Written by Logan T. Carlson
Central Wisconsin Sunday
As the calendar flips to another year, there are rumblings in the State Capitol of Gov. Scott Walker considering idea of eliminating the state’s income tax in favor of shifting the state’s revenue toward a sales tax.
No official proposal has been developed or released by Walker, but in interviews last month with the Wisconsin State Journal and the Milwaukee Journal Sentinel, he said he was “envious” of states such as Texas and Florida that do not have personal income taxes.
Lt. Gov. Rebecca Kleefisch is holding meetings with businessexecutives around the state, asking them for their ideas on tax reform. During a meeting last month in Beloit, Kleefisch reportedly asked business leaders how the state “could love you more,” in a video of the closed-door meeting obtained by the State Journal.
While it’s hard to know the potential effects of eliminating the state’s income tax without details of a proposal, the state’s Legislative Fiscal Bureau estimates a sales tax of 13.3 percent would be required to offset any loss of tax receipts. That’s an 8.3 percent increase from the state’s current 5 percent sales tax and wouldn’t include any additional municipal or county sales taxes.
Scott Larson said he hasn’t heard a lot of feedback from members of the Marshfield Chamber of Commerce & Industry, or MACCI, about the tax idea, but he thinks it’s something that will get more attention.
“I think the business community would be very open to listening to proposals and would have some suggestions,” said Larson, the executive director of MACCI. “I applaud the governor for at least floating the idea of looking at things differently.”
Larson said many small businesses would benefit from eliminating income taxes, and any potential changes would get their attention.
However, it’s not clear what effect it would have on new business startups, something in which Wisconsin historically has lagged the nation, said Dale Knapp, research director for the Wisconsin Taxpayers Alliance.
From 1993 through 2011, Wisconsin ranked 49th in the nation in new firm creation, Knapp said. Only Iowa placed lower.
“There is a lot of research out there that shows much of new job creation comes from small companies and new businesses, and that the older companies tend to be adding jobs, but are generally moving the other direction,” Knapp said. “My guess, it would have little impact on firm creation. New businesses don’t have taxable income in their early years. Moving to a sales tax isn’t going to affect them very much during the first three to five years.”
And depending on what types of goods and services were exempted from sales tax — Wisconsin currently exempts purchases of food and other goods directly used in manufacturing products — it potentially could have a detrimental effect on new startups.
“One of the issues you have with a sales tax, particularly with services, you don’t want to have pyramiding,” Knapp said, which is when a individual or company purchases something and pays sales tax on it, and then a consumer pays a sales tax on it when it’s used.
“(Pyramiding) would be an issue, depending on what goods and services were and weren’t taxed,” he said.
Who pays more
Assuming the same exemptions in the tax code remain, eliminating the income tax is seen as a huge tax cut for top earners in the state, according to the Wisconsin Budget Project and the Institute on Taxation and Economic Policy, or ITEP.
That’s because the top 20 percent of income earners in the state pay between 4.6 percent and 5.6 percent of their income in income taxes, compared to between 0.9 percent and 2.5 percent of their income in sales taxes, according to ITEP figures.
The reverse is true for those in the bottom 40 percent of income earners, who pay a higher proportion of their income in sales taxes — between 5 percent and 6 percent — while paying less in income taxes.
“If we fully pay for the elimination of the income tax by raising sales tax, then the lowest 80 percent of Wisconsinites would pay more, and in many cases substantially more, than they save through reduced income tax,” said Jon Peacock, the executive director of the Wisconsin Budget Project, whose estimates show the bottom 80 percent paying between $266 and $1,045 more in taxes, while those in the top 20 percent pay between $1,500 and $44,000 less than the current system.
“(Lower income households) have to spend a higher portion of their income on goods that are taxable, and so a consumption tax falls much more heavily on them as a percentage of their income,” Peacock said. “I think taxes that are based on ability to pay are much fairer, and taxes that aren’t tied to ability to pay are extremely burdensome for lower income and even middle-income households.”
That view isn’t shared by all, including Larson, who said he doesn’t think moving to a sales tax would impact low-income households’ ability to purchase goods and services.
“It only impacts you on what you are purchasing,” he said.
Business set up
An additional point to consider is how businesses are set up. Under current law, some are set up as pass-through entities, meaning they pay taxes through individual income tax, while others pay through corporate income taxes.
The Legislative Fiscal Bureau believes that if income taxes were eliminated in favor of sales taxes, some businesses that currently pay corporate income tax would reincorporate as pass-through entities to avoid those taxes, meaning adjustments to corporate taxes might be necessary. Assuming the corporate income tax was eliminated completely, the bureau’s estimates show the sales tax would have to increase an additional 1 percent — up to 14.3 percent — to make up for the lost revenue.
“I’m not sure why the business community would get behind it, because I think it would be a huge problem for retailers in the state,” especially those who are competing with companies on the Internet, Peacock said. “Perhaps some wealthier business owners view it as a positive thing, but to triple our sales tax would be a huge problem for most retailers in the state.”