Steven Walters: Three tax pros consider abolishing income tax

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Steven Walters
Monday, January 6, 2014

If Gov. Scott Walker asked them how Wisconsin could abolish its $7.5 billion individual income tax, here’s what three tax-policy veterans would say.

-- Tom Hefty, retired health care executive and former economic adviser to Gov. Jim Doyle.

Abolishing the income tax “deserves study. It is a stretch goal, but possible [and] would involve:

“1. Increasing the sales tax and expanding the sales tax base;

“2. Increasing regular federal aid to state and local governments…

“3. Targeted cuts in state spending and finding efficiencies in areas where Wisconsin spending remains significantly above the national averages.

“The last state commission on comprehensive spending reform was the SAVE Commission—almost 20 years ago. According to the last published rankings, Wisconsin remains relatively high (14th) in welfare spending per capita and 15th in higher education spending per-capita. …

“Tommy Thompson regularly used ‘Blue Ribbon Commissions’ … to come up with new ideas and test trial balloons.

“Jim Doyle had only one Blue Ribbon Commission—in eight years.”

“Scott Walker has not appointed a single Blue Ribbon Commission.

“And the UW System has checked out of the public policy debates on taxes, spending and economic development. The Wisconsin Idea is dead.”

-- Andrew Reschovsky, economics professor at UW-Madison’s LaFollette School of Public Affairs.

“I want to start by arguing that there is no evidence that a state tax system that does not rely on the individual income tax generates more economic growth than a more balanced tax system. … (T)here is little credible evidence to suggest that eliminating the income tax would spur economic growth…

“The revenue-neutral replacement of a progressive state tax (the individual income tax) with increases in the sales tax, excise taxes, and user fees, most of which are regressive, will most likely have a negative impact on state economic growth. …”

Reschovsky only listed potential tax changes Walker might consider:

Sales tax expansion: +$300 million.

Increase sales tax rate to 7.5 percent on expanded tax base: +$2.35 billion.

Triple beer excise tax rate (from 6.5 cents to 19.5 cents per gallon): +$18 million.

Increase liquor, wine excise taxes by 25 percent: +$12.1 million.

Increase $2.52 per pack cigarette tax by 25 cents: +$55 million.

Increase excise tax on tobacco products 10 percent: +6 million.

Increase motor fuel tax by 10 cents per gallon: +$292 million.

Double driver’s license, vehicle registration fees: +$675 million.

Twenty percent increase in UW System tuition: +$675 million.

Total additional revenue: $4 billion.

“Despite my best efforts, all the tax and fee increases identified above would raise only a little over half of the revenue” needed to replace the individual income tax, Reschovsky concluded.

-- Todd Berry, president of Wisconsin Taxpayers Alliance.

“Before one focuses on the individual income tax, three points have to be made:

“1. Serious tax-reform efforts require much ground-laying and accumulation of surplus,” which has not happened.

“2. If major tax reform is the goal, there are a number of legitimate approaches that could be pursued—not just the individual income tax. Two of the most obvious involve the major taxes where Wisconsin is [higher than] other states—the individual income and property taxes—both more than 25 percent above national averages.”

3. “If tax equity across various kinds of businesses were the goal,” Berry said, up to $8.4 billion may have to be replaced. That’s what the $7.5 billion individual income tax and the $925 million corporate income tax total.

That’s a “daunting challenge.” Berry added.

“On the expense side, one would have to shift major state tax-funded programs to other revenue sources.

“For example, various units of local government would have to replace state aid with local property taxes. Higher education institutions would have to rely more on tuition, gifts and grants and less on state tax dollars. And the transportation fund could no longer rely on increasing general fund subsidies. …

“On the revenue side, there is only one current tax capable of generating significant amounts of revenue—the general sales tax. If the individual income tax alone were to be replaced, the state sales tax rate would have to be near triple what it is now (5 percent) or goods such as food, gas, or drugs or services would have to be taxed.”

“Replacing a retail sales tax with a European-style Value Added Tax could also be considered. It could solve some of the political and technical issues associated with a higher and expanded retail tax. However, a VAT would be a dramatic departure from the past and present practice for Wisconsin—and virtually any state.”

Steven Walters is a senior producer for the nonprofit public affairs channel WisconsinEye. Email stevenscwalters@gmail.com.

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