On May 28, Wisconsin Representative Dale Kooyenga introduced a bill that reforms numerous elements of Wisconsin’s taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code. These reforms would improve the state’s ranking in the State Business Tax Climate Index,[1] which annually compares the states’ tax systems on over 100 variables that impact business. If enacted, the plan would move Wisconsin out of the bottom ten states. Representative Kooyenga’s proposal expands on Governor Walker’s income tax cut which is currently written into the budget being considered, simplifies the code, makes it more neutral to different types of business activity, and trims several odds and ends that have persisted for decades. The result is an Index ranking of 40, up from the current ranking of 43.
A full list of provisions is found in the bill’s legislative note,[2] but major provisions would:
Reduce income tax rates across the board, while reducing the number of brackets from five to three by 2015 (see Table 1);
- Eliminate the Alternative Minimum Tax starting in tax year 2013;
- Sunset defunct provisions relating to the now-extinct estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. “pick-up” credit;
- Recouple depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. and depletion schedules to the federal standard;
- Eliminate or reduce several distortionary business tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.
s, with major changes that would:
- Eliminate the jobs credit
- Make credits for research and development available to passthroughs for 2013, but then repeal the research facilities credit in 2014
- Eliminate film tax credits
- Limit the manufacturing and agricultural tax credit
- Increase the cap on capital losses from $500 to conform to the federal $3,000; and
- A stipulation that any additional sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. revenue generated as a result of federal legislation creating a new internet sales taxAn internet sales tax is a sales and use tax collected and remitted on remote sales, many done online. In 2018, the U.S. Supreme Court ruled that states could impose such obligations on sellers lacking physical presence in the state, vastly expanding the reach of these collection and remittance requirements. regime is used to lower the state’s individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rates.
Table 1: Individual Income Taxes under Representative Kooyenga’s Plan |
||||||||
|
Current Law |
Governor's Plan |
Kooyenga's Plan in 2015 |
||||||
|
4.60% |
> |
$0 |
4.60% |
> |
$0 |
4.50% |
> |
$0 |
|
6.15% |
> |
$14,510 |
5.94% |
> |
$14,510 |
5.94% |
> |
$14,510 |
|
6.50% |
> |
$29,020 |
6.36% |
> |
$29,020 |
7.60% |
> |
$319,460 |
|
6.75% |
> |
$217,630 |
6.75% |
> |
$217,630 |
|||
|
7.75% |
> |
$319,460 |
7.75% |
> |
$319,460 |
|||
|
*Rates given are for married joint filers |
These changes improve Wisconsin’s score in our State Business Tax Climate Index, in both the state’s overall scores and numerous subscores. Table 2 outlines these score improvements.
Table 2: State Business Tax Climate Index Scores under Representative Kooyenga’s Plan |
||
|
Current Law |
Representative Kooyenga’s Plan |
|
|
Overall |
43 |
40 |
|
Corporate |
32 |
26 |
|
Individual |
46 |
45 |
|
Sales |
15 |
15 |
|
Unemployment Insurance |
23 |
23 |
|
Property |
33 |
33 |
Income Taxes and Economic Growth
While political voices often have robust disagreements about the level of services that governments ought to provide, the academic literature speaks virtually in unison on the relationship between tax rates and economic growth. Of the 26 peer-reviewed studies on the topic, 23 find a negative relationship between taxes and growth. Additionally, all of the studies in the past 15 years support that conclusion.
Of the studies that distinguish between different types of taxes, corporate and individual income taxes are found to harm growth most, while sales and property taxes are found to hurt growth least.[3] This finding makes logical sense as well; taxes on income disincentivize value creation, whereas sales taxes are levied at the point of consumption, meaning in a relative sense that they incentivize savings. Savings, in turn, is associated with long run economic growth because people and businesses purchase capital from savings.
Progressive income taxes have been found by economists to be distortive to the labor market as well. Edward Prescott found that income taxes in Europe over 1950-2000 reduced the number of hours worked by employees,[4] and Jens Arnold found that progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. structures harm growth.[5] Elimination of the Alternative Minimum Tax further removes negative work incentives and greatly simplifies the tax code.
