Recently in Wisconsin Category

Wisconsin is facing the largest budget shortfall in state history. This week, debate started in the General Assembly on ways to fill the expected $6.6 billion gap . Only $1.6 billion of the state's shortfall was predicted just last month, demonstrating how quickly the fiscal situation has deteriorated.

The budget proposal being debated uses a combination of spending cuts and tax increases to balance the books and is based on the plan passed by the Joint Finance Committee in late May. The Joint Finance Committee's budget bill included cigarette tax increases, reductions in the state's capital gains exclusion from 60 percent of net capital gains income to 40 percent, and a new top income bracket for "very high" income earners. For a complete summary of the Joint Finance Committee's proposals, see the helpful report from the Wisconsin Council on Children and Families.

Legislative leaders seem confident a budget will be passed before the start of the new fiscal year on July 1. The first hurdle is for Democrats who control the Assembly by a slim margin (52-46) to rally the 50 votes they need to pass their proposed budget.

But even if Wisconsin lawmakers resolve this shortfall, their fiscal challenges are not over. They learned Tuesday from the Legislative Fiscal Bureau that the state will likely face a $2.2 billion shortfall by the middle of 2013.

As state policymakers craft their budgets for the upcoming fiscal year, they must confront a pair of daunting challenges, one fiscal, the other economic. The budget outlook for the states is, at present, the most dire in several decades. In this context, then, states must find ways to generate additional revenue that create neither additional responsibilities for individuals and families struggling to make ends meet nor additional distortions in the economy as a whole.

For nine states -- Arkansas, Hawaii, Montana, New Mexico, North Dakota, Rhode Island, South Carolina, Vermont, and Wisconsin -- one straightforward approach would be to repeal the substantial tax breaks that they now provide for income from capital gains. In tax year 2008 alone, these nine states are expected to lose a total of $663 million due to such misguided policies, with individual losses ranging from $10 million to $285 million per state. A new ITEP report explains that repealing these tax preferences would help states reduce their large and growing budgetary gaps, enhance the equity of their current tax systems, and remove the economic inefficiencies arising from such favorable treatment.

This report explains what capital gains are, how they are treated for tax purposes, and who typically receives them. It also details the consequences of providing preferential tax treatment for capital gains income for states' budgets, taxpayers, and economies in nine key states. Lastly, it responds to claims about both the relationship between capital gains preferences and economic growth and the role capital gains taxation plays in state revenue volatility. (Appendices to the report provide detailed state-by-state estimates of the impact of repealing capital gains tax preferences.)

Read the report.

As we noted last week, up until now, New York has been the most encouraging example of a state considering a progressive approach to filling its budget gap. Now, with the unveiling of Wisconsin Gov. Jim Doyle's proposed budget, another state can be looked to by progressives as an example to be followed.

Gov. Doyle's budget includes two main progressive reforms. First, the income tax rate on income over $300,000 per year would be raised by one percentage point. Second, the state's unusual exemption of 60% of capital gains income would be lowered to 40%. While a 40% exemption is still unnecessary and regressive, this change would be a major first step toward taxing those who live off their wealth at a rate more similar to those who work for a living. Both of these changes would primarily affect the upper-income individuals most capable of making it through this economic storm.

More good news for tax fairness advocates comes from a recent poll of New York State voters conducted by Quinnipiac University. As the poll shows, it turns out that progressive solutions make sense not just on policy grounds, but on political grounds as well. The poll found that nearly 80% of New York voters support raising the income tax on income over one million dollars. That number falls only slightly when New Yorkers are asked if they support raising income taxes on income over $500,000. Additionally, proposals to raise tax rates on income over $250,000 enjoy well over 50% support in New York. Click here for the complete poll results.

Finally, in addition to the progressive reforms described above, the Wisconsin governor is also pushing a proposal to institute combined reporting of corporate income. Enacting such a proposal is an absolutely vital part of maintaining the viability of any state's corporate income tax.

At the state level, the usual response to recommendations that taxes be increased to preserve vital state services has generally been: "Now is not the time". The most notable exception to this trend so far has been with the cigarette tax, as we've explained before. Increasingly, however, policymakers appear to be coming around to the idea of boosting gas tax rates in order to raise the revenue needed to maintain our nation's infrastructure. Given that most state gas taxes haven't been increased for quite a few years, and that during that time inflation has significantly eroded the value of most gas tax rates, our only response can be, "It's about time."

