Winnebago County Executive Mark Harris has been sounding the alarm on what he says are fiscally irresponsible tax policies for years.
Harris, the Democratic candidate for Wisconsin's 6th Congressional District, is a numbers guy. He holds a law degree from the University of Michigan and is a trained accountant. And he saw the state's revenue shortfall coming from miles away.
State revenue for the 2013-14 fiscal year came in $281.2 million short of expectations, according to numbers released by the Department of Revenue on Thursday. The state collected $13.9 billion in taxes — about 1 percent less than the previous year and 2 percent less than what was projected.
The shortfall puts the two-year state budget on track to come up at least $115 million short by June 30, 2015, unless the money is accounted for in higher-than-expected tax revenues or lower-than-expected spending. The current calculations also don't include a $25 million revenue sharing payment the Forest County Potawatomi tribe is withholding from the state in a dispute over a proposed casino.
The governor's office promised that the budget will be balanced at the end of the two-year period, which is required by the state Constitution.
"Our state will end the fiscal year with a significant positive fund balance and we will finish the biennium with a balanced budget," said Laurel Patrick, spokeswoman for Gov. Scott Walker. "The total revenue collections are less than 2 percent lower than estimates. As we have done in the last several years, we will continue to manage the Wisconsin taxpayers’ money well and keep the state’s fiscal house in order."
But Harris and other Democrats warn that serious cuts may be required to get the state's finances on track.
"The amount here is huge," Harris said. "They’re going to have to cut back on a substantial amount of spending."
Harris expects that to be achieved first by lapsing appropriations that have already been approved, rather than making direct cuts right before an election in which Walker faces a tough fight against Democratic challenger Mary Burke.
"They really need a budget correction, but this administration is not going to do that before the election," Harris said. "The fiscal years run from July 1-June 30. We'll be a good ways into this year before they're willing to address this."
Department of Administration spokeswoman Stephanie Marquis told WisPolitics on Thursday that the administration does not anticipate needing a budget repair bill to address the shortfall.
Harris said the conditions of the current shortfall differ from those that triggered the state's last budget repair bill, when Walker took office.
"There was a big shortfall, but it was caused by lower revenues from a slower economy (that) had been in decline for a time up until then," Harris said. "This one’s a little different. The economy’s growing, and that’s boosting revenues. This largely is a result of tax cuts that went beyond the revenue they had available."
The biggest revenue discrepancies came from income tax and corporate tax collections. Walker has signed about $2 billion worth of tax cuts since he took office, including some that haven't yet reached their full effect. The effects of a $500 million tax cut passed in March are being seen in the amount of income tax withheld from paychecks.
But another tax package could be affecting current revenues and have a greater impact in years to come, Harris said. The domestic production tax credit, slipped into the 2011-13 budget at the last moment, will effectively eliminate state income taxes for many of Wisconsin's corporations, factory owners and agricultural producers by the time it's fully phased in.
The credit kicked in last year, giving businesses classified as manufacturing or agricultural a dollar-for-dollar tax credit of 1.875 percent on reported income. The credit increased to 3.75 percent in 2014, and will increase to 5.526 percent in 2015. Fully phased in, the credit will amount to 7.5 percent in 2016 and beyond.
That means the policy would someday end up providing more in tax credit than taxes owed. Wisconsin's income tax rate doesn't hit the 7.65 percent maximum level until a tax filer reaches $300,000 in income.
At $300,000, there would be enough credit left over to shelter another $39,400 in outside income. The amount of credit exceeds state taxes due until a filer reaches $1.5 million in income.
"I have a strong suspicion they did not realize how many of those credits were going to pass through individual tax returns," Harris — who has been critical of the credit since it passed with the last biennial budget — said.
Because the tax credit still has more phases to come, Harris said "the taxes will continue to be cut, and it’s not clear if there will be sufficient growth in the economy to offset that."
Harris said he doesn't think Republicans have been responsible with their budgeting.
After the revenue numbers were released, Republican lawmakers heralded an increase in sales tax revenue from the previous year, although the amount brought in was still lower than projected.
"Consumer confidence is on the rise as seen by the increase in sales tax revenues. It’s clear that returning taxpayer dollars to the rightful owners can help grow the economy," said Assembly Speaker Robin Vos, R-Rochester, in a statement. "This report is another indication that our budget reforms are paying off for the state as our economy continues to get stronger."
Similar statements came from the co-chairs of the state Legislature's Joint Committee on Finance, Sen. Alberta Darling, R-River Hills, and Rep. John Nygren, R-Marinette.
Harris said that argument proves his point.
"We are having a recovery," Harris said. "Obviously what’s caused the revenue to drop is that the tax cuts exceeded what that recovery was providing. That really proves my point."
In remarks delivered during a conference call on Friday, state Democrats criticized their Republican colleagues' interpretation of the numbers.
"Only someone who doesn’t understand how budgets work or someone who intends to willfully mislead voters could make such an absurd claim that a $281 million shortfall is somehow proof of thriving economic conditions instead of a disappointing reminder that these failed policies aren’t working for Wisconsin families," said state Sen. Jennifer Shilling, D-La Crosse.
While Senate Majority Leader Scott Fitzgerald, R-Juneau, noted in a statement on Thursday that the state has enough money — about $280 million — in its rainy day fund to cover the lagging revenue, Walker told reporters during a campaign stop Friday that he would rather address the shortfall with spending cuts and economic growth efforts than by using the rainy day fund. He did not say whether he would tap into it as a secondary approach.