Contemplating the State of the State Income Tax
What Sorts of Tax Changes Does Wisconsin Need?
In his State of the State message this evening, Governor Walker reiterated his intent to cut the state income tax for “middle class” Wisconsinites. We won’t learn any details until the Governor’s 2013-15 budget is introduced next month, so it’s hard to critique the plan now. However, it’s not too soon to raise the sorts of questions and concerns that state policymakers should be considering in the months ahead, as they debate the budget bill.
Can the state afford a significant cut in the income tax?
Policymakers need to carefully consider whether cutting income tax revenue would undermine the state’s ability to maintain support for state investments that are critically important to the state’s workforce, quality of life, and economic competitiveness – such as support for K-12 and higher education. They will need to take into account that new or phased-in tax cuts already on the books are going to reduce state General Fund revenue by $262 million in the 2013-15 budget, and even more in the following biennium. (See our 2-page issue brief.)
In addition, the fiscal cliff bill prevents the automatic restoration of Wisconsin’s estate tax, which erases $219 million of revenue the Walker Administration had included in their 2013-15 budget projections. (See my Jan. 4th blog post.) The Governor’s tentative plan to move General Fund dollars into the Transportation Fund adds to the reasons that cutting income tax revenue is likely to undermine support for things like education, health care and property tax relief.
How will the proposal affect the distribution of state taxes?
We don’t know the details yet, but we can make some general observations about the effects of cutting income taxes. Because the income tax is the one progressive part of state and local taxes, cutting this part of the tax mix will make a larger percentage of Wisconsin’s state and local taxes fall onto low- and middle-income Wisconsinites, who already pay more taxes than high-income state residents. (See the chart in this issue brief.) Reducing the rate for the middle tax bracket sounds at first blush like an even-handed approach, but it would provide no help for the bottom two-fifths of Wisconsin tax filers, and a disproportionate part of the benefit would go to taxpayers making more than $200,000. Making our tax system more regressive and cutting support for safety net programs would accelerate the growing disparities between low-income and wealthy Wisconsinites. (See our Nov. 20th paper.)
How will the proposal affect local aid, property taxes and equal opportunity?
If the proposed cut in income tax rates isn’t offset by tax reforms that generate revenue, the plan is likely to further erode funding for Shared Revenue and school aids. That could lead to higher property taxes and/or deeper cuts for schools and local services. In addition, cutting local aid could exacerbate the growing disparity between low-income parts of the state and more prosperous communities. Until recently, Wisconsin had a long and proud tradition of trying to equalize opportunity; however, substantial reductions in school aid and Shared Revenue are already creating a growing divide in the state, and a continuation of that trend would hurt the state’s economic competitiveness.
Another very significant issue is the potential effect on the state’s structural deficit. We’ll take a look at that issue in a future blog post, and we’ll also follow up with more information about the distribution of a rate cut for the middle tax bracket.