In Maryland, for example, the Senate President recently expressed an interest in raising the gas tax, urging that "there's got to be an increase in the transportation trust fund somewhere, and there's got to be a way we can find people with the political will to make it happen". Numerous governors have echoed this call as of late, most recently in Massachusetts, and Idaho.

In Idaho, especially, the Governor was able to hit the nail on the head with his observation that, "[we last raised] the fuel tax... 13 years ago. And now here we are trying to accomplish 2009 goals with 1996 dollars. Everyone in this room or listening to me throughout Idaho today -- everyone who has a household budget or runs a business -- knows that just doesn't work".

In response to this problem, Idaho Governor "Butch" Otter has recommended bumping the gas tax upward by 2 cents in each of the next 5 years. Addressing the root of the problem even more directly, Wisconsin Governor Jim Doyle has proposed indexing the gas tax rate to inflation -- a practice that had existed in Wisconsin up until 2006. Maine and Florida continue to index their gas tax rates today, with very favorable results in terms of providing each state with a somewhat more adequate and sustainable source of transportation revenue.

Importantly, the federal gas tax is not indexed to inflation, meaning that the Federal Highway Trust Fund is suffering from many of the same problems we see plaguing the states mentioned above. The federal gas tax has not been increased in over 15 years. President Obama's new Energy Secretary, Steven Chu, has previously gone on the record as supporting raising the gasoline tax. The views of Transportation Secretary Ray LaHood are not yet clear. What is clear, however, is that something will have to be done at the federal, as well as the state level, if gas tax revenues are to be restored to their previous purchasing power.

Of course, the gas tax is not perfect. Aside from the long-term issues arising out of improved fuel efficiency (which we need to begin planning for now), the regressivity of the tax is very worrisome, especially in these difficult times. Fortunately, low-income gas tax credits, as we've advocated on multiple occasions, are very capable of remedying this shortcoming.

This week the Wisconsin Way coalition released a report called Blueprint for Change which outlines recommendations for change in three areas: economic development, tax reform, and government spending/management. Members of the coalition are quite diverse and include the Wisconsin Education Association Council, the Realtors Association, and the Wisconsin Counties Association. The group has been working for over a year, holding forums across the state and engaging folks in a "public conversation about modernizing and refining taxes and government." Wisconsin is one of many states facing a budget shortfall so efforts to engage the public on important fiscal issues are certainly laudable, but many of the specific proposals discussed in the report make us question whether or not the coalition and members of the public understand basic tax principles.

For example, one of the strategic initiatives on tax reform is to "enhance fairness and progressivity in the levying and collection of taxes," but later in the report "increasing reliance on income sensitive revenue sources like sales and consumption taxes" is suggested. Ironically, it is exactly because sales taxes aren't income sensitive that they are such a regressive funding option. Increasing the state's reliance on sales tax is no way to increase the fairness and progressivity of Wisconsin's tax structure.

Another contradiction in the report appears in the discussion about business development and job growth. The group purports to want to "enhance the ability of Wisconsin's tax structure to stimulate business development and expansion and job growth," but one of the action options they propose is to eliminate the state's corporate income tax. But there is solid evidence that state corporate taxes often aren't that important when companies are making decisions about where to locate.

We're puzzled by the Wisconsin Way report and wonder if a basic review of tax policy principles might be helpful for coalition members, who are welcome to look at a helpful ITEP policy brief on the issue. Despite the alleged input from 6,000 Wisconsinites, the Wisconsin Way so far seems to be exactly what Senate Majority Leader Russ Decker calls a "recipe for disaster for Wisconsin taxpayers."

Anybody following state politics recently knows that budget shortfalls are among the first issues that will have to be addressed when most state legislative sessions begin this January. In many cases, state policymakers have appeared heavily biased in favor of slashing services to remedy these gaps, usually based on the absurd assumption that raising taxes would somehow be more painful than stripping needed services from the nation's most vulnerable lower- and middle-income families. But Governor Jim Doyle of Wisconsin has recently set an intriguing example for other struggling states to follow by agreeing to consider an early revival of the state's temporarily suspended estate tax.

The estate tax is an incredibly progressive tax that only affects a few very wealthy families -- hardly the folks struggling most in our current economic crisis. As a recent CTJ report showed, less than 300 families paid any federal estate tax whatsoever in Wisconsin in 2007. This amounted to only 0.6% of Wisconsin estates. Nonetheless, even this relatively minor tax could result in enormous gains if the money is put back into the state's economy, such as by filling some of the 3,500 state jobs the governor has ordered be left vacant.

