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From Governing’s
Some back-of-the-envelope calculations showed the depth of the problem: The state could cut spending on operations by 10 percent; school aid by 3 percent, municipal aid by 10 percent, and medical assistance by 5 percent — and eliminate the state’s new prescription plan entirely — and Wisconsin would still be $400 million short.
The obvious alternative was reform of the tax system. The panel suggested raising the sales tax rate from 5 to 6 percent, expanding the sales tax base to include professional and business services, and increasing the levies on cigarettes, gasoline and automobile registration. All of this would allow a cut in the state’s relatively high income taxes. What was the response? In the words of Mark Bugher, a member of the commission and former secretary of administration in Wisconsin, “the report was wildly heralded as a reasonable effort to fix the budget. By everyone but politicians.” Actually, to say the political leadership didn’t embrace the report would be putting it mildly. Both candidates for governor ran away from it as if it were on fire. Republican incumbent Scott McCallum and Democratic challenger Jim Doyle held fast to their no-new-tax pledges. Now, however, Doyle is in the governor’s mansion, and he may have little choice other than to reconsider. Most of the states with deficits in the range of Wisconsin’s are either missing an important stream of revenue, as in Oregon and Washington, or have unusually low rates, like Virginia. In Wisconsin’s case, says Todd Berry, president of the Taxpayer’s Alliance, “there is nothing fundamentally wrong with the tax structure.” The state has a well-balanced combination of income, sales and property taxes, and its residents can’t be accused of shirking their fiscal duties. Wisconsin’s tax burden has been one of the 10 highest in the nation for 30 years. The state is like a patient who can’t improve his health by giving up smoking, because he never smoked. While Wisconsin doesn’t tax many of the major services, it has generally avoided creating problematic loopholes, opting for broadly based and reasonable exemptions on such things as food and medical supplies. A joint legislative committee on tax exemptions has to give its blessing to any changes that would punch holes in the tax base, and it generally keeps such changes in check. What’s more, Wisconsin wasn’t hit as hard by the stock market decline as other states since it excludes 60 percent of capital gains from its tax base. As a result, says former Revenue Secretary Rick Chandler, “our income tax collections have fallen short of the mark, but less so than other states.” Nevertheless, the current problems were predictable. Although Wisconsin has the same balanced-budget requirement as virtually every other state, it has been meeting that requirement only as a technicality. The legislature has routinely carried forward balances for use in the second year of a biennium — a practice guaranteed to cause problems in times of economic downturn. What’s more, the state never put money into a rainy day fund, despite the fact that revenues came in higher than estimates throughout the 1990s. And although tax rates are still relatively high, legislators took every opportunity to cut them over the years. “The political system is pretty short-sighted,” says Andrew Reschovsky, a professor of public affairs and applied economics at the University of Wisconsin-Madison. “If there were funds around, we gave tax relief. Political pressure, and the partisan nature of the legislature made it very hard for even sensible politicians to act in sensible ways.” Wisconsin also has suffered from “keeping up with the Joneses” syndrome. After neighboring Michigan decided to shift to state funding for its schools, Wisconsin followed suit, choosing to absorb some two-thirds of the cost of K-12 education. That’s put pressure on the state’s revenues. When Minnesota instituted a sales tax holiday, Wisconsin did a similar thing, which cost the state more than $700 million. Administration of the system, on the other hand, has been generally solid. Budget cutbacks required that high-level officials spend some of their time opening tax return envelopes last year, but on a much larger scale, the state has stuck behind a commitment to spend $60 million on an integrated tax information system that is currently going online. The Revenue Department makes good use of imaging equipment and is setting up a free e-filing site for individual taxpayers while it mandates electronic filing for most sales tax filers. A Tax Refund Intercept program finds taxpayers who receive federal refunds and makes certain that if they owe money to the state, they pay up. And nobody accuses the department of being easy when it comes to catching tax evaders. “Wisconsin is stronger and more aggressive in getting its taxes than the federal government,” says Jere McGaffey, a tax practitioner and a partner with the accounting firm Foley & Lardner. “It’s far more likely that you’ll run into a state auditor here than a federal auditor.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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ast fall, in response to the prospect of a $2.8 billion deficit in the coming biennium, a bipartisan panel of longtime state officials issued a report called “The Fiscal Crisis in Wisconsin, an Analysis of Its Origins, Implications and Solutions.” Although the title was a trifle wordy, the conclusion was straightforward: Spending reductions will be necessary, but they won’t bring the books into balance without inflicting deep damage on the state’s economic development.