Tax Shifts Would Cut Taxes for Richest, Raise Taxes for Others


October 15, 2014

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Expanding the sales tax to pay for income and property tax cuts would harm taxpayers with low incomes – and give large tax cuts to the highest earners. A recent policy report that recommends such a “tax shift” overlooks those facts.

This isn’t the first time that a tax shift has been proposed in Wisconsin. Late last year the Governor floated the idea of eliminating the state income tax and substantially raising the sales tax rate to make up the difference.

Such moves would raise taxes for those with low and moderate incomes who are still struggling to recover from the recession, and cut taxes for those with the highest incomes. Shifting the responsibility for paying taxes away from those who are well-able to pay and toward everyone else won’t help create jobs or contribute to broad prosperity.

Expanding the Sales Tax to Basic Necessities Would Harm Families Struggling to Make Ends Meet

The mistaken idea that Wisconsin’s economy would be helped by increasing the state’s reliance on the sales tax, and decreasing the amount of revenue state and local governments take in from income and property taxes, was most recently raised in a report by the Wisconsin Policy Research Institute. The report recommends that the state expand the sales tax to a number of goods and services that are not currently taxed, and use the additional revenue to lower other taxes.

Among the 24 things that would be newly taxed are basic necessities such as food, water, and fuel. That would make it harder for struggling Wisconsin families to put food on their tables and keep their children warm and safe.

Basic necessities

The sales tax increase would wipe out any benefit low- and middle-income Wisconsinites might get from the proposed income tax cut – and then some. But people with the highest incomes would get a substantial tax cut overall. The top 1% of taxpayers – with an average income of $1.1 million – would receive an average tax cut of $6,948 in 2014. The bottom 20% of Wisconsin taxpayers by income – who earn an average of $14,000 a year – would pay $110 more in taxes, on average.

High-income taxpayers would receive the biggest tax cuts as a share of their income, as well as the biggest tax cut in dollar terms. The WPRI proposal would reduce the share of income the top 1% of earners pay in taxes by 0.6% on average. The top 40% of taxpayers would, on average, receive a tax cut while the remaining 60% would, as a group, experience a tax increase. The income group with the largest tax increase as a share of income would be the bottom 20%, with an average tax increase of 0.8% of income.

expanding-sales-tax,-lowerin-gother-taxes

 

The WPRI report suggests that lawmakers could pass a refundable income tax credit to offset the taxes on basic goods and services for some taxpayers. But it is unlikely lawmakers would do so, given that they have shown little interest in strengthening other, similar tax credits. In fact, state lawmakers made deep cuts to the Earned Income Tax Credit and the Homestead Credit as part of the 2011-13 budget, resulting in working families and other taxpayers with low incomes paying $170 million in higher taxes over the last four years. Given that lawmakers are unlikely to approve a new refundable tax credit, expanding the sales tax to include necessities like food and water would shift responsibility for funding schools and other services to middle- and low-income Wisconsinites.

Although the addition of a refundable tax credit could soften the impact of the tax shift plan for low-income households, other changes that are more likely could have the opposite effect. The business community is likely to oppose extending the sales tax to certain services, including legal services (+$120 million), architecture/engineering services (+$84 million), and accounting services (+$51 million). And it’s highly unlikely that Wisconsin would become the first state to impose the sales tax on labor costs for construction ($499 million). Removing components opposed by the business community could make the tax shift plan fall even more heavily on low-income households, depending on what other changes are made to maintain cost neutrality.

An Extreme Tax Shift: Eliminating the Income Tax Entirely

Some state policymakers have shown interest in a more extreme tax shift: eliminating the state’s individual and corporate income taxes altogether and raising the sales tax to make up for the lost revenue. This change would result in extremely large tax cuts for the rich and corresponding tax increases for taxpayers with low and moderate incomes.

Such a radical move would mean that 80% of taxpayers taken as a group would be paying more in taxes – some of them, a lot more. For example, a taxpayer in the lowest 20% of the income scale would pay nearly $750 more in taxes, on average. But taxpayers with high incomes would receive very large tax cuts. The top-earning 1% would have received an average tax cut of nearly $44,000 if this tax shift had been implemented in 2013.

To replace the revenue lost by eliminating the income tax, the state sales tax rate would need to be raised to about 13.5%, giving Wisconsin the highest state sales tax rate in the nation.

Measured as a portion of their earning, taxpayers with the lowest incomes would pay 5.4% more of their income in taxes under the extreme tax shift, on average. Those with the highest incomes would pay 4.1% less of their income in taxes.

Eliminating the income tax 

Tax System Already Favors those with Highest Incomes

Wisconsin’s state and local tax system is already tilted in favor of those with the highest incomes, a situation that lawmakers should be trying to improve, not worsen.

Wisconsin taxpayers with high incomes pay a smaller share of their income in state and local taxes than do other taxpayers. The top-earning 1% pay just 6.6% of their income in state and local taxes. That’s much lower than the 9.8% share of income that taxpayers in the middle 20% pay, or the 9.3% that those in the lowest income group pay.

Highest earners pay smallest share of income in taxes

Recent tax shift proposals would cut the share of income wealthy residents pay in taxes even further, requiring other taxpayers to make up the difference. That would make Wisconsin’s tax system less equitable than it already is. It would also be another blow to families who lost jobs and saw their wages stagnate during and after the Great Recession, while wealthier households have prospered.

Tamarine Cornelius

 

 

Note: The Institute for Taxation and Economic Policy provided information on tax cut distribution and share of income paid in taxes. Tax cut dollar amounts are averages for an income group. Taxpayer units are based on tax filers. The share of tax cuts by income group is for Wisconsin residents only, although a small share of Wisconsin taxes are paid by non-residents. The current share of income paid in taxes includes the federal deduction offset, which reduces taxes more for high-income groups than for low-income groups.