What if state leaders approved $500 million in new spending and never reconsidered the program?
This might seem far-fetched, but it has been occurring in Wisconsin for years. And that is what motivated the latest report from the Wisconsin Taxpayers Alliance (WISTAX), “The Spending No One Sees: The Rising Cost of Wisconsin’s Tax Expenditures.” WISTAX is a nonpartisan organization devoted to public policy research and citizen education.
WISTAX President Todd A. Berry illustrated the reason behind the report with an example. “In its budget, Wisconsin spends almost $900 million annually on property tax credits that appear on homeowners’ December property tax bills. In addition, it provides in the state income tax a school property tax credit that foregoes more than $400 million per year in tax collections. The $900 million expenditure is a direct one that is scrutinized every two years when a new state budget is developed. However, the income tax credit remains on the books largely ignored, even though both have the same purpose – to provide property tax relief.”
For this reason, tax experts sometimes call the various tax exemptions, deductions and credits “tax expenditures.”
And, as the new WISTAX report points out, the lack of legislative review of this “hidden” spending through the tax code is just part of the problem. Another issue is that tax expenditures increase the likelihood that tax rates on all taxpayers will rise to compensate for the cost of the tax break.
Wisconsin’s individual income tax, which raised $7.1 billion in 2014, contains billions in tax expenditures, based on a WISTAX review of the Department of Revenue’s (DOR’s) Tax Exemption Devices report. For example, the state excludes certain income from tax and allows some spending to be deducted before calculating tax. The “cost“ of these tax breaks totaled $641.7 million in 2014. In other words, had these exclusions and deductions not been part of state law, income tax collections would have been $641.7 million higher – or, tax rates could have been as much as nine percent lower. Nearly half ($309.0 billion) of those breaks were due to the state not taxing Social Security. Since 1998, the cost of income tax exclusions and deductions rose 97.8 percent, or 50 percent faster than adjusted gross income (66.4 percent).
In addition, 41 state income tax credits had a total tax cost of $1.6 billion in 2014, WISTAX said. The largest is the school property tax credit ($403 million) already mentioned. When the tax credits are combined with previously discussed exclusions and deductions, the total cost rises to $2.2 billion, or nearly one-third of income tax collections.
The new study also highlighted tax expenditures in the state’s corporate income tax. The law offers a variety of tax breaks, including 37 tax credits totaling $123 million. The largest is the new manufacturing and agricultural credit, which offset $33.2 million in 2014 corporate income taxes. The credit is also available to businesses that pay tax through the individual income tax, bringing the estimated total cost of the credit to $64.9 million, or $20.7 million more than the $44.2 million projected at the time the credit was enacted.
The state’s other major tax, the state sales tax, which is imposed on the purchase of tangible goods and selected services, yielded $4.6 billion in 2014. The state exempts some items from the tax, including food ($579.3 million), motor fuels ($571.3 million), and certain purchases by farmers and businesses ($730.3 million).
In addition, DOR identifies 27 services not subject to the state sales tax with a 2014 tax cost of $1.6 billion. If those services were taxed, the state could generate the same amount of revenue with a rate of 3.2 percent rather than its current 5 percent, WISTAX said.
“There will always be useful credits or exemptions in tax law,” WISTAX’s Berry said. “That is not the issue. Rather, it is whether we should authorize billions in tax-spending and never reconsider them while we review state spending regularly.”
A free copy of The Wisconsin Taxpayer magazine, “The Spending No One Sees: The Rising Cost of Wisconsin’s Tax Expenditures” is available by visiting wistax.org; emailing [email protected]; or calling 608.241.9789.