In my last column before Christmas in 2013, I climbed back on my old hobby horse to once again advocate for eliminating Wisconsin’s income tax and replacing some of the tax revenue with an increase in the sales tax. Eight years later almost to the day, former Governor Scott Walker is leading the charge with a group of tax reform groups to do exactly that. Armed with a study by Noah Williams at the University of Wisconsin-Madison’s Center for Research on the Wisconsin Economy, Walker and fellow reformers say that it is time for Wisconsin to become the 10th state without a state income tax.
Our government extracts money from all of us in myriad ways. Most state governments get the majority of their revenue from the income tax and the sales tax. In Wisconsin, those two taxes account for 84% of general purpose revenue in the state budget with the income tax filling 52% of the state’s general purpose revenue bucket.
The model used in Williams’ study shows that state government could maintain the same intake of revenue after eliminating the state income tax if it increases the state sales tax from the current 5% to 9.43%. But the sweet spot for the overall benefit of the state is to increase the state sales tax to 8% after eliminating the income tax. While this would result in a 12.55% decrease in state revenue, thus requiring spending cuts, it would increase economic output by 7.93%, employment by 6.87%, consumption by 7.19%, and, perhaps most importantly, increase average after-tax income by 9.35%.
One of the primary reasons cited by the study for eliminating the income tax is to make Wisconsin more competitive with other states. Our society is more mobile than ever — particularly for the middle and upper classes. People weigh a lot of things when deciding where to live, where to work, or where to start a business. Whether or not there is an income tax is one of those important factors. People are voting with their feet as Wisconsin exports people to states like Florida, Texas, and Nevada. Wisconsin already has an uphill battle to attract workers, retirees, and entrepreneurs with brutal winters, high taxes, and a steep regulatory burden. Eliminating the state income tax would encourage people to take a harder look at Wisconsin when deciding where to live, work, and play.
Beyond attracting more people to move to and stay in Wisconsin, the sales tax is fairer than the income tax. By its very definition, the income tax is only paid by people who earn an income. It is a tax on earning a living that the idle rich, the idle poor, and the intentionally unemployed do not have to pay. It is a tax that only those people who jump out of bed every day to go to work have to pay to support state government.
The sales tax, on the other hand, is paid by anyone who spends money on goods and services. It is paid by the rich lady who buys her fourth home, the middle-class family buying a used car, and the unemployed twenty-something buying beer for the weekend. Everyone pays, which spreads the tax burden more equitably across all Wisconsinites.
Furthermore, it is much more difficult for politicians to manipulate the sales tax to favor or punish people. With the income tax, politicians have created a labyrinth of a tax code that gives breaks to the people they like and punishes those who they do not. Other than exempting particular goods or services, the sales tax is more resistant to political maneuvering.
While I strongly support eliminating the state income tax for a hundred reasons, such a move does not correct the biggest problem with state funding. The question of how we fund state government is less important than what we are funding. Wisconsin state government taxes so much because it spends so much. Every single state budget in my lifetime has increased spending from the prior budget.
Irrespective of the economic cycle, which political party is in power in Madison, population trends, or the ability of Wisconsinites to pay, state spending always goes up. It is more predictable than the tides. Until we control state spending, we will never take meaningful steps to lower the tax burden. All we are doing is finding better ways to pay.
*** For my fellow Christians who are celebrating the Birth of Christ this week, I wish you all a very Merry Christmas.
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