Plan Limits or Eliminates Distortionary Business Tax Credits
This plan aims to trim a few distortionary tax credits in the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. code, including the credit for job creation. While such tax preferences can be politically expedient because they ostensibly incentivize new jobs, their effect on the economic playing field is damaging.
Tax credits are economically equivalent to subsidies because they place certain businesses on an elevated platform above their competition. In the prospect of tax reform, retaining credits implicitly means that rates on any non-favored business must be higher. One of the best studies for illuminating this fact finds that most studies examining the effectiveness of incentives do not have a method for accounting for opportunity cost, where the money might have been spent elsewhere.[6] Ideally, the credit should be closed and the revenue put toward lowering the overall rate. The case against tax credits is especially strong for film production incentives, which have additionally been shown to be associated with abuse and fraud, in addition to failing to generate economic benefits that exceed their costs.[7] The trend in many states is toward reducing or eliminating their programs.[8]
Internet Sales Tax Provision Protects Against Revenue Spike
Boatloads of ink have been spilled over the problems with state collection of internet sales taxes.[9] One of the persistent claims that this plan addresses is that the new taxes collected as a result of federal legislation would be a windfall for state governments that they would in turn spend. Representative Kooyenga’s plan addresses this concern by devoting any additional tax revenue from a federal internet sales tax solution to lowering state income tax rates, shifting burdens in the long run toward a more pro-growth, consumption-based system.
Conclusion
To be sure, more needs to be done to remove problems in the Wisconsin tax code, but this plan is a concerted step in the right direction. It would remove some of the special treatment of certain businesses (which comes with the cost of higher overall rates), and cuts income taxes across the board.
[1] See Scott Drenkard & Joseph Henchman, 2013 State Business Tax Climate Index, Tax Foundation Background Paper No. 64 (Oct. 9, 2012), https://taxfoundation.org/article/2013-state-business-tax-climate-index.
[2] Wisconsin Legislative Fiscal Bureau, Memorandum from Bob Lang, Director, to Representative Dale Kooyenga describing Representative Kooyenga’s proposed budget amendment and its fiscal effects, May 28, 2013, http://www.thewheelerreport.com/wheeler_docs/files/0529kooyenga.pdf.
[3] William McBride, What Is the Evidence on Taxes and Growth?, Tax Foundation Special Report No. 207 (Dec. 18, 2012), https://taxfoundation.org/article/what-evidence-taxes-and-growth.
[4] Edward C. Prescott, Why Do Americans Work So Much More than Europeans?, 28 Federal Reserve Bank of Minneapolis Quarterly Review 2-13 (2004), http://www.minneapolisfed.org/research/QR/QR2811.pdf.
[5] Jens Arnold, Do tax structures affect aggregate economic growth? Empirical evidence from a panel of OECD countries, OECD Economics Department Working Papers No. 643 (2008).
[6] Terry F. Buss, The Effect of State Tax Incentives on Economic Growth and Firm Location Decisions: An Overview of the Literature, 1 Economic Development Quarterly 90-105 (2001).
[7] See Mark Robyn, Film Production Incentives: a Game California Shouldn't Play (Testimony before California Legislature), Mar. 21, 2011, https://taxfoundation.org/article/film-production-incentives-game-california-shouldnt-play-testimony-california-legislature.
[8] See Joseph Henchman, More States Abandon Film Tax Incentives as Programs' Ineffectiveness Becomes More Apparent, Tax Foundation Fiscal Fact No. 272, (June 2, 2011), https://taxfoundation.org/article/more-states-abandon-film-tax-incentives-programs-ineffectiveness-becomes-more-apparent. See also Will Luther, Movie Production Incentives & Film Tax Credits: Blockbuster Support for Lackluster Policy, Tax Foundation Special Report No. 173 (Jan. 14, 2010), https://taxfoundation.org/article/movie-production-incentives-film-tax-credits-blockbuster-support-lackluster-policy.
[9] For a primer, see Joseph Henchman, Testimony on the Proper Role of Congress in State Taxation, Apr. 25, 2012, https://taxfoundation.org/article/testimony-proper-role-congress-state-taxation.
Share