economic upturn. ‘Smart states’ don’t pass budgets with trivial ending balances, as Wisconsin has done for years.”
Wisconsin still faces a so-called structural deficit — the gap between anticipated tax collections and spending commitments — of about $900 million through the 2011 budget, Berry said.
One budgeting method, the Generally Accepted Accounting Practices, puts Wisconsin’s latest deficit at $2.44 billion — a $300 million increase in a year.
Wisconsin state officials don’t use that accounting method because it would consider promises of future state aid to local governments as a draw against current tax collections.
— Copyright © 2008, Milwaukee Journal Sentinel/Distributed by McClatchy-Tribune Information Services