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Our Path Forward: Fair Taxes

Wisconsin should make state taxes fair and based on ability to pay by closing loopholes like the Manufacturing and Agriculture Tax Credit and raising top rates on the highest-earning individuals. At the same time, taxes on low and moderate-income should be reduced by restoring the Homestead Credit and the Earned Income Tax Credit. Further, Wisconsin should widen the sales tax to include all goods and services outside food, education, and healthcare; and make it progressive by raising it on purchases more than twice the median state family income. 

What’s the Problem Addressed? Wisconsin lawmakers have passed more than 50 tax cuts since 2011, most are heavily slanted to favor the state’s wealthiest individuals.1 In fact, the top 1% of taxpayers together received a tax cut that was more than 10 times larger than the tax cut for the bottom 20% of all taxpayers.2 The Walker administration has larded our tax system with loopholes and credits for the very wealthiest individuals: 75% of all individual tax credits in Wisconsin are claimed by people earning more than $1 million per year.3  And although the top income tax rate in Wisconsin is 7.65%, wealthy individuals who can take advantage of Scott Walker’s Manufacturing and Agriculture Credit (MAC) through LLCs and pass-through corporations had an effective tax rate reduced to 0.15% in 2012.4  This is lower than any individual state tax rate in the country.5

The amount of money is going to the very very rich is staggering. In 2017 alone, 11 individual income tax filers with incomes over $35 million received just under $2 million apiece in tax credits (a total of $21.5 million), and another 1,270 income tax filers with incomes greater than $1 million got more than $127,000 apiece (a total of $161.8 million).6 

At the same time, taxpayers with low and moderate incomes have actually had their taxes raised. While they were showering their donors with tax breaks, Scott Walker and the Republicans in the state legislature slashed the Earned Income Tax Credit (EITC) and the Homestead Credit. According to the Legislative Fiscal Bureau., these tax increases have cost Wisconsinites with low and moderate incomes more than $260 million since 2011.7 

How OWR’s Proposal Addresses It

Eliminating the MAC –which has failed to drive employment, as Wisconsin’s manufacturing job growth rate has lagged the national average by 33% over the life of the program—would have saved the state $1.4 billion between 2013 and 2019.8 This money should be spent instead on increasing the Earned Income Tax Credit and the Homestead Credit, and making them once again indexed to inflation so that they keep pace with the cost of living. Wisconsin should strive to distribute credits breaks to more people, and to give lower income people more purchasing power to grow our economy from the bottom up.

At the same time, Wisconsin can fairly raise revenue, and curb the negative effects of runaway income inequality, by replacing our income tax altogether with a steeply progressive sales tax on all consumption of all goods and services outside food, education, and healthcare. Under such a tax, people would report their annual savings and spending on the exempted categories in addition to their income, as many already do under 401(k) plans and other retirement accounts. The difference between a family’s its income and its annual savings is its consumption. That amount, minus a standard deduction—say, $30,000 for a family of four—would be the family’s taxable consumption. Rates would start low, say, 10 percent. A family that earned $50,000 and saved $5,000 would thus have taxable consumption of $15,000 and would pay $1,500 in taxes—less than they do under the current tax system.  However, the greater the consumption, the greater the tax, and tax rates would rise sharply once annual consumption reached twice the annual average household income (approximately $130,000). This would shift the tax burden to people who were earning and spending the most money, and reduce some of the negative effects of income inequality in our state. 

Who Else is Doing This?
Florida briefly tried an expanded sales tax in the 1980s, but abandoned almost immediately, and although it has been proposed elsewhere—Maryland Senator Ben Cardin has proposed such a tax plan for the whole of the US—a progressive sales tax on consumption has not been implemented in the US, although they are more common in Europe. In the United States,46 states have a sales tax, although they all exclude services from taxation. This excise of services is a is the product of “historical accident, not than logic…Acquisition of services by households constitute consumption expenditure in the same fashion as the purchase of commodities; there is no basic difference between the two that warrants different tax treatment.”9

Why Not Wisconsin?
Scott Walker, realizing the error of his ways (or at least sensing that Wisconsinites are FED UP with his trickle-down economics), has voiced support for increasing the EITC in 2017 and 2018. However, despite the talk of concern over budget deficit, the governor and the Republican majority still support the MAC and other credits that are costing the state dearly and primarily benefit the rich. And although a host of policy wonks, most notably Professor Robert Frank at Cornell University, support a broad-based progressive sales tax on consumption, this has not yet been installed anywhere in any state in the US.

NOTES

  1.  Wisconsin Budget Project. Missing Out Recent Tax Cuts Slanted in Favor of those with Highest Incomes. June 27, 2017.
  2.  Id.
  3.  Hesselbein, Diane. Walker’s Tax Cuts for the Wealthy are Costing Wisconsin Big Time. Retrieved June 24, 2017.
  4.  Williams, Noah. The Impact of the Manufacturing and Agriculture Credit in Wisconsin. Center for Research on the Wisconsin Economy. Retrieved June 24, 2017.
  5.  Among states that had a personal income tax. See Facts & Figures: How Does Your State Compare 2017. Tax Foundation. Retrieved June 17, 2017.
  6.  DeFour, Mathew.  11 Taxpayers Making More Than $35 million to Reap $21.5 Million from Tax Credit. Wisconsin State Journal. Retrieved June 17, 2017.
  7.  Wisconsin Budget Project. Missing Out Recent Tax Cuts Slanted in Favor of those with Highest Incomes. June 27, 2017.
  8.  Cornelius, Tamarine. Wisconsin Left with Little to Show for Nearly Eliminating Requirement that Manufacturers Pay Income Tax. Wisconsin Budget Project. Retrieved June 17, 2017.
  9.  Kaeding, N. Sales Tax Base Broadening: Right-Sizing a State Sales Tax. Tax Foundation. 
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