It is clear what this has meant for the Wisconsin economy: Recovery of once-battered manufacturers; the emergence of a strong and diverse service sector; a surge in new business creations; and record low unemployment.

What these years have meant for Wisconsin state government, its tax collections, spending priorities and budgeting practices, is more mixed.  But a look back suggests some unmistakable trends.

Tax Trends

The past decade might be called the “roaring 90’s.”  State tax collections, what the bean counters call “general purpose revenues (GPR),” have increased almost 80% from $5.536 billion (b) in 1988-89 to $9.948b in the year 1998-99.  Collections have out-paced growth in prices, population adjusted for inflation and personal incomes.

Had GPR taxes grown at the rate of inflation over the past ten years, they would have increased 37.7% to $7.628b.  If they had kept pace with population and inflation growth they would have risen 49.8% to $8.292b.  And had state taxes grown at the same rate as personal income, they would be up 72.6% to $9.555b.

There are a variety of reasons for the revenue surge.  Obviously, this has been a time of prosperity for Wisconsin.  The 1991 recession that slowed the country had minimal impact here.  Per capita personal income, which was close to 8% below the U.S. average after the punishing 1981-83 recession, has inched toward parity with the nation.  More jobs and higher incomes have spurred tax collections.

So did increased business and investment activity.  The unprecedented rise in the stock market left both the federal and state treasuries awash in revenue from capital gains taxes.  And new businesses that once would have paid corporate income taxes are frequently organized today as partnerships or proprietorships with income taxed on an individual, rather than corporate, basis.

Another factor is the state’s individual income tax law.  Though tax rates were cut in the mid-eighties, the income tax was not updated for inflation between 1988 and 1998.  As a result, tax brackets, tax credits and the standard deduction remained unchanged, while incomes grew, due to inflation or new job opportunities.  It was not uncommon for a middle-income family whose income merely kept pace with inflation to see its state income tax burden grow faster.

Individual income taxes were 46.5% of state taxes in 1989, but 53.0% in 1998.  A small tax cut pushed that figure down to 51.9% for fiscal 1999.  Between 1989 and 1999, income tax collections doubled (+100.4%), growing by almost $2.6b.  This outpaced all GPR collections (79.7%), as well as both sales (74.0%) and corporate income (41.7%) taxes.  In recent years, headlines have repeatedly announced large state surpluses, of which 70% or more have been attributable to the income tax.

In other states, strong revenue growth has brought hefty cuts in state tax.  Here, the state’s focus has been on “buying down” local property taxes.  A $1.2-billion increase in state school aids and tax credits begun in December 1996 put considerable pressure on state finances.  While property taxes as a percent of personal income dropped to their lowest in a decade, the individual income tax rose to its highest in two decades.  Unlike its neighbors, Wisconsin could not enact major state tax reductions because it needed virtually every dollar of new revenue to subsidize local school taxes.

The impact of the state’s decision to provide, on average, two-thirds of public school revenues has clearly affected state tax policy.  It has had an even greater impact on state spending.

Between 1989 and 1999, state general fund expenditures grew by $4.39b (81%), from $5.45b to $9.85b.  Not surprisingly, this figure roughly matches the increase in revenues over the same period.  However, not all programs have fared equally (see below).
 

• School Aids.  In dollar terms, all state programs are dwarfed by school aids and related tax credits.  During the past decade, about 55 cents of every new dollar spent-$2.437b of $4.394b in total-has gone to school tax relief.  In 1988-89, $1.891b was spent; in 1998-99, the figure was $4.329b, or 129% higher.  While schools claimed 34.7% of the GPR budget ten years ago, they now account for 44.0%-and the share continues to rise.

• Corrections.  Also driving state expenditures over the past decade has been spending on adult prison facilities.  Due to repeated reorganization of correction programs, obtaining an accurate picture of the impact of various “crime-fighting” initiatives is not entirely possible.


Nevertheless, the trends are unmistakable.  Although still not a large part of the state budget in dollars, corrections is the state’s fastest growing major program in percentage terms.  Spending jumped 325% in the past ten years, from $146.1 million (m) in 1988-99 to $620.4m in 1998-99.

This $474m increase represents one in every nine new GPR dollars spent.  Put another way: A program that claimed about 3% of state spending ten years ago now accounts for more than 6%.  Debt service for prison construction is not included in this figure.

• The Other ‘Big Three.’  Schools and prisons now account for over half the state budget.  Adding aids to counties and municipalities (“shared revenues”), the University of Wisconsin (UW) System and Medicaid (medical assistance for the poor), and over three-quarters of state general fund spending is represented.

