Transforming taxes: Republican lawmakers want to change the way Wisconsin taxes its residents

JESSIE OPOIEN | The Capital Times | jopoien@madison.com | @jessieopie Jul 5, 2017

Gov. Scott Walker has made a career out of cutting taxes. And with $4.7 billion in tax cuts over the span of his two terms as governor, he’s not done yet.

Walker’s proposed 2017-19 budget would bring that reduction to a total of $8 billion since he took office in 2011. The governor argues those cuts, along with other major initiatives including his signature Act 10 legislation, have driven up revenue — a concept he has dubbed the “reform dividend.” While the catchphrase hasn’t quite caught on, the argument has. Conservatives point to the state’s low unemployment rate and proposed investments into education as evidence that Wisconsin is, as Walker puts it, “working and winning.” And with that “reform dividend” comes his justification for even more tax cuts, including a proposal to eliminate the state’s portion of the property tax entirely.

Critics say the state can’t keep up with these tax cuts much longer. They note that new spending on education comes after years of cuts in the name of plugging deficits. At best, they say, Walker’s budget fills some of those cuts back in. More tax cuts, the argument goes, will inevitably lead to a reduction in the quality of public services and infrastructure, if it hasn’t already.

Meanwhile, within the Legislature — with its largest Republican majority in decades — momentum is growing behind what could amount to more significant changes to the way Wisconsin taxes its residents, including an effort to move the state toward a flat income tax and a proposal to eliminate the personal property tax.

Todd Berry, a longtime tax policy analyst and president of the Wisconsin Taxpayers Alliance, is “not inclined to predict” any major changes to the way the state raises revenue. A proposal to repeal the personal property tax would require an adjustment in priorities. Moving to a flat tax requires more support than currently exists. Even a significant change in transportation funding — the largest source of discord among lawmakers and the governor during the budget process this year — is unlikely, he said.

What is significant in the current climate, Berry said, is that so much of the push for major tax reform is coming from lawmakers, particularly from a group of trained accountants known as the “CPA Caucus.”

The four-member group is composed of three certified public accountants — Sen. Chris Kapenga, R-Delafield, Sen. Howard Marklein, R-Spring Green, and Rep. Dale Kooyenga, R-Brookfield. Rep. John Macco, R-Ledgeview, is a financial adviser. Marklein and Kooyenga both sit on the Legislature’s Joint Finance Committee, which reviews, refines and rewrites the state budget after it is introduced by the governor.

The accountant-lawmakers have led the charge on tax policy changes large and small: eliminating 18 tax credits in three years, reducing the number of income tax brackets, reducing the number of people required to pay the alternative minimum tax and reducing the so-called “marriage penalty.”

While Walker typically speaks in general terms about simply cutting taxes, the measures coming from the CPA Caucus are more about the particulars of tax policy.

Historically, major tax policy initiatives have come from governors, Berry said, in particular changes made under Warren Knowles, Patrick Lucey, Lee Sherman Dreyfus, Tony Earl and Tommy Thompson.

“When we really had pretty dramatic tax law changes, from both parties, those proposals have come from the governor,” Berry said. “What is somewhat different about, particularly income tax policy in the last several budgets, is that the big change that we saw in 2013-14 and now this new change in 2017-18-19, both came not from the executive branch, but from a small group of Republican legislators with professional tax background.”

Kooyenga, a U.S. Army Reservist and potential U.S. Senate candidate with a penchant for quoting the Broadway musical “Hamilton,” said his goal is to pull back on efforts made by politicians to “move levers” and control behavior through tax policy.

“I’m a firm believer that there should be less power in Madison and less power in D.C. And one of the ways that even Republicans have tried to assert their power is by creating mechanisms in the tax code to try to get people to do what they want to do,” Kooyenga said. “And I think that people should decide what they want to do and try to minimize the government trying to penalize or reward certain actions.”

On that point, Rep. Gordon Hintz, D-Oshkosh, agrees: more thoughtful consideration should be given to tax credits, exemptions and other policies to determine whether they will accomplish what they are intended to do.

“I think there’s a misunderstanding of, if you exempt the taxes for something, that that’s going to be enough incentive to create what you ultimately want,” said Hintz, a member of the Joint Finance Committee.