Last year around this same time we brought you word about the groundbreaking study from the Institute for Wisconsin's Future which found that two-thirds of companies filing 2003 Wisconsin income tax returns owed nothing in state taxes. This month the Institute issued another report that "highlights a $643 million shortfall in corporate income tax receipts in 2006 due to the use of tax loopholes."

The new report once again brings to light the number of Wisconsin companies that simply aren't paying any tax." Almost fifty thousand corporations filed tax returns with the Wisconsin Department of Revenue in 2005. Two out of three returns showed a bottom-line tax of zero dollars."

The study's shocking findings won't be allowed to collect bookshelf dust. Instead, the results have prompted a legislative response. On Wednesday Senator Hansen unveiled a creative corporate tax disclosure proposal that would, "require the large public corporations doing business in Wisconsin to submit publicly accessible annual disclosures of their income and all items that can be used to reduce their Wisconsin tax liability." Stay tuned into the new year for more developments on this important disclosure legislation.

At long last, the Wisconsin legislature approved a two-year $57.2 billion budget. The agreement comes 4 months after the budget deadline and is expected to be signed by the Governor Friday. A hospital tax and taxes on oil companies didn't make it into the final bill. But the bill did include a cigarette tax increase that will raise the tax on a pack of cigarettes from 77-cents to $1.77. The bill also includes additional school aid for low-income districts and children's health insurance expansion and eliminates the tax on Social Security benefits.

Wisconsinites may be relieved that the budget impasse is over. Advocates for tax fairness will find the budget compromise lacking. However, advocates seem pleased with the overall spending priorities set forth in the new budget. For more read this statement from the Wisconsin Council on Children and Families.

The budget clock is also ticking in Wisconsin as the Governor and the University of Wisconsin chancellors have both denounced the budget approved by the Assembly, saying that the budget cuts included would increase class sizes in universities and decrease class offerings. A conference committee is currently meeting to reconcile the Assembly budget with the Senate's which included tax increases and a health care plan. Senator Neal Kedzie says the state "could be in for a very long and bumpy ride."

The governors of both Pennsylvania and Wisconsin have proposed new taxes for oil companies. Governor Rendell would subject oil companies' gross profits in his state to a 6.17 percent tax in lieu of the state's corporate income tax. Governor Doyle would tax oil companies' gross receipts at 2.5 percent. It remains to be seen whether state governments can really ensure that the tax will be paid by the oil company shareholders, as both governors claim, rather than being passed onto consumers.

Probably the most important step a state can take to ensure that oil companies (and other businesses) are paying their fair share is to adopt combined reporting of corporate income for tax purposes. This prevents companies from shifting costs and profits (on paper) between subsidiaries in different states to get the lowest tax bill possible. Fortunately for Pennsylvania, Governor Rendell's tax on oil companies would be calculated using combined reporting. Experts like University of Wisconsin-Madison economist Andrew Reschovsky have suggested that Wisconsin needs to move in this direction as well. Reschovsky told the Milwaukee Journal Sentinel, "In my view, if the governor wants to raise more money from oil companies, and other multinational companies, the most effective thing he could do would be to urge the Legislature to adopt combined reporting."

Wisconsin's tax laws allow cities that rely heavily on tourism to levy a special "premium resort area" sales tax. Governor Jim Doyle's new budget would rewrite the tax laws to declare parts of Milwaukee a "premium resort area." This would give Milwaukee officials the authority to levy a half cent sales tax within the "resort" area of the city. If adopted by local officials, Doyle's idea would help to diversify the city's revenue structure ... but an equally welcome option would be reforming the taxes collected by the state government. As the Institute for Wisconsin's Future's Jack Norman documented last fall, two thirds of the corporations doing business in Wisconsin pay no corporate income tax right now.

Last year, Wisconsin Governor Doyle signed into law a bill completely eliminating all taxes on Social Security benefits by 2008. This week, Governor Doyle prepared a new budget, which includes a measure fast-forwarding the exemption by one year. The proposal comes at a time when the state is straining to fill a $1.6 billion shortfall. The proposed budget attempts to find new revenue by increasing vehicle registration fees, cigarette taxes, and the real estate transfer tax. The Legislative Fiscal Bureau estimated that the Social Security exemption alone would cost around $100 million per year. In his State of the State speech earlier this year, Governor Doyle said that Wisconsin had to learn to live within its means... advice that he should heed himself.