The point is best driven home graphically.  Cumulative percentage growth in major GPR programs is pictured below.  As already mentioned, corrections has led the way (up 325%), with spending accelerating since the mid-nineties.  School aids and credits rose 129%, with a noticeable jump occurring with the change in state school funding in 1995-97.  Both items surpass the rise in all GPR spending.

Medicaid (74%), the UW (36%) and municipal and county aids (25%) have all grown less than this amount.  The latter two have also trailed the consumer price index (up 38%).

Shared Revenues.  In the early seventies, state government used a dual strategy to provide assistance to local units of government, spending about 1.7 times as much on school aids and tax credits (34.8% of GPR) as it did on revenues shared with counties and municipalities (20.0%).

Since then, the legislature has de-emphasized shared revenues in favor of school “property tax relief.”  The ratio of the latter to the former is now more than 4.3 to 1.  Annual increases in school property taxes have moderated in recent years, but other local levies have continued to increase at more than 5%.

UW.  The same pattern can be seen in funding for public schools and the University of Wisconsin System.  In 1972-73, when the UW System was created, the state’s colleges and universities represented about 17% of the general fund budget.  Spending on school aids and tax credits was about double the UW.  By 1983-84, school aids/credits were 33.6% of the GPR budget, while the university was 12.8%, a ratio of 2.6 to 1.

State pick-up of school funding moved the school/UW ratio to 4.8 to 1.  In 1998-99, 44% of state general spending was for school aids and credits, while 9.2% went to the UW.

Expenditures for operating agencies of state government have fared similarly to the university and shared revenues.  In short, there has been a major shift in state spending priorities in the last decade.

Is There a Plan?

The rationale for these changes has been articulated on the campaign trail and understood in the corridors of the state Capitol: school property tax relief.  Whether the legislature understood then, or the public understands now, the impacts of these changes are far from clear.

If one were to summarize state budgeting in the nineties, it would be: Take whatever revenue comes in, budget for schools and prisons, and pray.  Fundamentally, a budget is supposed to be a plan for taxing and spending.  But, is there any evidence of a plan?

In every fiscal year since 1993-94, actual state revenues have exceeded initial projections offered by the governor.  Part of this is due to the conservatism of forecasts, but much of it is due to an unexpectedly strong economy.

Between fiscal years 1994 and 1999, actual revenues have cumulatively surpassed collections by more than $1.4b; if the current state budget is included, that figure rises to $1.6b.  If one examines growth in state taxes beyond what personal income growth would provide, as was done earlier, cumulative “excess” tax collections during 1994-99 have been more than $2.6b.

   Year          Governor          Actual
Ending       Proposed     Revenues       Diff.

       94          $7,293.2        $7,434.6           $141.4
       95            7,687.7         7,945.6             257.9
       96            8,334.7         8,346.4               11.7
       97            8,779.4         8,954.6             175.2
       98            9,260.2         9,700.8             440.6
       99            9,727.5       10,124.8             386.2
     00p          10,415.7        10,688.7            273.0 b
     01p          10,540.7        10,422.0           -118.7 b

            b = budgeted

The problem has not been a shortage of money.  Yet every budget, as passed, has ended with virtually not net balance.  In the past three biennia and the current one, the governor and legislature have collectively decided to spend more in the second year than was expected in revenues:  $20m more in 1994-95; $346m more in 1996-97; and $90m more in 1997-99.  The figures for 1999-2001 will approach $400m.

In a July 1999 study, the Wisconsin Taxpayers Alliance reviewed state taxing and spending patterns over the past quarter century.  Removing inflation from the picture, it was found that “about 40% of ‘real’ spending growth can be explained by two factors:  (1) ‘real’ tax growth in the year prior and (2) the presence of a gubernatorial election.”

What does this mean?  When revenue estimates are revised upwards, when unexpected surpluses appear in the state treasury, budgets are almost immediately boosted.  Figures speak for themselves: Compare annualized growth in inflation-adjusted state taxes and spending during five-year periods over the past 25 years.

  1975-80                  1.8%                            0.4%
  1980-85                  0.8                              -0.4
  1985-90                  1.3                               1.2
  1990-95                  2.9                               2.4
  1995-99                  3.8                               3.5

Calls for sweeping tax reform, or setting aside money for a “rainy day” to avoid tax increases and service cuts in a recession have been ignored.  Proposals to “endow” certain public services, e.g., health education, and fund them from investment earnings rather than taxes, have fallen on deaf ears.  In short, there’s not much evidence that Wisconsin state government can plan beyond the next year, perhaps the next election.