STATE AND LOCAL TAXES IN WISCONSIN Including Options for Reducing Property Taxes Presented to the Governor’s Excellence in Education Taskforce April 20, 2004 OUTLINE OF PRESENTATION A. REVENUES BY TYPE OF TAX B. TAXES BY LEVEL OF GOVERNMENT C. STATE AND LOCAL TAX BURDEN D. OPTIONS FOR REDUCING PROPERTY TAXES Note: These options are purely illustrative. They were prepared in response to taskforce member questions. 2 A. REVENUES BY TYPE OF TAX Wisconsin state and local governments collected $18.5 billion in taxes in FY2003. Individual income, property and general sales/use taxes were the major sources, accounting for 86% of total taxes. TABLE 1 CHART 1: STATE & LOCAL TAX REVENUES BY TAX TYPE, Wisconsin State and Local Tax Revenues FY2003 by Type of Tax, FY03 Amount Corporate Other 6% Tax ($ millions) % of Total 3% Motor Fuel Property 6,894.3 37.3% 5% Property Individual 5,052.0 27.3% 37% Sales 4,018.5 21.7% Sales 22% Motor Fuel 902.5 4.9% Corporate 526.5 2.8% Other 1,087.1 5.9% Total 18,480.9 100.0% Individual 27% 3 • The property tax is almost exclusively a local tax. A state forestry tax accounts for less than 1% of total property tax collections. • The individual income tax is exclusively a state revenue source, since local governments do not have the authority to impose a tax on income. • The sales tax is imposed by the state at a 5% rate, by most counties and a football stadium district tax in Brown County at a 0.5% rate, and by a baseball stadium district in Milwaukee, Ozaukee, Racine, Washington and Waukesha counties at a 0.1% rate. • The next 2 largest taxes are both state-imposed – the motor fuel tax used for transportation-related spending, with collections of $902 million, and the corporate income and franchise tax, totaling $527 million. • A variety of other taxes, such as excise (cigarette, beer, liquor), estate, insurance and utility taxes, raised an additional $1,087 million. 4 State and Local Tax Sources over Time Percent Distribution of State and Local Taxes, FY85 - FY03 100% 90% 80% 70% Other 60% Corporate Motor Fuel 50% Sales Individual 40% Property 30% 20% 10% 0% FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 5 State and Local Tax Shares Over Time • In the FY85-03 period, the shares contributed by Wisconsin State & Local Taxes by Tax Source, the 3 largest taxes 40% FY1985 and FY2003 (property, individual and 35% 35.4% 37.3% sales) increased from 30% 82% to 86%. 26.8% 27.3% • Sales tax share rose from % of Total Taxes 25% 21.7% 20% 19.4% FY1985 FY2003 19.4% to 21.7%, property 15% tax share rose from 35.4% 10% 7.9% 5.9% to 37.3%, and individual 4.9% 4.9% 5.5% 5% 2.8% income tax share 0% increased slightly from Property Individual Sales Motor Fuel Corporate Other 26.8% to 27.3%. • The contribution of the corporate income tax and miscellaneous taxes declined. 6 B. TAXES BY LEVEL OF GOVERNMENT The state collects most of the taxes raised in Wisconsin – about three-fifths of total state and local government collections. The state imposed $11 billion in taxes, and local governments raised $7 billion. • Most of the taxes TABLE 2 imposed by the state are Wisconsin Taxes by Level of Government, FY03 general purpose taxes – Amount used to finance general Level of Government/Type of Tax ($ millions) % of Total government activities. State taxes General purpose tax revenues 10,199.7 55.2% • Segregated taxes are Program tax revenues 22.6 0.1% Segregated tax revenues 1,101.3 6.0% earmarked for specific Total state taxes 11,323.6 61.3% purposes -- transportation, Local taxes Property taxes 6,827.2 36.9% conservation, recycling. Other taxes 330.1 1.8% The motor fuels and other Total local taxes 7,157.3 38.7% Total 18,480.9 100.0% transportation taxes account for more than 80% of segregated tax revenues. 