(The Center Square) – A combination of increased spending and significant tax cuts will eliminate much of the Wisconsin state government’s remaining historic surplus and — if the economy tanks — might lead to spending cuts in future years.

“The biggest factor is economic growth,” said Tyler Byrnes, a senior research associate for the Wisconsin Policy Forum. “If you’re having good economic growth, you can weather the storm more easily.”

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The nonpartisan group analyzes policies to help inform the decisions of elected leaders. It recently called the latest budget an “all of the above” compromise between Republicans and Democrats.

That’s because — along with significant income tax cuts — total spending is set to increase about 12% for the 2025-2027 budget years, which started in July. Wisconsin is among about 20 states that have biennial budgets.

That percentage increase to about $111 billion matches another large increase for the last budget, which featured more one-time spending. The new budget differs because spending increases and tax cuts will persist into future years, Byrnes said. It includes about $1 billion in income tax cuts for workers and retirees for the next two years.

In the past decade the state budget has swelled from about $73 billion to $111 billion, a 53% increase. 

States have been flush with cash since the coronavirus pandemic due to higher levels of federal funding and sales tax revenues, and many have matched those surpluses with more spending and tax cuts.

Wisconsin had a general fund balance of about $7 billion in 2023. That is projected to dwindle to about $770 million in 2027, although the state has an additional emergency fund with $2 billion.

The economic factors loom large because a downturn has wide-ranging effects: It can lead to decreased revenues from sales taxes and the state income tax — which is the largest revenue source for Wisconsin — and spending increases for residents who qualify for subsidized health insurance and other assistance.

“If we see continued softening in economic growth, that will make it tough,” Byrnes said.

Other important factors that might complicate future budget decisions include: increased costs for Medicaid; reductions in federal aid; and inflation, he said.

A statement from the office of Gov. Tony Evers, a Democrat who will not seek reelection next year, did not address all those concerns when asked by The Center Square but criticized President Donald Trump and federal Republican leadership for changes to healthcare and food subsidies in the recently passed One Big Beautiful Bill Act.

Evers estimates those changes will cost the state more than $140 million each year.

Wisconsin Senate President Mary Felzkowski and Speaker Robin Vos of the State Assembly, both Republicans, did not immediately respond to requests to comment for this article.

Steady growth

Republicans for more than a decade have had majorities in both chambers of the legislature, although Evers has been governor since 2019. And the Republican Senate ranks were reduced below a supermajority by Democrat wins in last year’s General Election.

That led five Democrats in the Senate to join Republicans to approve the current budget. Four Senate Republicans voted against it.

Before the pandemic the state’s budget had routine spending increases of between about 4% and 7%, according to a Center Square analysis. Massive general fund surpluses led to increases of about 12% in each of the past two budget cycles.

“If you take the pandemic out, the overall state budget from 2010 to 2025 has had pretty steady increases,” Byrnes said.

The largest spending increases in the past decade have been tied to education and healthcare, the analysis showed. An example: funding for the state universities of Wisconsin jumped about 16% in the new budget, or about $2.2 billion. University spending by the state increased between 2% and 4% in the budgets immediately before the pandemic.

State leaders have also used a significant portion of the surplus for roads projects. The transportation budget had increases of about $1 billion and $700 million in the two most-recent budgets, in part to fund those one-time projects.

Other significant spending increases were tied to special education, childcare and hospital reimbursements for low-income residents.

Medicaid funding

The most-significant departmental increase in funding in the new budget is for health services. Part of that nearly $8 billion increase stems from raising reimbursement rates to hospitals for subsidized care for low-income residents.

The state will charge more taxes from Medicaid health providers in exchange for paying the providers more in a bid to gain more federal funding. Wisconsin is among a handful of states that have eschewed more federal funding to cover those expenses for fear that the funding might diminish.

The decision to increase hospital taxes was spurred by the Big Beautiful Bill’s changes to Medicaid funding, which will block those increases and the federal funding that often accompanies them. Overall, the change is projected to add about $300 million to the state’s general fund this budget cycle, Byrnes said.

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Health services spending in future years will be affected by Wisconsin’s aging population. The state’s median age is estimated to be more than 40 — significantly higher than many of its neighboring states.

Medicaid costs increase by age. It can cost the state an average of less than $2,000 per year to cover a child, whereas older residents can average more than $20,000 for long-term care.