While rolling out another slew of arbitrary benchmarks for reopening Wisconsin and offering platitudes of sympathy, Gov. Tony Evers said, “As much as people believe we’re going to return to the good old days — that’s just not going to happen.” That is true for many of us, but it is especially true for government. The collapse of government revenue due to the government-imposed economic collapse has already begun and it will not subside any time soon. Governments at all levels will need to make huge structural changes to adapt to the new reality.
Our federal government is spending money at an unprecedented level. Congress and President Trump have already committed to $2.4 trillion in COVID relief packages and are discussing spending trillions more. This spending is ballooning the national debt to over 122% of the nation’s gross domestic product, a level higher than the nation had after World War II.
The federal government has a tool that no other government in our nation has. It can print as much money as it wants to pay off the debt. Doing so potentially leads to hyperinflation and the collapse of the American economy for generations, but it can do it. State and local governments do not have that option. If a state or local government can’t cover its bills, it might go bankrupt and default on its loans.
Last week the Legislative Fiscal Bureau released information on the state’s tax collections for April. Since Evers locked down the state’s economy in the middle of March, April was the first full month of lockdown economics. As expected with businesses shuttered, over 400,000 newly unemployed citizens, and people being forced to stay home, state sales and income tax collections plummeted.
According to the preliminary data, total tax collections were down $870 million compared to April of 2019. That is a 43% decline in revenue over last year and an even steeper decline over what the state expected to collect when they wrote the budget. As we approach the middle of May with no end of the economic misery in sight, the tax collections will be far less than what the budget called for. Meanwhile, some expenditures are increasing to respond to COVID.
To put this in perspective, in January, the LFB forecast that the state would end the budget with a $620 million surplus. Governor Evers actually called a special session of the Legislature because he wanted to spend the projected surplus on schools. At the time I argued in this column that it would be immoral to spend money we did not have. A projection is, after all, not actual money.
Thankfully, the Legislature has more sense than Governor Evers and declined to spend any of the surplus. The decline in tax revenues for April alone have completely wiped out any projected budget surplus and pushed the state budget into a deficit. As tax collections in May and for the foreseeable future will also be well below what the budget called for, the state government is facing a massive shortfall thanks to Governor Evers’ decision to crush the state’s booming economy in response to a virus.
The decline in tax revenue is also cascading to all other levels of government. County, municipal, and school governments are also facing a future with a lot less money to spend. The gravy train has skidded off the rails. So far, the governor and local government leaders have done very little to restrain spending. Perhaps accustomed to having someone bail out their bad decisions, they have been very slow to act.
All this means that state and local governments will have to make some big, difficult, and necessary decisions in the coming months to bring spending in line with what the people can afford. Everything must be on the table including employee benefits, pensions, entire departments, buildings, staff for elected officials, the governor’s mansion, schools, universities, and, yes, entitlements.
When this must happen, government employees and beneficiaries are sure to forcefully object, but it must happen. There just isn’t enough money. Just like private businesses and citizens must adapt to the new normal of smaller economy, so must our government.
The reality is that tax collections are down because people simply have less money. Income tax collections are down because people are unemployed or have had their income cut. Sales tax collections are down because people can’t afford to spend money like they used to. Business tax collections are down because businesses are making less and going under. We can’t tax our way out of budget deficits because the money just isn’t there.
The private sector has already shouldered the burden of government-mandated economic ruin. The public sector will have to carry its load too.