Where Does the State Get Its Money?
Each year, the state of Wisconsin takes in and spends about $33 billion. Depending on the source of the revenue, there are some restrictions on how it may be used. Chart 3 shows the main sources of revenue as a percentage of total state revenue.
Chart 3: Revenue Sources for the 2009-11 Budget
Wisconsin Tax Revenue
The biggest fund lawmakers can use when putting together the Wisconsin budget is called the General Fund, which contains General Purpose Revenue. As the biggest and most flexible source of funds, this is where most of the attention is focused come budget time.
GPR revenue comes almost exclusively from taxes, primarily the individual income tax and the sales tax. Most (but not all) taxes paid by Wisconsin residents go into the General Fund. Examples of taxes that are not deposited into the General Fund include the property tax, which is mostly levied and collected by local governments, and the gasoline tax, which is deposited into a segregated fund used for transportation purposes. This guide will focus on taxes deposited into the General Fund, which are shown in Chart 4.
Revenue deposited into the General Fund includes:
- The individual income tax, which is levied on the income of individuals, is familiar to most of us. The percentage of income paid depends on the amount of income, with higher-income individuals paying a higher percentage of their income. Forty-one states have a broad-based state income tax. (1)
- The sales tax is another familiar tax. Wisconsin levies a 5% tax on most purchases, and counties have the option of adding another 0.5% to fund county operations. A few areas of the state have an additional fraction of a percent levied to fund special projects like Miller Park or the Lambeau Field renovation. Because of this, sales tax varies across the counties from 5.0% to 5.6%, but the share that goes to the state is a constant 5.0% no matter where a purchase is made. Forty-five states have a sales tax.(2)
- Excise taxes are taxes on the use or consumption of certain products. Revenue from excise taxes is mostly from taxes levied on tobacco products and to a much lesser extent on alcohol, which is why they are sometimes called “sin taxes,” though excise taxes can also be levied on other, “non‑sinful” products. Excise taxes as a percentage of General Fund revenues have increased in recent years, but still make up a small percentage of the whole.
- Corporate franchise and income tax is also a relatively small source of GPR dollars. For a long time, many corporations paid little or no tax in Wisconsin due to a variety of loopholes. Many of those loopholes have been closed recently, with a modest increase in revenue likely to result.
- Public utility taxes, insurance company taxes, and a few other minor sources make up the remainder of GPR funding.
1. Federation of Tax Administrators, January 2010.
2. Tax Foundation, February 2010.
Tax Relief for Individuals
The State of Wisconsin has several tax credits that are targeted towards low-income individuals. A tax credit is a set amount of money that lowers one’s tax bill. The two main targeted tax credits for individuals are:
- The Homestead Credit, which directs property tax relief to low-income homeowners and renters. The program is sometimes referred to as a “circuit breaker” because it is intended to provide relief once property taxes exceed a taxpayer’s ability to pay them.
- The Earned Income Tax Credit, which is offered at both the federal and state levels as a means of providing assistance to lower-income workers and increasing the incentive to work.
Both the Homestead Credit and the Earned Income Tax Credit are refundable, which means that the credits not only reduce the amount of taxes owed, but if they reduce the taxes owed to less than zero then the state writes a check to the taxpayer for the remaining amount of the credits.
Wisconsin Taxes: Who Pays?
A sound tax system should treat people in similar circumstances similarly, and people in different circumstances differently. That might sound obvious, but often state tax systems don’t live up to these principles. Wisconsin does a better job than many states, but there’s still room for improvement.
Overall, taxes in Wisconsin are regressive. This means that low and middle income people pay a higher percentage of their income in state and local taxes than higher income people do, as shown in Chart 5. For example, families in Wisconsin making less than $20,000 a year pay 9.2% of their income in combined sales and excise, income, and property taxes, while families making $388,000 or more pay only 6.7% of their income in those taxes.(1)
Different taxes have different characteristics. Sales and excise taxes are fairly regressive, as shown in Chart 6. Income taxes tend to be progressive, since higher income people typically pay higher shares of their income. The property tax, which is predominantly a local tax, is mildly regressive. Combining several taxation methods results in a somewhat fairer system, lower rates overall, and a stable revenue source.
A good tax system should be understandable, stable, economically neutral, not interfere with Wisconsin’s ability to compete in national and global markets, and provide adequate revenue.
1. Who Pays? ITEP.