Wisconsin's 'Phony' Budget Crisis

Opponents of Wisconsin Republican Governor Scott Walker say that the governor is ginning up a phony deficit crisis. Opponents say Wisconsin is in surplus, not in deficit. They also say corporate tax cuts caused the deficit. Wrong on all counts.

The state's deficit is very real. Fox Business has Wisconsin's nonpartisan Legislative Fiscal Bureau report. There is a section that, read in isolation, does show a $121.4 million general fund gross balance as of June 30, 2011, and a net balance of $56.4 million. These are the figures used by the governor's opponents to say the state is in surplus.

But the fine print of the rest of the memo spells out at least $315.7 million in unpaid bills or expected shortfalls in programs such as Medicaid services for the needy ($153.2 million alone), the public defender’s office and for corrections. (EMac note: The figure rises to $437 million if you factor in all of the costs submarined in the footnotes).

The state owes Minnesota $58.7 million under a discontinued state income tax reciprocity deal. The deal covered individuals who live in Wisconsin and earn income in Minnesota. More individuals live in Wisconsin and earn income in Minnesota than live in Minnesota and earn income in Wisconsin.

Also, like most states Wisconsin has succumbed to budget gimmickry, which happened under the prior Democratic governor. The $121.4 million figure doesn't include $200 million that Wisconsin owes to the state’s “Injured Patients and Families Compensation Fund.” That $200 million is a debt that the Wisconsin state supreme court declared resulted from an illegal raid on the fund under former Democrat governor Jim Doyle, which was done to balance the budget. That the state had to pay court expenses to litigate this obvious asset seizure should be proof enough of the reckless attitude in play toward state finances.

Finally, the $121.4 million figure doesn’t include the $25.2 million owed to the public defender’s office ($3.5 million) and the state’s department of corrections ($21.7 million).

And the claim that Gov. Walker's corporate tax-cut bills approved in January are responsible for the deficit is wrong, too, because the cuts have not taken effect yet, so they cannot be part of the current problem.

These cuts do not take effect until the next two-year budget, from July 2011 to June 2013.

Set aside for now that many economists argue that corporate tax cuts actually keep businesses and jobs in the state, and create revenue. Look at companies fleeing Illinois and California due to tax hikes. Witness Indiana’s Republican Governor Mitch Daniels giving a shout out to Illinois businesses to pull stakes and relocate to Indiana, given Illinois dramatic tax hikes to cut its deficit.

The Legislative Fiscal Bureau’s report shows that corporate income and franchise taxes “are estimated to increase from $834.5 million in 2009-10 to $935.0 million in 2010-11.” That’s right, increase.

The report notes: “The estimates also have been adjusted to reflect the impact of corporate income/franchise tax law changes enacted during the 2009-11 biennium.”

The report also says: “Collections are forecast to decrease to $900.0 million in 2011-12, and then increase to $925 million in 2012-13.”

However, the bureau’s “analysis indicates that for the three-year period, aggregate, general fund tax collections will be $202.8 million lower than those reflected in the November/December reports.”

Why? Not just because of corporate tax cuts, analysis which seems to rely on the static modeling technique, rather than dynamic scoring.

The bureau’s report says: “More than half of the lower estimate ($117.2 million) is due to the impact of Special Session Senate Bill 2 (health savings accounts), Assembly Bill 3 (tax deductions/credits for relocated businesses), and Assembly Bill 7 (tax exclusion for new employees).”

So individual cuts and business incentives to create jobs are behind the estimated shortfall here.

Like other states, Wisconsin has relied on federal aid. Wisconsin’s state pension has projected rosy stock market returns, which led it to in turn set aside less money in those funds, because heck the market will take care of it.

Many states did likewise, betting on average 8% to 10% annual returns. That budget hole, among others, has led to the states to act like the tin can on the just married car always clamoring after federal money.

When will the U.S. do what the International Monetary Fund does when it gives aid money out to reckless governments? The IMF ties federal aid to specific covenants like pension reform.

Taxpayers increasingly pay for rising government union compensation. Just as in Wisconsin, taxpayer funded government worker paychecks are dunned 1% to pay for union dues, which unions then use to lobby for tax and spend increases.

Tax Foundation has data that shows that last year, 25 states saw unions lobbying for tax and spending hikes. Tax Foundation says 29 states raised taxes by $24 billion last year, the largest sum since 1979.

The real fight in Wisconsin is the governor’s push to end not just collective bargaining for benefits, but also for automatic payroll deduction of union dues.

State battles like the one in Wisconsin will get worse as the Administration’s stimulus money runs out this June.