SPN MacIver Institute 2012 National Think Tank of the Year
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Sullivan Report Call for Tax Shift Ignores History

Comments | Posted in mi perspectives | By MacIver Institute | Posted August 29, 2012 9:47 AM

By James Wigderson
Special Guest Perspective for The MacIver Institute

The much-anticipated Sullivan Report on Wisconsin's workforce development was released last week, and much of the coverage focused on the report's recommendations regarding addressing the state's "skills gap" between potential workers and employers. The report, named after former Bucyrus CEO Tim Sullivan, also had some recommendations that should cause hesitation about accepting the report in its entirety.

The report, "The Road Ahead: Restoring Wisconsin Workforce Development," said of Wisconsin's high tax burden, "This report would be incomplete if we were to present issues regarding our workforce without discussing taxes."

Sullivan's report approvingly gives a quote from current Department of Revenue Secretary Richard Chandler, "We can't afford to be complacent. Wisconsin should be doing everything possible to promote economic growth and jobs, including the state's tax structure."

The report adds,

"...Wisconsin's tax structure has a negative effect on our ability to attract and retain our workforce. Although Wisconsin has recently made greats strides towards improving its business climate, the Tax Foundation's State Business Tax Climate Index ranks us 43rd. This ranking is important for Wisconsin as the United States Department of Labor reports that most mass job relocations are from one U.S. state to another, rather than to overseas. Our state is losing out on economic growth to other states. While lawmakers are able to offer tax credits and other incentives to companies, these often cover systemic issues."

The report is correct that more needs to be done to change the state's tax policies. Our next door neighbor and competitor Illinois may be losing on the football field, but despite massive tax increases the burden of taxation on business is still either on a par with or less than the burden in Wisconsin. As the Sullivan report notes, Wisconsin has ranked in the top ten for tax burden since the Tax Foundation began ranking the states 37 years ago. Another report ranks Wisconsin fourth highest in percentage of personal income paid in taxes at 11%.

While the Sullivan report recognizes that Wisconsin has a problem, it misdiagnoses what the problem is.

"One way to remove this stigma is to reduce our reliance on personal income taxes and property taxes by shifting the burden to consumption tax."

It's not just a "stigma," and what Wisconsin needs to do is reduce the overall tax burden - not merely shift the burden to the sales tax.

To be fair, the Sullivan report is clear in that it is not calling for an overall tax increase. It also cites another report friendly to the idea of a tax shift that if the corporate income tax is cut by 50%, the property tax by 9%, and the personal income tax by 13%, it could be offset by an addition of 2.5% to the state sales tax. This would bring the minimum statewide rate to 7.5%.

According to the report cited by Sullivan, the combination of tax cuts offset by an increase in the sales tax would possibly result in nearly 10,000 jobs, an increase in per capita disposable income of $410, and an increase in investment of $1.4 billion in a one-year period.

Whether or not an increase in the sales tax to offset cuts in corporate and income taxes would be politically advisable, the Sullivan report ignores Wisconsin history when it comes to using the sales tax to offset property and income taxes.

The sales tax in Wisconsin was created in 1962 at a mere 3% to provide property tax relief. While a member of the State Assembly, State Senator Glenn Grothman wrote about the sales tax's creation, "The new tax became effective the next year and property taxes actually did drop by seven percent. Four years later they had bounced back to $623 million - a twenty percent increase in five years; and well over the rate of inflation at the time. There was not tax relief - just more spending."

In 1968, Wisconsinites were unhappy about property taxes. A report by the Wisconsin Taxpayers Alliance in 2006 explained what happened, "In 1968, property taxes surpassed 6% of personal income for the first time. A task force was commissioned to study why Wisconsin's property taxes were historically high. One reason, the group argued, was that other states made greater use of the sales tax."

Sounds familiar. However, the next year Wisconsin passed an increase in the sales tax to 4% - under Republican Governor Warren Knowles - and the promised property tax relief never came. The sales tax also shifted from a list of items to be taxed to a limited category of items that were exempt from the tax.

In 1982, under another Republican governor, Wisconsin enacted a "temporary" increase in the sales tax to 5% (despite criticisms by then-Assembly Minority Leader Tommy Thompson) to fill a temporary shortfall. The temporary increase was to be accompanied by the passage of a constitutional amendment that would require future revenue from the increased sales tax to either go to property tax relief, or else the increase to the sales tax would sunset. The sales tax increase split the Republican Party, Governor
Lee Dreyfus decided against seeking re-election, and the following year Democratic Governor Tony Earl made the sales tax increase permanent without the property tax relief.

The problem isn't how to shift the tax burden to remove the "stigma" of Wisconsin's abnormally high tax burden, but how to reduce the overall tax burden to make Wisconsin more competitive to employers and skilled employees. Shifting taxes in a revenue-generating shell game has only encouraged Wisconsin politicians to keep the old rates high while taking the new revenue generated from the tax increase. The lesson from Wisconsin's history of promises of the relief from the sales tax is don't just offset taxes - cut them.