Taxes and Fiscal Policy Maciver Budget Blog

February 8, 2017

Walker's 2017-2019 Budget: Taxes and Spending

**April 6, 2017 Update:** The Joint Finance Committee has scrapped all non-fiscal policy items from the Governor's budget proposal, including many items described in this piece. Read more about the latest move out of the budget committee over at our Budget Blog. Most notably, the budget committee struck the Governor's entire transportation budget.

In the below piece, any policy items with an asterisk beside them are now struck from the budget and may be introduced as separate bills.

After spending weeks rolling out aspects of his 2017-19 budget proposal, Governor Scott Walker delivered his budget address today in front of a joint session of the state legislature. Walker said his budget, which increases spending in a number of key areas and reduces taxes, is made possible by an improving economy and prudent fiscal management - which he calls the "Reform Dividend."

Major themes of Walker's budget include large investments in K-12 and higher education. The budget increases K-12 spending by $649 million, reduces tuition for in-state students at UW System campuses, and adds $105.2 million in state funding for UW.

The budget also promises to make government more accountable to taxpayers. As part of this initiative, Walker's budget cuts taxes by nearly $600 million by reducing the lowest two tax rates, putting more of the earnings of a middle income family into a lower tax bracket, and eliminating the state's share of the property tax. The budget also invests more money in local road maintenance and rural broadband.

In addition, Walker's budget includes a variety of new welfare reform measures, a plan he calls "Wisconsin Works for Everyone." The plan adds new work requirements for those receiving government assistance and includes various provisions that make it easier to transition from welfare to the workforce.

Key Takeaways:

Spending: The 2017-19 budget all-funds spending is $76.1 billion, of which $34.5 billion is GPR spending. That's an increase of 2.6 percent (base year doubled) and 1.3 percent (base year doubled) over the last budget, respectively. The governor provides a sizable funding increase for K-12 education, Health Services, and tax relief.

Taxes: The budget reduces the lowest two income tax rates and increases the amount of earnings that fall under the second-lowest bracket for a $204 million income tax cut. It also eliminates the state's portion of the property tax, a $180.5 million tax cut. The budget does not raise the gas tax or vehicle registration fee.

Bonding: Total new bonding in the 2017-19 budget amounts to $1.027 billion, down from $1.067 billion in the current budget. Of the 2017-19 new bonding, $500 million is for transportation.

Positions: This budget adds 445 full-time equivalent positions, mostly in UW, the Department of Corrections, and the Department of Health Services.

Reforms: A major new initiative is to require UW schools to provide a 3-year degree option. The governor also proposes eliminating the state prevailing wage law** and incorporates wide-ranging welfare reforms.

The 2017-19 budget would spend $76.1 billion in total - $37.5 billion in 2018 and $38.6 billion in 2019, the first and second years of the biennial budget. That all-funds total includes state general purpose revenue (GPR), federal revenue, segregated revenue and program revenue.

Total GPR spending, which is spending entirely controlled by the state, would be $16.9 billion in 2018 and $17.6 billion in 2019 for total two-year GPR spending of $34.5 billion.

Compared with the 2015-17 budget, all-funds spending increases by $375 million in the first year and $1.18 billion in the second year - a total increase of $1.55 billion. Using Madison math, or the base year doubled method, that equates to a 2.6 percent increase compared to the last budget. For GPR, spending increases by $862 million. Using Madison math, or the base year doubled method, that equates to a 1.3 percent increase compared to the last budget.

As MacIver has repeatedly pointed out, GPR spending is especially important because it is the funding that the state completely controls. All GPR funds come directly from Wisconsin taxpayers - income taxes, sales taxes, and corporate taxes, among many others.

Walker has described the increased funding proposals for a variety of state agencies in this budget a "reform dividend," made possible by cost savings and revenue increases thanks to reforms passed over the last six years.

Walker has made tax relief one of the top priorities of his administration, and that positive trend continues in earnest with his 2017-19 budget proposal. Walker proposes cutting income taxes by $204 million total by reducing the lowest income tax bracket from 4 percent to 3.90 percent and the second-lowest bracket from 5.84 percent to 5.74 percent. The plan also expands the size of the second-lowest bracket by 25 percent. Since all taxpayers, regardless of income, pay those rates on at least a portion of their income, that's a tax break for all Wisconsin income tax payers.

Walker also zeroes out the last remaining portion of the state property tax - the forestry tax. This tax cut will save Wisconsin property taxpayers $88.8 million in FY18 and $91.7 million in FY19 - a total of $180.5 million over the two-year budget.

These tax cuts and others Walker's budget proposes - including a back-to-school sales tax holiday estimated to lower shoppers' sales tax bill by $11 million per year - would save Wisconsinites nearly $600 million over the 2017-19 budget.

While Walker's tax cut proposals are another giant step in the right direction, Wisconsin is still a long way from a truly fair, economically competitive tax system. In January, the MacIver Institute introduced its ambitious tax reform proposal - a Glide Path to a 3 Percent Flat Income Tax for Wisconsin. In order to make Wisconsin competitive in a global economy, lawmakers should strive for bold tax reform in the upcoming budget deliberations.

** indicates that the item has been removed from the budget, as of April 6, 2017.

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