From Democrats’ perspective, that argument applies to the state’s manufacturing and agriculture tax credit, which reduces the state income tax for manufacturers and agricultural producers. The credit is estimated to cost $299 million in fiscal year 2016-17, up 134 percent from the projected annual cost of $128 million when it was added to the state budget in 2011.

According to an analysis by the nonpartisan Legislative Fiscal Bureau, more than three-quarters of the credit is projected to go to people earning more than $1 million per year in 2017. About $21 million is projected to go to 11 people making $35 million or more per year.

A sticking point for critics is that the credit is not tied to job creation.

“We evaluate and audit spending programs all the time, and when they’re ineffective or wasteful or problematic, we demand accountability. But when we spend $1.4 billion of revenue on a credit that is ineffective, expensive and benefits super-rich people, we don’t do a look back. We don’t ask for accountability,” Hintz said. “If we had a spending program that went from $128 million a year to $334 million a year, people would be crazy.”

Supporters of the credit argue it’s helped stanch the loss of manufacturing jobs from the state, arguing the increased cost is a sign that companies are spending their money in Wisconsin.

“Locked myself in the office this evening to develop a plan to eliminate the state's personal property tax,” Kooyenga tweeted at 9:48 p.m. on June 6.

Kooyenga has since completed his plan, which he said is now being reviewed by Assembly Speaker Robin Vos, R-Rochester.

The personal property tax, implemented in the early days of Wisconsin, when most of its governmental revenue came from property taxes, began as a tax on items like livestock, furniture, jewelry and vehicles. Its property tax counterpart — real property — covers land and buildings.

Todd Berry, a longtime tax policy analyst and president of the Wisconsin Taxpayers Alliance, said he doesn't expect significant changes in the immediate future to the way people are taxed in Wisconsin. However, he said, it's unusual that the impetus for much of the state's tax reforms has come from the Legislature in recent years.

The list of exemptions to the personal property tax has grown to include, among other items, clothing, personal items, stocks and bonds, vehicles, farm and manufacturing machinery and business computers. The tax now applies, in general, to furniture, equipment, machinery and watercraft owned by businesses.

According to an analysis by the Wisconsin Taxpayers Alliance, personal property has accounted for between 2.2 and 2.6 percent of the state’s property tax base since 2005. Compared to the 40 other states with some form of a personal property tax, Wisconsin taxes less than most, but more than most of its neighbors.

While the personal property tax brings in a relatively small sum compared to other taxes, the state Department of Revenue estimates eliminating it would result in a loss of about $261 million per year in funding for schools and local governments. That’s based on a proposal introduced in April by Sen. Duey Stroebel, R-Saukville, and Rep. Bob Kulp, R-Stratford.

Depending on the proposal, the money would either be gone or accounted for with an increase to real property taxes — paid by homeowners and business owners, rather than only business owners, as it is currently.

Kooyenga said in an interview that his plan would reclassify some personal property items as real property, putting the fiscal impact below $240 million. It would also eliminate and reduce some tax credits.

“We would be replacing (the revenue),” Kooyenga said.

Winnebago County Executive Mark Harris, a Democrat who ran unsuccessfully for Congress in 2014 and the state Senate in 2016, is wary of any plan to eliminate the tax. With a population of about 170,000, the county receives about $2 million per year from the tax and another $500,000 in state aid tied to an exemption for business computing equipment, Harris said.

“If they just repeal it and do nothing else, it would shift from business taxpayers onto residential taxpayers,” said Harris, also a trained accountant. “To prevent it shifting on residential taxpayers, they would have to make us whole out of general purpose revenue.”

Dipping into the GPR pot means more competition for funding that currently goes to services like schools, health care and corrections — and people like Harris aren’t convinced there’s enough money in that pot to go around.

Hintz, whose district is in Winnebago County, said he generally supports eliminating the personal property tax. But in doing so, he said, lawmakers should make sure of three things: focus first on funding schools, don’t shift the tax burden to local government and ensure funding will sustain the absence of the tax in the future.

“I certainly know what the negative impact for small businesses has been, and I think it’s questionable on a fairness standpoint if the application of that is, is that the best way to generate revenue?” said Hintz.

Still, he added, if the state can’t make up the difference, municipalities will either have to cut services or increase local taxes.

Walker is supportive, with conditions.

