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State officials will have an unprecedented opportunity to choose to cut taxes, increase state spending or do both in Wisconsin’s 2023-25 budget, according to a new report from the nonpartisan Wisconsin Policy Forum.

State officials will have an unprecedented opportunity to choose to cut taxes, increase state spending or do both in Wisconsin’s 2023-25 budget, according to a new report from the nonpartisan Wisconsin Policy Forum.

As they do so, they’ll be balancing a record-high projected state surplus with the possibility of a recession on the horizon — and continuing to navigate a divided government in which Republicans control the state Legislature and a Democrat occupies the governor’s mansion.

“The state is in a much better position this year to shoulder the increasing costs of ongoing state and local services and make new commitments,” according to the report, which analyzed budget projections for the coming biennium in comparison with previous budgets. 

To assess the environment for the upcoming budget process, the Wisconsin Policy Forum factored in projected increases in tax collections, base spending levels and routine adjustments — but excluded any proposed new spending from state agencies. In doing so, the Policy Forum projected that the state’s general fund revenue would exceed budgeted spending in the 2023-25 budget cycle by $6.8 billion. 

The analysis comes two weeks after a report from the state Department of Administration projected Wisconsin will end the current fiscal year with an unprecedented $6.6 billion surplus. The state’s record-high general fund balance is independent of its “rainy day” budget stabilization fund, which currently holds its highest balance in state history, at $1.7 billion.

The Wisconsin Policy Forum analysis uses those DOA projections, but unlike the DOA report, it does not factor in the spending requests submitted by state agencies in September, which total $3.62 billion over the biennium, nor does it factor in the rising costs associated with existing services. It does, however, include some routine adjustments, such as routine fund transfers and a placeholder amount for state employee compensation. 

“The state is in a much better position this year to shoulder the increasing costs of ongoing state and local services and make new commitments,” the Policy Forum found, adding that the analysis was bolstered by the fact that it did not include “the billions of dollars in the state’s general and rainy day fund balances that have built up from past annual surpluses.”

Gov. Tony Evers — who was reelected to a second term last month — will factor all of these projections, along with state agency requests, into the two-year budget proposal he introduces in February. Evers’ proposed budget will then go to the Legislature’s Joint Finance Committee before it reaches the full Republican-led Legislature — which will modify it before sending it back to the governor for revision, passage or a veto.

The WPF report notes new spending could be expected over the biennium to maintain current services within Medicaid health programs, to give state employees pay raises to reflect inflation, and to provide additional funds for schools, prisons, local governments and the University of Wisconsin System.

Evers has already shared some of his proposed priorities, including a nearly $2 billion increase for public schools and a $600 million tax cut targeted at low- and middle-income households. 

The WPF report assessed the costs of several proposals based on figures obtained from agency budget requests, the DOA and the Legislative Fiscal Bureau. It found that the cost to continue Medicaid services over the 2023-25 budget would be about $757 million, and that, in the same scenario, declining to use federal funds to expand the state’s Medicaid program would result in a $1.55 billion cost.

The WPF analysis also noted that funding budget requests from the UW System and the Wisconsin Technical College System would cost about $377 million. Increasing general K-12 school aids by 1% in each year of the budget would cost about $157 million, and increasing shared revenue to local governments by 1% in each year would cost about $25 million.

Repealing the state’s personal property tax would cost the state about $202 million over the biennium, and reducing state income tax collections by 1% in each year would cost about $192 million. 

“All budget projections, however, are freighted with uncertainty. Every state budget is based on predictions about tax collections and (the) economy more than two-and-a-half years into the future,” the WPF report notes, adding that factors including inflation, interest rates set by the Federal Reserve, global energy prices and the ongoing war between Russia and Ukraine will affect the state’s finances.

Similarly, the DOA projection was based on a national economic forecast, and external factors that could affect it. Additionally, the DOA report noted, a “disproportionate share” of revenue growth came from “volatile components” such as investment income and corporate profits.

The WPF offers its analyses for context and does not advocate specific policies.

“When writing budgets, lawmakers typically face agonizing choices between meeting the needs of the present and preparing for future challenges that are hard to predict, like a potential recession,” the report read. “This time, state officials may have the financial wherewithal to accomplish both.”

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