How the Surplus Deal Would Have Revealed the Budget Crisis

The Risk of Spending the Surplus

The Surplus Deal which failed to pass through the Senate has been widely misunderstood as a lost opportunity to reduce taxpayer burdens, but the deal would've wiped out the surplus, exacerbated the structural deficit, and baked-in hundreds of millions of dollars in new spending into the next budget. Had the Deal passed, the next legislature would have been forced to address the state's fiscal problems without a surplus to fall back on, and taxpayers would be in an even worse position than they are now.

When the biennium began the surplus stood at $4,605 million and was expected to close out at $2,367 million by the end of FY27. This $2,238 million reduction in the surplus is the result of the state's structural deficit, where Taxes and Departmental Revenues ($47,204 million) are insufficient to cover the state's Net Appropriations ($49,442 million).

If we take the spending and expected revenue for FY27 and use that as the base-year doubled for the next budget cycle, then by the end of the biennium the surplus would amount to only $525 million (Table 5). But this assumes virtually no growth in appropriations from the general fund and constant revenue.

Don't Count on Revenue

Most likely legislators are counting on revenue growth substantial enough to prevent such a marked decline in the surplus, but why should they?

Over the last five budgets, the closing balance of the general fund account has been anywhere from 16-8700% higher than originally projected. But six budgets ago, the ending balance was 99% less than projected. During the 2013-15 biennium, the state estimated it's general fund balance would close at $91 million, but it actually closed at only $254,000.

This couldn't have been foreseen. But if it happened once, it can happen again. And given the current state of the economy, expecting substantial revenue growth to mitigate the drawdown in the surplus seems dubious at best. Legislators and proponents of the Deal are counting on earning revenue they do not yet have, in a future they cannot know.

This is always the case with budgeting, but the difference here is that proponents of the Deal are willingly getting rid of a cushion that protects the state's financial position in the case of unforeseen events, and at a time when the budget is fundamentally unbalanced. The surplus is being reduced not because the state can afford to do away with it, but because it is spending more than it collects in revenue.

Count on Spending

Furthermore, why should taxpayers assume that government spending will remain constant?

All Funds spending in the current budget increased by 15% over the last biennium and rises by an average of 7% each budget cycle. GPR increased by 3%. Bonding increased by 357%. Given the state's history of ever-increasing spending, it's reasonable to assume that the surplus will fall short of the estimated $525 million.

With respect to the Surplus Deal, MacIver reported on the fact that the Deal results in $819 million of ongoing commitments that will be factored into the next budget process, and which would result in a negative general fund balance of $380 million.

Since then, the LFB has published a more detailed estimate of a cost-to-continue budget should the Deal have passed. Unlike the first estimate, this one includes the cost of all Acts passed during the session, with a new, revised general fund balance.

According to the new estimate, a cost-to-continue budget would result in a general fund balance of -$2.95 billion at the end of the next biennium.

In addition to the state's underlying financial problems coming to the surface as a result of this deal, the narrative surrounding the extent of the "tax relief" this deal afforded have been overstated. 

In reality, only the rebate, income tax deductions, and property tax credits were true relief. All of the school aid payments were simple transfers that would not have necessarily lowered taxpayers' total tax liability. In reality, taxpayers' paid more in income taxes so they could lower their property taxes. Money moved from the left hand to the right.

Problematically, there is also an inevitable degree of subsidization from income tax payers to property tax payers because many workers do not pay property taxes directly or in substantial amounts, and many property tax payers are retired and on fixed incomes, which are tax-exempt in Wisconsin. The fact that these items result in ongoing increases in GPR appropriations is proof of this subsidization. On the other hand, the income tax deductions and property tax credits merely result in a decrease in revenue.

Ultimately, the purpose of the Deal was mixed: to provide some tax relief while also increasing state spending. Senior Fellow Bill Osmulski explained it well when he said:

"Every time Wisconsin has a positive fund balance or expects a surplus, it uses that as an excuse to increase permanent spending. Tax collections won't always exceed expectations. At some point, the pendulum will swing back, and the state will be facing some very tough choices."