The Wisconsin Policy Research Institute puts specificity into a Scott Walker campaign promise to cut taxes further in WPRI’s new report:
Creatures of habit and tradition, Wisconsinites are bound to a tax system that reflects our past and ignores our future.
Wisconsin has become more competitive on the tax front than it once was. The passage of Act 145 in March brought the total amount of tax reductions in the last few years to nearly $2 billion — not an inconsequential sum. And yet, the state still imposes a larger tax burden on its citizens and businesses than most other places.
Economists from Suffolk University’s Beacon Hill Institute for Public Policy have determined through economic modeling that we would benefit long-term from further tax cuts. And yet, they’ve found, Wisconsin doesn’t just suffer from high taxes. It suffers from the wrong tax mix.
While our sales taxes are lower than those in two-thirds of other states, our income and property tax burdens remain significantly higher — an economically detrimental combination. There is a clear need for Wisconsin to step back on firm ground and consider a new tax mix that lowers more harmful income and property taxes and broadens the sales tax base.
WPRI’s report begins with this fact …
Compared with the rest of the country, taxes in Wisconsin are high. Approximately 11.6% of personal income typically goes to pay an array of taxes — a higher percentage than in at least two-thirds of other states. Decreasing that percentage would make Wisconsin more prosperous in specific, tangible ways.
… and then proposes:
Reducing the individual income tax rate by 10% and reducing the corporate rate to the same level as the new highest individual rate of 6.885% would, for instance, be one way to cut the tax burden by more than $900 million and, by 2018, create 11,300 new private-sector jobs, more than $300 million in new investment and more than $1.1 billion in new, real disposable income.
Tax cuts, at the same time, are not the only way to improve long-term economic prosperity in Wisconsin.
Legislators could help spur similar economic growth and lose almost no government tax revenue by simply changing the tax mix, that is, by reducing income and property taxes and making up for them by broadening the sales tax base.
This would not entail increasing the sales tax rate. In fact, Wisconsin could cut the individual income tax by $730 million, cut the property tax by more than $1.1 billion, broaden the sales tax base to include some (but not all) areas that are currently exempt and still cut the sales tax rate from 5% to 4.475%. By just changing the mix — “swapping” one tax for another — the state would gain 10,580 private-sector jobs, realize an increase of $948 million in investment, and see an increase of $892 million in real, disposable income.
Expanding the tax base while lowering the tax rate is preferable to simply raising the current sales tax rate, and there are a variety of ways to structure such a broad-based consumption tax. Various routes deserve further study, as does the issue of how Wisconsin can make sure its tax system fairly treats individuals across the entire economic spectrum.
Some Wisconsin tax history is helpful here. The most unpopular tax has always been the property tax. The income tax was created in 1912 in part for property tax relief. The sales tax was created in 1962, and raised in 1969 and 1983, in part for property tax relief. You’ll notice that complaints about high property taxes (which are based on fact) have not ceased.
Notice I said “in part.” The other part is the reaction to Wisconsin’s long-standing envy of success. The history was reported by WPRI in 2003:
In reading Wisconsin’s history, what emerges is the Badger State’s rare combination of ethnic, religious, and political traditions. Mix Yankee founders and northern European immigrants; combine Protestant reformers and a strong Roman Catholic presence; add the labor activism of the industrial era to agrarian roots; douse liberally with the “Social Gospel,” the Wisconsin Idea, and Progressive-era legislation … and you have Wisconsin’s unusual brand of politics and government.
Just how unusual is suggested by Daniel Elazar, a leading student of states and federalism, who argues that the 50 states are pure or hybrid versions of three political cultures:
• Individualistic: This culture “emphasizes the centrality of private concerns,” placing “a premium on limiting community intervention.” The individualistic culture originated in such mid-Atlantic, non Puritan states as Pennsylvania, New Jersey, Delaware, and Maryland; it spread west to become dominant in Ohio, Indiana, Illinois, and Missouri; and later it spread to such states as Nevada, Wyoming and Alaska.