“I don’t mind chipping away at that. I’ve said all along, if I started from the ground up and had to build something, there’s no way I would create the personal property tax because it doesn’t make any sense,” Walker said in an interview.

Walker said he would “love” to get rid of the tax, but not at the expense of his other changes, including income tax cuts proposed in his two-year budget.

Competition with other priorities is why the tax remains on the books despite a century-long desire among people of varied political perspectives to get rid of it, said Berry.

“The problem is, it’s never anybody’s top priority for tax cuts, because it’s not sexy,” Berry said. “The sticking point simply is if you get rid of it you’ve got to come up with several hundred million dollars of money so that local governments are made whole, so they don’t lose revenue. And of course there are always other, better things to do.”

In Walker’s 2017-19 budget proposal, income tax cuts fall into the “better things to do” category, as does eliminating the state’s portion of the property tax, known as the forestry mill tax.

His plan would reduce income tax revenues by about $203 million, in part by cutting rates for the two lowest brackets by one-tenth of a percentage point.

Walker’s plan to eliminate the forestry mill tax would amount to a reduction of about $180 million over the two-year budget period. While most property taxes are levied by local governments and school districts, the state’s portion goes to fund the acquisition, preservation and development of forests in the state.

That move helps the governor make good on a campaign promise to keep property taxes on a median-valued home at or below where they were in 2014, when he was last elected.

“That’s just been a target of ours,” Walker said. “It’s not just keeping a political promise, but it’s the one area where people are seeing a tangible difference. I always like to warn lawmakers to be cautious because sometimes people say, ‘Well, we don’t hear as much about property taxes as we used to.’ That’s because we’ve lowered them.”

If property taxes were to increase again, Walker said, it wouldn’t be long before lawmakers would start hearing about them.

Simplicity is listed by those on the left and right as a quality to strive for in tax policy. The disagreement lies in how to achieve it.

Kooyenga’s vision involves gradually adjusting the state’s tax brackets until the income tax reaches a flat 3.95 percent rate for all income levels in 2029. That proposal was included in a sweeping transportation funding plan the lawmaker introduced in May as an alternative to Walker’s budget.

Rep. Gordon Hintz, D-Oshkosh, is an outspoken opponent of the manufacturing and agriculture tax credit, which he says is ineffective and too expensive. It's an example, from his perspective, of the wrong priorities taking the lead in Republican tax policies.

“A lot of Republicans were upset, as they should be, with (Democratic Gov. Jim) Doyle for raiding the transportation fund. Now the opposite is happening. Now we’re transferring general fund money into the transportation fund,” Kooyenga said. “One could argue that we’re raising too much money in the general fund, by evidence that we have plenty leftover to move to the transportation fund … If you look over the last 10 years, there’s actually been $715 million net that has gone from the general fund to the transportation fund.”

Walker is intrigued, but not committed to supporting the shift to a flat tax. In general, he said, it would be good to have “one simple rate” for income and sales taxes, with limited exemptions and loopholes. Current law places taxpayers in four brackets, with rates ranging from 3.95 percent for the lowest earners to 7.65 percent for the highest earners.

“I think the concept’s a good one,” Walker said, adding that he would want to see a proposal that includes a substantial enough deduction to make sure taxes weren’t increased on working families. “There’s ways you could make it work so the average citizen would either see it as a tax cut or tax-neutral.”

Hintz generally supports the idea of getting rid of some exemptions, but he joins his Democratic colleagues in opposing a flat tax.

“The simplicity masks the inequality,” Hintz said. “A flat tax disproportionately benefits high-income earners, which shouldn’t be a surprise.”

At the heart of the debate are questions about what makes a tax policy fair. These questions are framed around terms like “horizontal equity” and “vertical equity.” A tax policy that is horizontally equitable taxes people within a similar income or wealth range at the same rate. A tax policy that is vertically equitable taxes people with more wealth or income at a higher rate than people who make less money.

Within that framework, there are progressive taxes, which tax higher incomes at higher rates; regressive taxes, which take a larger percentage from low-income earners; and proportional taxes, which apply the same rate regardless of income.

Opponents of a flat, or proportional tax, say income should be taxed progressively — people who have more resources should contribute at a higher rate. Supporters argue that higher earners would still pay more money than lower earners under a flat tax, just not at a higher rate.

Kooyenga’s plan would scrap the state’s alternative minimum tax, capital gains exclusion, property/rent tax credit, married couple credit and others.

