Night and Day, Mostly, on Wisconsin Finances

It’s far from a perfect picture of financial health, but, despite some recent slippage, Wisconsin’s fiscal position and business climate have made a night-to-day turn-around since Gov. Scott Walker and the GOP took over the reins of state government in 2011.

His administration has had the advantage of a gradually improving economy, especially in comparison to the tsunami that crashed through the national and state economies from late 2007 to 2010. That devastation, engendered by gross negligence – at best – on Wall Street and in the nation’s capital, triggered the previous Doyle Administration to raise taxes, jack spending, raid segregated funds and engage in all manner of financial gymnastics.

On the positive side of the state’s current fiscal and tax ledger are reversed deficits, lower taxes, a start on healthier reserves and improved tax rankings.

On the negative side are higher debt, a thin budget balance going forward and a remaining large deficit under standard accounting rules.

The improvement in the state’s fiscal scorecard has allowed Rick Chandler, secretary of revenue, to say, “The state is no longer in a crisis management mode.”

Here are some of the salient points in the state’s financial picture and business climate posture:

• We are projected to drop out of the Big Ten in tax rankings. The Wisconsin Taxpayer Alliance pegs the state currently at 12th in state and local taxes as a percentage of per capita income. That reflects budget changes made since 2011. (Minnesota, which has been raising taxes, leaped past us to 8th.) Chandler put tax reductions at $1.4 billion in the last two budgets, maintaining that most of it is going to the middle class.

• From a projected deficit of $3.6 billion going into the 2011-2013 budget, the state ended up with a positive carry-over of $759 million going into the 2013-2015 budget. That’s great progress, but the carry-over projected for 2015-2017 is a slim $125 million. Any hiccup in revenues will bring red ink.

• Lowered business taxes, particularly for manufacturing and agri-business, which Chandler calls “the twin drivers of the Wisconsin economy,” are now a selling point for the state. State corporate income taxes for those two sectors will largely phase out by 2016. Capital gains are now exempt for investments in Wisconsin businesses if held for five years. Angel investment credits have been expanded, which stimulates startups and job growth. And health insurance premiums for employees are now 100% deductible. So are Health Savings Account contributions. That’s a much improved tax climate for business expansion here.

• Property taxes have leveled off since 2010. They were $2963 then for a median value home and are projected at $2925 for 2013. That’s the result of clamps on local spending and the savings from the notorious Act 10 that allowed local governments to manage employee benefit costs.

• While the state budgets balance, as required by law, state debt is rising sharply, mainly to fund road building. It will rise to by $2 billion in this budget to $16 billion, including $1 billion for transportation and $1 billion for other capital projects. Economic times are better, so we should be paying down debt, not adding to it. GOP fiscal conservatives are not walking the talk. That drains some of the credibility of Gov. Walker’s criticism of President Obama for doubling the national debt in his five years in office, not that such criticism isn’t valid. The federal debt growth as a percentage of revenues makes Wisconsin’s debt growth way low in comparison.

• We have a “rainy day” reserve fund of $278 million. Be Bold 1, the state’s economic plan adopted by major economic stakeholders in 2010, called for a fund of about $1 billion, so we have a good start. That mainly happened because state law requires part of excess revenues to go to that reserve.

• The GAAP deficit, the real state deficit, was reduced by about $800 million for the biennium to $2.2 billion at the end of 2012. Be Bold called for its elimination by the 2023-25 budget. Again, a good start.

• Wisconsin still relies too heavily on the property and income taxes. We rank 10th highest for property taxes among the states and 12th for income taxes. Our sales taxes are 35th, so many state strategists think Wisconsin, for competitive reasons, should raise the sales tax a point or two and drop the other two taxes by the same dollars. Polls show people feel the pain of the sales tax the least. It is income and property taxes that drive people and businesses elsewhere.

So, we are in a better place fiscally than we were in the aftermath of the economic meltdown. Some of the gain came from the inevitable recovery of the economy, some from disciplines and policies inaugurated by the Walker Administration.

The administration could take another step forward toward fiscal health if it bit the bullet on health care costs for state employees and Medicaid. Even though the federal government shows no clue about managing the costs of entitlement programs, hence the deficits and rising debt, some states are using innovative management to tame that beast.

Walker would be a more serious presidential candidate if he would follow suit and cracked that nut.

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