• Traditionalistic: This is a political culture that “accepts government as an actor with a positive role in the community,” but seeks to “limit that role to securing the continued maintenance of the existing social order.” Not surprisingly, the traditionalistic strain of American politics is a major factor in all of the border and southern states, extending west to Oklahoma, Texas, New Mexico, and Arizona.
• Moralistic: The “moralistic” culture considers government “a positive instrument with a responsibility to promote the general welfare.” This culture is predominant in 17 states that stretch from New England through the upper Midwest to the Pacific coast — what several observers of American history and politics have called “Greater New England.” Even more significantly, this moralistic approach is virtually the only political culture found in nine states: Maine, Vermont, Michigan, Minnesota, North Dakota, Colorado, Utah, Oregon, and, not surprisingly, Wisconsin.
The states in this last group, Elazar notes, were “settled initially by the Puritans of New England and their Yankee descendants … [who] came to these shores intending to establish the best possible earthly version of the holy commonwealth. Their religious outlook was imbued with a high level of political concern.” Most significantly for states like Wisconsin and Minnesota, “they were joined by Scandinavians and other northern Europeans who, stemming from a related tradition (particularly in its religious orientation), reinforced the basic patterns of Yankee political culture, sealing them into the political systems of those states.”
I argued early in this blog that the “moralistic” approach blended the worst features of the political cultures of states older than Wisconsin. Add to that the protosocialist cultures of the countries whose emigrants came to Wisconsin (Germany and the Scandinavian countries), who in trying to escape the old country forgot to leave behind the bad features of their former countries, and you get a state whose citizens don’t value success and envies people with more money than they have, and then act surprised when we are chronically behind the rest of the country in businesses, business incorporations, personal wealth and personal income growth.
Given that unfortunate cultural history, the report includes these fighting words:
Ongoing changes to tax law and collections are being implemented in Wisconsin as well as other states. Wisconsin’s overall ranking may have improved slightly in recent months as a result. But Wisconsin does not appear to have fallen more than a handful of places and is still in the top third. Combined with recently enacted cuts, the largest tax reductions modeled for WPRI would bring Wisconsin closer to, though still slightly higher than, the average for all U.S. states.
Wisconsin has not conducted a comprehensive tax-impact study for more than a decade. But outside analyses indicate that the system remains progressive overall. And it will continue to be so even with recent changes under Act 145. In other words, low earners pay less in Wisconsin than their counterparts in most other states. High earners pay more. According to the Minnesota Center for Fiscal Analysis, Wisconsin’s income tax was the 10th most progressive in 2010. A 2009 study by the Institute on Taxation and Economic Policy showed Wisconsin’s total state-local tax system to be ninth most progressive by its measure (ratio of tax burden of the bottom 20% to the top 1%). Although those data are relatively old, recent tax law changes may have made the system even more progressive.
One of the questions this state must address is whether the relative progressivity of its tax system, which is advantageous in the near-term to some individuals at the lower end of the economic spectrum but is the product of tax choices that harm Wisconsin’s long-term potential and productivity, can be retained in a way more aligned with the realities and opportunities of the modern economy.
The report includes four possible tax reform packages, each of which is funded by a broader sales tax. The most radical is probably replacing the state income tax by increasing the sales tax to 9.5 percent. (Insert obligatory demagoguery from Democrats here.) The fourth package, which would cut income and property taxes, also includes a broader, though actually lower than now, sales tax.
Of course, politics interferes with what might be the best possible tax cut plan. You may recall when the aforementioned AB 145 was being created in the Legislature, newspaper polls indicated that voters preferred property tax cuts to income tax cuts. So AB 145’s property tax cut was four times the size of AB 145’s income tax cut, whether or not property tax cuts are more effective than income tax cuts to improve economic prosperity.
Quite obviously, the only way anything remotely close to this will happen is if the correct candidates win Nov. 4. That doesn’t mean it will happen, but it will certainly not happen if the wrong candidates win Nov. 4.