Super-sized Deficit Faces New Legislature

 Michael Theo  |    December 09, 2008

Recently victorious legislative candidates are probably having second thoughts these days about the jobs they fought so hard to win. Tightening credit markets, stock market implosions and declining tax revenues have created the worst potential budget deficit in Wisconsin’s history.

Between mid-October and mid-November, a projected $1.5 billion budget deficit ballooned into a $5.4 billion potential crisis. If it materializes, a deficit of that magnitude will represent 12.5 percent of the overall budget, which would top the previous mega-deficit in 2003 of $3.2 billion, which constituted 9.5 percent of the state budget.

Wisconsin is not the only state facing major budget problems. Forty-one states are facing budget deficits, according to one national report. Some estimates predict state deficits could reach $100 billion by 2010, or 13-14 percent of the total value of all state budgets. With the potential for states to respond with deep cuts  to infrastructure investments, education, government services and state employees and/or significant tax increases, congressional leaders and President-elect Obama are considering a federal government bailout for state governments. However, a decision on this will likely not be made until after Obama is sworn in as president on January 20, 2009.

As revenues shrink, the Doyle administration has directed state agencies to go back to the budget drawing board to make more spending cuts. On November 14, Department of Administration Secretary Michael Morgan told state agency heads to find ways to cut spending even deeper than the 10-percent cuts ordered earlier. He directed agencies to “carefully review all activities to identify redundancies, low-priority programs and new ways of doing business.” One thing to keep in mind is that the $5.4 billion projected deficit figure is calculated in part by assuming agency requests for spending increases in the upcoming budget. Given the  current fiscal environment, it is likely that most of those requests will be denied. The governor is currently working on the 2009-11 biennial budget, which he is expected to introduce in February.

It is too early to say which state programs will be cut and by how much, but the state’s largest expenditures will be under intense scrutiny. According to a report by the Wisconsin Taxpayers Alliance, the “Big 5” spending programs in state government are:

  • K-12 schools:   $5.94 billion (44 percent of spending)
  • Medicaid:   $1.72 billion (13 percent of spending)
  • Corrections:   $1.076 billion (8 percent of spending)
  • Univ. of Wisconsin:  $1.075 billion (7.9 percent of spending)
  • Shared revenues:       $946 million (7 percent of spending)

These programs constitute nearly 80 percent of the state general purpose revenue budget and thus could face significant cuts if the budget is to be balanced without major tax increases.

Governor Doyle has indicated that his preference is to avoid raising general taxes such as income or sales taxes. But as the deficit grows, so does pressure to balance the books with some tax increases as well. Many observers expect that revenue enhancers supported by Doyle and many Democrats last session, but successfully defeated by Republicans, will be reintroduced in the new budget. These taxes include a hospital gross receipts tax and a tax on oil companies. With Democrats now in control of both houses of the Legislature as well as the governor’s office, these tax increases will likely become law next session.

It’s too early to predict how the governor and the Legislature will choose to proceed, but it seems increasingly clear that it would be impossible to balance a $5.4 billion deficit with all cuts or all tax increases. Some combination seems inevitable. As policymakers ponder their choices, the Wisconsin REALTORS® Association will be making the case that raising the cost of real estate transactions would deepen and prolong the recession, creating additional hardships for Wisconsin families, and thus should be avoided at all costs.

Real estate has always been the leading economic indicator and will lead the state and national economies out of the current recession. Any new policies that increase the cost or frustrate the process of transferring real property in Wisconsin will only worsen and extend our current economic problems. Policymakers should instead concentrate on actions that would reduce the cost of real estate transactions and encourage credit-worthy buyers and sellers to re-enter the marketplace and get our state and national economies moving again.

Michael Theo is Vice President of Legal and Public Affairs for the WRA.

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