Miller: Kooyenga's tax plan strikes a blow for simplicity
Let’s start with a simple proposition. The purpose of taxation is to raise revenue for government to function. Period. Yet legislators continually distort this proposition by using the tax laws to reward or penalize all sorts of behavior. Hence, the mind-numbing complexity we have today at both the federal and state level.
To the rescue comes Rep. Dale Kooyenga (R-Brookfield). He and his GOP colleagues in the Assembly have struck a blow for simplicity by proposing a tax and transportation plan for Wisconsin that is both bold and long overdue.
The plan would shrink, over the next decade or so, our four income tax brackets that currently range from 4% to 7.65% to a single flat tax rate of 3.95%. At the same time, it would wipe out (or reduce) a variety of tax credits, fees and the partial capital-gain exclusion that differentiates between sale of farm assets and other types of capital gains. To top it off, the plan also would eliminate the execrable state alternative minimum tax. (Wisconsin is one of only a handful of states with such a tax.)
All these special provisions that pockmark our tax laws bedevil the ordinary taxpayer, if not providers of tax software and professional tax preparers. Ironically, they often don’t achieve their intended purpose of enhancing economic activity or someone’s notion of fairness, but stymie it because of the time and expense spent trying to decipher what they mean. Good riddance, I say.
The Legislative Fiscal Bureau projects that the tax cuts, when fully implemented, would cost the state over $2 billion annually. This is a bad thing? That means over $2 billion more in taxpayers’ pockets to invest or spend, as they see fit. Moreover, the cuts could lead the way for a possible influx of small business owners and entrepreneurs from, say, financially beleaguered Illinois who would add to the state coffers with new taxpaying jobs.
Critics claim that the net result for some middle-class taxpayers is that their income taxes actually would increase (due to the loss of credits, etc.). In response, Kooyenga wisely has said he is willing to make adjustments to ensure that doesn’t happen. The larger point remains this: regardless of whatever tweaking is warranted, the underlying concept is a sound one that ought to go forward.
For 2017, the Tax Foundation ranks Wisconsin’s overall business tax climate 39th out of 50 states — and its individual income tax burden 43rd. I might add that this dubious distinction holds despite the fact that Scott Walker has been governor for the last six and one-half years.
Compare Wisconsin with two states commonly viewed as being progressive or at least politically moderate: Washington (two Democratic U.S. senators, a Democratic governor and legislature partially controlled by Democrats) and New Hampshire (two Democratic U.S. senators). Neither has an individual income tax except, in the case of New Hampshire, on investment income. Although Washington charges a steep sales tax, New Hampshire has none at all. Not coincidentally, they both rank in the top 20 with respect to overall business tax climate.
Wisconsin need not go that far to be competitive, but it must do a lot better than it is now. The income tax part of Kooyenga’s plan offers that opportunity.
Insofar as the rest of the plan is concerned, its virtues are a bit more mixed, but still positive. It would apply the state’s 5% sales tax on gas, while reducing the per-gallon gas tax by 4.8 cents and the state mandate that now requires retailers to mark up gasoline prices. Some say the net effect would not lead to a price increase at the pump, whereas others, including Walker, dispute that.
The particular worry is that over the short term, taxes might increase in the aggregate because the income tax reductions would phase in over a longer period. That is especially worrisome to Walker because it now appears he plans to run for a third term as governor next year.
What motivates Kooyenga and others to impose a sales tax on gas, however, is to raise revenue in the least painful way, and reduce borrowing, for long-deferred road repairs. The problem with Wisconsin’s habit of more and more borrowing is that now repayment of debt consumes over 20% of the state’s revenues.
Here again, however, Walker seems to be interested in the short term, i. e, November 2018.Toward that end, borrowing can be disguised more easily than a tax increase, even one that is potentially offset by other tax and cost reductions. (Walker has proposed $500 million more in borrowing in his budget proposal to partially close a shortfall in the transportation fund.)
Another intriguing part of the plan is to seek federal approval for collecting tolls on interstate highways in Wisconsin. That, too, could go toward defraying road construction costs. Why not have drivers (or their employers) who actually use those roads — including a large number of out-of-staters — bear a portion of such costs?
Of course, most Democrats cringe at the notion of an income tax cut. Even some Republicans scoff at Kooyenga’s plan, such as Sen. Luther Olsen (R-Ripon), who compared it to “Rube Goldberg." Wrong, Senator Olsen. What we have now is of the Rube Goldberg variety, with punishing taxes, blinding complexity and overreliance on ultimately self-destructive borrowing. Kooyenga’s plan starts to lead us out of this morass. Kudos to him.
Jay Miller is a Whitefish Bay village trustee, a tax attorney and an adjunct professor at the University of Wisconsin-Milwaukee’s Lubar School of Business.