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    May 12, 2017

I have received many questions since the Assembly presented their Road to a Flat Tax proposal last week. Here is brief Q&A on some of the most asked questions:

 

Wouldn’t the application of the sales tax on fuel lead to a compounding of higher prices at the pump when fuel prices increase?

It is important to note that the starting point of the Assembly Road to a Flat Tax proposal is to reduce the state’s unique minimum mark-up law which requires a 9.18% mark-up on all fuel sales. The proposal lowers the required mark-up (although my preference would be to eliminate it entirely) from 9.18% to 3%.  Since the minimum mark-up law has the same impact whether petroleum prices increase, stay the same or decrease, there would be no new impact of higher prices at the pump. The Assembly leadership has offered to place restrictions on the sales tax if the Senate appears open to adopting our proposal. 

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Will the price I pay at the pump increase?

We do not know how the market will react. If the assumption is that gas stations will lower their prices closer to a 3% mark-up in order to compete, the overall proposal will lower prices. However, if gas stations do not feel competitive pressure from the new mark-up percentage then the price may see an incremental increase. This week a gas station owner in Northern Wisconsin publicly stated that he promises the Road to a Flat Tax will actually lead to overall lower gas prices. You can read his letter here.

What is the problem with debt?  Isn’t it just like the mortgage I have on my house?

The answer is no. With a mortgage on a home, you are paying for an asset that nearly always appreciates in value over time. When a homeowner pays off their mortgage they are left with a home that can be sold to a third party generally for an amount worth more than what they purchased it for. Bonding for roads leaves you with a road that has no value by the time the bonds are paid off. 

Why is an income tax overhaul coupled with a transportation solution?

For a period of time the transportation fund was being raided by the general fund. This practice resulted in significant concern and ultimately led to Wisconsin voters voting to amend the state constitution to prohibit the transfer of money from the transportation fund to the general fund. Today the opposite is occurring; the general fund is transferring money to the transportation fund. There is a revenue mismatch – the general fund has a surplus and therefore revenues can be decreased; the transportation fund has a deficit and revenues are being increased in order to pay to lower this deficit. The Assembly proposal puts an end to these transfers, which total $80 million over the course of the 2017-19 budget, and ensures that individuals using the roads, pay for the roads.

It is unfair that owners of electric cars do not pay for our roads through higher registration fees and do not pay gas taxes. Why doesn’t the Assembly proposal address this?

The Assembly proposal does address this issue. The proposal adopts Michigan’s language that resulted from a study which calculated an equitable fee on gas and hybrid vehicles to make up for the fact that these drivers do not pay the gas tax. The fee is not intended to discourage the purchase of hybrid or electric vehicles, but ensures these drivers are also paying for our roads.

I heard the Department of Transportation is inefficient. Why give more money to the department when there is an opportunity for cost savings?

No additional resources are given to the Department of Transportation (DOT) under this proposal. All of the revenue created from lowering the minimum mark-up, applying the sales tax to fuel and then lowering the gas tax will be used to reduce bonding. Reducing bonding by $300 million saves $150 million in interest over the course of the bond. This is savings that can then be used on labor and concrete versus interest to out-of-state bond holders. Concurrently this proposal enacts the most substantial series of transportation reforms in state history.

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I’m confused – I hear there are tax cuts, but I also hear my taxes can increase. How can both be true?

The Assembly proposal doesn’t just cut taxes, it simplifies the tax code. Wisconsin’s tax code is very complex; our standard tax form is twice as long as the federal tax form. The vast majority of Wisconsin residents would see their income taxes decrease but, as the proposal currently stands, for every 6 residents that see a tax decrease, 1 resident may see an increase in tax liability. The details are still being worked out so that the final proposal maximizes the number of winners. However, this is why tax reform is so difficult. With a tax code in Wisconsin full of special favors, eliminating preferential tax treatments will create winners and losers. 

Here is one example: The Assembly proposal would eliminate the 30% capital gains exclusion. This exclusion means that an individual with an adjusted gross income of $50,000 earned entirely from labor is taxed at a higher rate than their neighbor who has the same income, but derives their $50,000 from investments. The neighbor with investment income is only taxed on $35,000 of his income ($50,000 less the 30% Capital Gains Exclusion). The Assembly proposal eliminates this treatment in exchange for overall lower rates. The example demonstrates the opportunity for political opportunists to always find a sympathetic “loser” in tax reform although most individual’s situations change from year to year and over time, nearly all Wisconsin residents are winners when the tax code is reformed. 

Have more questions?  Please reach out to my office and we will assist you in addressing them. Here is a link to a Wisconsin Eye Interview speaking to the Assembly Road to a Flat Tax proposal in greater detail.

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State Capitol - Room 324 East | Post Office Box 8952 | Madison, Wisconsin 53708
(608) 266-9180 | Rep.Kooyenga@legis.wisconsin.gov

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