Filling the Budget Hole
Some revenue-raising options for the state
Things are looking pretty grim in Madison and in state capitals around the country.
Wisconsin will face an estimated $5 billion shortfall for the 2009-2011 budget and the state Department of Administration has asked agencies to cut their budgets by more than 10%, thanks to the worsening condition of the economy and global stock markets.
In addition to those cuts, the
state will have to find ways to raise revenue to pay for services that
will likely be more in demand as the global, national and state
“This is the time when we’ll need to raise taxes,” said Jack Norman, research director of the Institute for Wisconsin’s Future (IWF). “This is when we need it. And this is when there might be a political opening to do it. What’s the only other choice, given the deficit? To just cut, cut, cut?”
To start the dialogue, the IWF and the Wisconsin Council on Children and Families (WCCF) compiled a catalog of tax reform options that state lawmakers can consider, and they’ve rated them according to whether the tax option is progressive (if it is more likely to affect the wealthy) or regressive (if it is likely to affect low-income taxpayers disproportionately). These options include:
- Collect sales tax on purchases made on the Internet and from other mail-order firms to raise an estimated $31 million annually. Counties and sales tax districts would also see gains.And if Congress allows states to require out-of-state retailers to collect sales tax, an estimated $200 million could flow to the state.When sales tax is not collected from Internet and mail-order firms, it puts the local retail stores on Main Street at a competitive disadvantage.
- Reinstate the estate tax to collect $120 million annually. The tax on estates worth more than $675,000 ended on Jan. 1, 2008. The report notes that it’s a highly progressive tax and would affect less than 2% of the residents who die in Wisconsin each year. Even if the tax were imposed only on estates worth more than $1 million, Wisconsin would raise $95 million per year. A taxdeferral provision could be made so that family businesses would not have to be sold off to pay the estate tax.
- Eliminate the itemized deductions credit to raise $321 million annually. The report notes that higher-income taxpayers benefit the most from this credit, while few who earn less than $50,000 received this credit.
- Tax 100% of capital gains instead of 40% of capital gains to generate $277 million annually.This highly progressive tax reform option mainly affects those who earn more than $100,000.
- Increase the top marginal tax rate from 6.75% to 7.75% to collect $180 million per year. This tax increase would apply to singles whose taxable income exceeds $142,650 or married couples whose taxable income exceeds $190,210.
- Raise the state sales tax from 5% to 6% to raise $850 million annually. This mildly regressive tax would put Wisconsin’s sales tax rate closer to neighboring states’ sales tax rates. Minnesota has a 6.5% sales tax, Illinois has a 6.25% sales tax and Michigan has a 6% sales tax. Remember that many necessities, such as food purchased in grocery stores, are not subject to sales tax.
- Replace the corporate income tax with a gross receipts tax, as Michigan, Ohio and Texas have done. While some businesses would pay more under this “mildly regressive” tax option, others would pay less. Depending on how it’s structured, the new gross receipts tax could collect between $980 million and $1.369 billion. In 2007, the state collected $890 million from the corporate income tax.