How to put the state budget in the best position for 2023-2025

With the unexpected good news Tuesday of an additional $4.4 billion in tax revenue, the legislature and the governor have the opportunity to accomplish priorities that were often thought to be unrealistic: reduce taxes (Assembly Speaker Robin Vos immediately called for a massive tax cut yesterday), implement a learning loss recovery program for students who have been left behind from school closures, or expand strategic investments like broadband to ensure all Wisconsinites have access to high-speed internet. 

All of those options have merit – and IRG immediately supported giving some of the money back to taxpayers. But here’s an additional idea, one that would put the state in the strongest fiscal position for the 2023-2025 budget: eliminate the projected GAAP deficit, put money into the rainy-day fund, and ensure no structural deficit.  

A few weeks ago, I wrote a column describing why structural deficits and Generally Accepted Accounting Principles (GAAP) for state budgets matter and how they can be an important – if understated – piece of the biennial budget debate. In short, GAAP determines the budget’s long-term stability, measuring the projected deficit as well as items like cost of borrowing. As I referenced, Governor Tony Evers’ proposed budget would leave the next budget with a $1.3 billion hole while simultaneously transforming our hard-earned positive GAAP balance into a nearly $1 billion deficit. 

With news of an additional $4.4 billion in tax revenue, the need – and generational opportunity – to soundly build the 2023-2025 budget becomes paramount. Both political parties could support this concept. 

This becomes more important when we look deeper into the Legislative Fiscal Bureau’s (LFB) latest revenue re-estimates. The numbers are astounding: additional $1.45 billion in the current fiscal year (ending June 30), additional $1.54 billion in 2021-22, and an additional $1.44 billion in 2022-23. This is on top of $19 billion in federal revenue the state expects to receive through the various federal Covid relief acts.

So the state has no financial problem and can spend whatever it wants without consequence?  Not so fast.  There are a few concerns of which we should all be aware.

The LFB bases its revenue estimates (especially table 3) on projections regarding personal income, consumer prices, real GDP, housing costs, and other items. Personal income, economic profit, light vehicle sales, and housing look strong in 2021. 

However, these numbers quickly show a downward trend in 2022 and 2023. For example, sales of new and existing homes and housing starts are projected to drop precipitously. Simultaneously, personal income is projected to slow to a crawl in 2022 followed by a modest rebound in 2023. General Fund tax collections follow a similar trend (Table 4).  

Why are there downward trends in important economic indicators? For starters, the LFB revenue projections are based upon, in the short term, consumers spending more because of the federal government stimulus. However – as we’ve seen in the past – the federal stimulus will not last forever and the LFB numbers reflect this. Even if some of it is extended (likely through more borrowing from China), the volume can’t realistically be sustained without real impacts on the macroeconomy as well as the micro economy, which means your household and business. 

In addition, due to hyper spending at the federal level, inflation is on the rise for the first time in years, combined with and in part driven by scarcity of various consumer goods, including basics (have you tried to buy lumber lately?  Even if you can afford it, you probably can’t find it).  This has led to some economists using a word that many of us lived through in the thankfully forgotten Jimmy Carter era: stagflation.

These points were echoed by Senate President Chris Kapenga in Center Square:

“First, all of this money will need to be paid back. Second, I believe we are on the verge of significant inflation, which will decrease the value of each dollar. This is a temporary jump in tax revenue – sound financial planning would require this money is not spent on more government programs but returned to the taxpayer. There is no magic money tree, folks.”

With such warning signs, a fiscally prudent option for the surplus would be for both sides to work on putting money back into the taxpayers’ pockets, making a healthy deposit into the rainy-day fund, eliminating the projected GAAP and structural deficits projected under the governor’s budget, and making reasonable strategic investments in priorities such as broadband access. 

Being fiscally prudent would give the next governor – regardless of who he or she is –a sound foundation to develop the next state budget without placing a higher burden on our families and businesses. The opportunity is here. Let’s not waste it.

CJ Szafir is the President for the Institute for Reforming Government, a think tank based in Madison, WI.