CHICAGO — Warning that the state faces spending cuts to compensate for sagging revenues, Wisconsin Gov. Jim Doyle in his state of the state address this week proposed a series of tax breaks and a health insurance pool for small businesses to help spur the local economy.
Doyle warned that despite conservative revenue estimates used to craft the current budget, revenues are falling behind because of the economic slowdown. “Make no mistake: challenging days are ahead,” Doyle said. “We will have to delay some of the things we all agreed on. We will have to make deep cuts and hard sacrifices.”
To help offset the effects of the national economic slowdown at the state level, Doyle proposed creating an insurance pool that would provide $100 million in annual subsidies to help small businesses lower their costs. The governor also wants lawmakers to approve tax credits for companies that invest in research and development, grant exemptions from sales and property taxes on equipment used for research and development, and increase funding that aids start-up companies.
The speech and proposals received mixed reactions. Assembly Speaker Mike Huebsch, R-West Salem, agreed with the governor about the need to focus on the economy and health care, but in a statement yesterday he pushed Republican proposals to promote economic development. The Assembly is controlled by Republicans while the Senate is controlled by Democrats. Doyle is a Democrat.
The latest state figures show tax collections for the first half of the current fiscal year are growing at a rate of just less than 1%. The state previously forecast a 3% growth rate in its major taxes including the sales tax and personal and corporate income taxes. The state had originally projected a $65 million ending balance in the current fiscal year.
Doyle, now in his second term, said little more about the possible size of the budget shortfall or how much spending might be cut. While issuing the warnings, Doyle also touted improvements enacted in the current biennial budget, which runs through June 30, 2009, including a first-time deposit of $55 million in the state’s rainy-day fund and spending cuts, saying they would help the state manage through a slowdown.
Rating agency analysts have praised Wisconsin for fiscal improvements achieved in recent years, including a reduction in the state’s reliance on one-time revenues. That change has in turn reduced its structural imbalance. But, the state’s fiscal and political structure hinders it ability to achieve dramatic improvements and an economic downtown would prove a significant setback.
The state last fall lost the positive outlook on its credit from Standard & Poor’s which said Wisconsin still lacked the revenue strength, tax structure, and spending restraint needed to make greater strides in building its reserves. Fitch Ratings and Standard & Poor’s rate the state’s $4.6 billion of general obligation debt AA-minus and Moody’s Investors Service rates the state Aa3.
Wisconsin’s difficulties lie in part on its high level of nondiscretionary spending for schools and its current tax structure, which has resulted in limited revenue growth. While lawmakers did approve a cigarette tax increase and various spending cuts in the current budget, operating margins remain very tight, analysts have warned.
“Any variation in revenue performance could produce relatively large funding gaps, which are not easily recoverable given existing resources,” Standard & Poor’s Peter Block wrote in his agency’s report.
The state does have some factors in its favor such as its diverse economy, good liquidity, moderate debt levels, and fully funded pension and other post-employment benefit liabilities. The state carries a structural deficit of about $1.5 billion in its current $57.2 billion budget, down from $3.2 billion several years ago. That figure would drop further to about $900 million going into the next budget.