By the time the plan would fully take effect, in 2029, 1.9 million taxpayers would have their taxes cut by $2.8 billion, an average of $1,436 per person, according to an analysis by the nonpartisan Legislative Fiscal Bureau.

About 340,000 people would see their taxes go up by $53.7 million, or $158 per person. About 30 percent of the increase, or $15.8 million, would be paid by people earning between $30,000 and $50,000.

About 18 percent of the tax cut, or $6.5 million, would go to people earning more than $1 million, and about 28 percent, or $383.4 million, would go to people earning between $100,000 and $200,000.

Democrats’ concerns about a flat tax line up with common criticisms of conservative tax policy: it benefits the wealthy, while middle- and low-income earners get the short shrift. Researchers for the Wisconsin Budget Project say this is borne out in an analysis of the state’s most recently enacted tax cuts.

According to their analysis of 13 cuts to personal income, corporate income and property tax passed between 2011 and 2016, the combined effect of the cuts served to benefit residents with the highest incomes first, followed by middle-class residents, with the lowest earners receiving the smallest benefit.

Of the tax cuts studied in the analysis, the top 1 percent of earners were projected to receive 24 percent of the value of the $1.7 billion in taxes cut in 2017. The top 20 percent of earners were set to receive 60 percent of the cut.

A member of the Legislature's CPA Caucus, Rep. Dale Kooyenga, R-Brookfield, released a broad plan this spring that would overhaul the state's transportation budget and income tax code. He says his goal is to make the tax code "fairer, flatter and simpler."

“Any way you slice it, the lion’s share of these tax cuts has gone into the pockets of people who already have a lot of money,” said Tamarine Cornelius, a researcher with the Wisconsin Budget Project. “The top 1 percent is saving more on taxes each week from these tax cuts than the lowest income group will save over the course of the whole year.”

The Budget Project report encourages lawmakers to balance out the benefit by strengthening the state’s Earned Income Tax Credit and Homestead Credit, both credits that benefit low-income earners.

The Wisconsin EITC is a state extension of a federal program which benefits low- to moderate-income working people. The federal credit is based on earnings, marital status and the number of qualifying children a filer has.

In the 2015 tax year, 391,000 Wisconsinites received the federal credit — on average, $2,167 per person.

Walker’s budget would direct about $20 million per year toward increasing the EITC for an estimated 130,000 families, primarily benefiting qualifying parents with one child and newly married, dual-income couples.

But the expansion comes after a cut to the program of about $24 million per year in the governor’s 2011-13 budget, a move critics said effectively raised taxes on low-income working families.

Walker’s budget would also require able-bodied adults below the age of 62 to work in order to claim the state’s Homestead Credit. In order to receive the full value, people who claim it would have to earn a certain level of income. At the same time, the credit would once again be indexed for inflation for the elderly and disabled. Walker stopped that practice in 2011 after it was first implemented in 2009 under Doyle.

Asked what’s good about the state’s tax code, Kooyenga struggled to find an answer. After a few seconds, he named the governor’s efforts to lower property taxes and rattled off some of the changes pushed by the CPA Caucus, like the elimination of some credits.

“I know I’m never going to reach what my utopian tax policy is for the state of Wisconsin,” Kooyenga said. “But definitely we’ll be closer. We have less brackets, less tax credits. That’s what I’m trying to move towards. I don’t think I’ll ever get to exactly what I think the income tax and corporate tax and sales tax should look like, but I think with a lot of my colleagues, I’m doing a good job of playing defense and making the tax code work, and making it fairer, flatter and simpler.”

Hintz offered, “from a nerd standpoint,” that the state benefits from raising revenues through the “big three” — income, sales and property taxes — which he said helps shield the state’s economy from fluctuations at the national level.

Hintz accused Walker of governing by soundbite rather than working on adequately funding state services and improving quality of life.

“Before we give away any more money, before we fund some things we don’t feel are as important, let’s put the money we think is necessary to make sure all children have an equal opportunity,” Hintz said.

Walker named two goals when asked what he hopes his legacy on taxes will be: lowering the overall burden on taxpayers and leaving a fairer, simpler system in place.

“It’s not just about reform,” Walker said. “It’s really about paying lower taxes. I just fundamentally believe the people of the state are better at spending their money than the government is.”