Steven Walters
The State of Politics

How to End the Income Tax

Tax pros offer suggestions to Gov. Walker.

By - Jan 6th, 2014 10:49 am
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Gov. Scott Walker

Gov. Scott Walker

If Gov. Scott Walker asked them how Wisconsin could abolish its $7.5 billion individual income tax, here’s what three tax-policy veterans would say.

Tom Hefty, retired health-care executive and former economic adviser to Gov. Jim Doyle, says abolishing the income tax “deserves study. It is a stretch goal, but possible [and] would involve:

“1. Increasing the sales tax and expanding the sales tax base;

“2. Increasing regular federal aid to state and local governments…

“3. Targeted cuts in state spending and finding efficiencies in areas where Wisconsin spending remains significantly above the national averages

“The last state commission on comprehensive spending reform was the SAVE Commission — almost 20 years ago,” Hefty goes on. “According to the last published rankings, Wisconsin remains relatively high (14th) in welfare spending per capita and 15th in higher education spending per-capita…

Tommy Thompson regularly used ‘Blue Ribbon Commissions’ … to come up with new ideas and test trial balloons. Jim Doyle had only one Blue Ribbon Commission…in eight years. Scott Walker has not appointed a single Blue Ribbon Commission.

“And the UW System has checked out of the public policy debates on taxes, spending and economic development. The Wisconsin Idea is dead.”

Andrew Reschovsky, economics professor at UW-Madison’s LaFollette School of Public Affairs, offers this analysis: “I want to start by arguing that there is no evidence that a state tax system that does not rely on the individual income tax generates more economic growth than a more balanced tax system….(T)here is little credible evidence to suggest that eliminating the income tax would spur economic growth.

“The revenue-neutral replacement of a progressive state tax (the individual income tax) with increases in the sales tax, excise taxes, and user fees, most of which are regressive, will most likely have a negative impact on state economic growth.”

Reschovsky offers a list of potential tax changes Walker might consider:

-Sales tax expansion: +$300 million

-Increase sales tax rate to 7.5 percent on expanded tax base: +$2.35 billion

-Triple beer excise tax rate (6.5-cents to 19.5-cents per gallon): +$18 million

-Increase liquor, wine excise taxes by 25 percent: +$12.1 million

-Increase $2.52 per pack cigarette tax by 25-cents: +$55 million

-Increase excise tax on tobacco products 10 percent: +6 million

-Increase motor fuel tax by 10-cents per gallon: +$292 million

-Double driver’s license, vehicle registration fees: +$675 million

-20 percent increase in UW System tuition: +$675 million

Total additional revenue: $4 billion

“Despite my best efforts, all the tax and fee increases identified above would raise only a little over half of the revenue” needed to replace the individual income tax, Reschovsky concludes.

Todd Berry, president of Wisconsin Taxpayers Alliance. “Before one focuses on the individual income tax, three points have to be made:

“1. Serious tax-reform efforts require much ground-laying and accumulation of surplus,” which has not happened.

“2. If major tax reform is the goal, there are a number of legitimate approaches that could be pursued – not just the individual income tax. Two of the most obvious involve the major taxes where Wisconsin is [higher than] other states — the individual income and property taxes — both more than 25% above national averages.”

3. “If tax equity across various kinds of businesses were the goal,” Berry says, “up to $8.4 billion may have to be replaced. That’s what the $7.5 billion individual income tax and the $925 million corporate income tax total.”

That’s a “daunting challenge.” Berry adds. “On the expense side, one would have to shift major state tax-funded programs to other revenue sources.

“For example, various units of local government would have to replace state aid with local property taxes. Higher education institutions would have to rely more on tuition, gifts, and grants and less on state tax dollars. And the transportation fund could no longer rely on increasing general fund subsidies.

“On the revenue side, there is only one current tax capable of generating significant amounts of revenue, the general sales tax.  If the individual income tax alone were to be replaced, the state sales tax rate would have to be near triple what it is now (5 percent) or goods, such as food, gas, or drugs or services would have to be taxed.”

“Replacing a retail sales tax with a European-style Value Added Tax could also be considered. It could solve some of the political and technical issues associated with a higher and expanded retail tax.  However, a VAT would be a dramatic departure from the past and present practice for Wisconsin–and virtually any state.”

Steven Walters is a senior producer for the nonprofit public affairs channel WisconsinEye. Email stevenscwalters@gmail.com

6 thoughts on “The State of Politics: How to End the Income Tax”

  1. Rich says:

    “…Scott Walker has not appointed a single Blue Ribbon Commission.”
    Of course not, he has a legislature that enacts all the new ideas into law instantly, no need to test, study, or build support first.

  2. Mike Bark says:

    In a State like Wisconsin it would be nearly impossible to repeal the income tax. Most of the States that do not have an income tax are able to rely on some advantages they have. Nevada and Florida have a big tourism industry so the sales tax is enough. Alaska and Texas have major natural resources so it’s easy to generate the revenues off of that.

    I think you can reduce the rate and that would be best accomplished by broadening the sales tax to include things like professional services and some other things that are exempt and a bump in the overall rate.

    You could also look at getting rid of the corporate income tax. As it is right now when a big corporation wants to come into the State we’ll throw tax incentives at them and we’re already looking at getting rid of it for farms and manufacturing. It’s not a huge revenue generator to begin with so it could be turned into a nice recruiting tool for business. More businesses locating here means more people paying taxes. It should be noted that this wouldn’t help small businesses as the vast majority are pass through entities.

  3. Al says:

    Diverting state revenue sources from income tax to sales tax, fuel tax, college tuition increases, etc. will only hurt the people that can’t afford living in Wisconsin already. Another case of stealing from the poor to pay for the rich! Clean up state spending on unnecessary areas, but make sure that necessary ares like education, infrasucture, park systems, alternative transportation (high speed trains, light rail, bicycle paths, etc.), etc. and provide the funding needed to maintain Wisconsin as a desirable place to live. Walker does not get this and is only concerned about implementing short term solutions that bolster his political career, the same thing he did while as county executive…

  4. Big Al says:

    Several states have recently proposed to subject more services to sales tax, and I don’t believe any succeeded (Ohio, Minnesota as a couple examples). And given the current administration and legislature, I question if either would be willing to pass a tax increase to make up for any cut in the income tax (what would Grover Norquist think?).

    Blue Ribbon Commissions seem to be more about pushing a decision to a committee and being able to hide behind the commission’s decision than anything else.

    I have no idea what Tom Hefty is talking about on “increasing regular Federal aid to state and local governments” – general Federal aid to cities and local governments ended years ago and I’m guessing that’s not coming back.

    My opinion – either nothing or a small reduction in the rates with no tax increase on the state level. This would coincide w/ Walker’s historical county budget proposals – he proposes a no tax increase budget, the county board overrides him, but he can still claim to have proposed no tax increases.

  5. jerry person says:

    Reagan explaining what he things about unions and what he would call the Wisconsin republican party. It starts with C http://www.youtube.com/watch?v=HsHXJr8tqP0

  6. jody says:

    Do what other states do!! Make all major highways toll roads. Chicago alone brings in millions. Not to mention Indiana. Texas, Kansas, and NewYork . just to list a few.

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