Is Walker Serious About Ending Income Tax?
It brings in $7.5 billion per year. How would he replace it?
Republican Gov. Scott Walker says he learned this lesson from the 2011 fight he picked that limited collective bargaining by public employees: First, publicly explain the changes you want to make, and why they are needed. Lay that groundwork before you try to push anything through the Legislature.
In his book, “Unintimidated,” and in many statements, Walker has repeatedly said that in 2011 he acted first and then made his case for the changes. He said that lesson was underscored when even his wife, Tonette, asked him why he was pushing to all but eliminate collective bargaining.
This time, Walker says in year-end interviews, he wants a year of discussion before what could be his next “bold” move, if he is re-elected in November and gets to prepare a 2015-17 state budget: Eliminating the individual income tax, which brings in $7.5 billion a year.
“What would have the biggest impact on the economy?” Walker said in a WisconsinEye interview.
“If you look at the top states across the country, in terms of job growth, consistently they are states that have no income tax, or very low income tax.
There’s a certain amount of appeal to me of just saying, ‘Hey, if they’re doing that, it may not be the only reason, but it’s got to be a major catalyst’.”
But that’s a much more difficult task, since local governments levy about $10.5 billion a year in property taxes – $3 billion more than personal income tax collections. Credits lower the amount of taxes actually paid by property owners to about $9.5 billion.
Last year, the individual income tax brought in more than half of all general-fund taxes. The general fund is state government’s main checking account; it does not include transportation spending and other specific accounts. But the general fund pays for or subsidizes K-12 schools, local governments, Medicaid health care, prisons, the University of Wisconsin System, other state agencies and tax breaks.
Walker’s goal of wanting to see plans to eliminate a tax that brings in $7.5 billion a year not only introduces a major issue in next year’s race for governor, but prompts many other questions.
*Would the sales tax go up to eliminate the income tax?
Wisconsin’s 5 percent state sales tax brought in $4.4 billion last year, so a 1 percent increase would generate at least $880 million more per year. Wisconsin’s sales tax rate has not been increased since 1982.
Wisconsin has the lowest state sales tax in the region, compared to Minnesota (6.875 percent), Illinois (6.25 percent), and Michigan and Iowa at 6 percent. These rates do not include sales taxes added by local governments; in Illinois, they can drive the total sales tax to 9.75 percent.
In a Dec. 19 statement, the Wisconsin Budget Project, a subsidiary of the Wisconsin Council on Children and Families, estimated that Wisconsin’s 5 percent sales tax would jump to 13.5 percent if the sales tax was increased to offset the entire income tax.
“Simply swapping out the income tax for the sales tax would mean a tax hike for the vast majority of Wisconsinites, without doing anything to boost our economy,” said Budget Project Director Jon Peacock.
*Would some sales-tax exemptions end to eliminate the income tax?
In a February report, the state Department of Revenue estimated the annual cost of dozens of sales tax exemptions, including: motor fuels, $595.9 million; food, $536.9 million; sales to state and local governments and schools, $368.8 million; computer services, $176.4 million; religious, charitable, scientific and educational organizations, $149.5 million, and drugs and medicine, $143.6 million.
Every exemption has its advocates, so trying to eliminate any of them would be unpopular.
*How fair – or progressive – is Wisconsin’s income tax now? Who would be most helped if it were eliminated?
That’s the subject of another column, but here’s one interesting statistic: 31 percent of tax filers owed no income taxes in 2012, but filed to claim the Earned Income Tax Credit or other tax break. So, 69 percent of all tax filers paid all personal income taxes that year.
Some experts question Walker’s goal, saying it may be unrealistic. Says Andrew Reschovsky, an economics professor at UW-Madison’s LaFollette School of Public Affairs: “My starting assumption is that it will be impossible to replace the $7.5 billion of revenue.”
Steven Walters is a senior producer for the nonprofit public affairs channel WisconsinEye. Email firstname.lastname@example.org