7 State General Purpose Revenue (GPR) Taxes The individual income tax and general sales and use tax are the dominant GPR tax sources, accounting for 86% of GPR tax revenues. Insurance 1% Utility TABLE 3 3% Estate Excise 1% State General Purpose Tax Revenues, FY03 3% Other 1% Corporate Amount income and franchise Tax ($ millions) % of Total 5% Individual income 5,052.0 49.5% State sales and use 3,737.9 36.6% Individual Corporate income and franchise 526.5 5.2% income 49% Excise 354.8 3.5% Utility 276.8 2.7% State sales and Insurance 114.9 1.1% use 37% Estate 68.7 0.7% Other 68.1 0.7% Total 10,199.7 100.0% 8 Local Taxing Districts Several different kinds of local governments impose property and other taxes • School districts accounted for 42% of taxes imposed by local government. TABLE 4 • Municipalities levied $1.74 billion in taxes – mainly property taxes LOCAL TAXES BY TAXING DISTRICT, FY2003 Taxing District Property Tax Other Taxes Total Taxes % of Total ($ m) ($ m) ($ m) ($1.68 billion) but also room School Districts 2,988.6 - 2,988.6 41.8% taxes, wheels taxes and premier Municipalities 1,681.5 54.1 1,735.6 24.2% Counties 1,395.5 232.7 1,628.2 22.7% resort taxes. Tech.College Districts 507.4 - 507.4 7.1% Other Local Govts. 254.3 43.3 297.6 4.2% • County taxes included $1.4 billion Total Local Taxes 6,827.2 330.1 7,157.3 100.0% in property taxes and $233 million in sales taxes, giving them 23% of total local taxes. • The remaining local taxes were property taxes levied by technical college districts, and property, sales and exposition district taxes levied by other local governments. 9 Property Taxes by Class of Property • More than two-thirds of property taxes fell on residential property in TABLE 5: FY02. Residential property WISCONSIN PROPERTY TAXES BY CLASS OF PROPERTY, FY2003 includes single-family and multi- family housing with two to eight Amount % of Total units (the number varies by ($m) municipality). Class A - Residential 4,759.4 69.0% Class B - Commercial 1,307.4 19.0% • Commercial property, including Class C - Manufacturing 245.2 3.6% larger multi-family housing Class D - Agricultural 56.2 0.8% Other real property 308.2 4.5% accounted for 19% of the tax. Personal property 217.8 3.2% • Agricultural property accounts for Total Property Taxes 6,894.3 100.0% less than 1% of total property taxes. • Manufacturing, other real property and personal property each accounted for 3 - 4.5% of net property tax levy. 10 Property Taxes by Class of Property, FY1970 and FY2003 80% 69.0% 70% 60% 50% 47.4% 40% 30% 19.0% 16.6% FY1970 20% 15.0% FY2003 10.4% 9.9% 10% 3.6% 4.5% 3.2% 0.8% 0.5% 0% Class A - Class B - Class C - Class D - Other Personal residential Commercial Manufacturing Agricultural Property 11 Homeowners are bearing a larger share of the property tax burden at the same time that they are sending less kids to schools. Households with children under 18 has decreased from 50% in 1960 to 30% in 2000 50% 48% 46% 44% 42% 40% 38% 36% 34% 32% 30% 1960 1970 1980 1990 2000 Census Year 12 C. STATE AND LOCAL TAX BURDEN Chart 2: State & Local Taxes as % Of Personal Income, FY2003 • State and local taxes 12% 11.3% were 11.3% of personal income in FY2003. 10% • Property tax accounted for 4.2% of income, 8% individual income tax 6% 3.1% and sales tax 2.5%. 4.2% 4% 3.1% 2.5% 2% 0.6% 0.7% 0.3% 0% al e l ty er l s ta ue at du le er th To or F Sa op vi O rp or di Pr Co ot In M 13 State and Local Tax Burdens Are at Historically Low Levels • Tax burdens were relatively Wisconsin State and Local Taxes as % of Personal Income, FY1985-2003 constant around 12% of income from FY85-FY91. 13.0% 12.7% 12.5% • From FY91-FY96, the overall 12.5% tax burden gradually rose to a 12.0% high of 12.7% in FY95. 11.5% • Since FY96, overall tax burden 11.3% has generally declined, mainly 11.0% because of declines in the 10.5% property tax and individual FY85 FY87 FY89 FY91 FY93 FY95 FY97 FY99 FY01 FY03 income tax burdens. • FY00 was an exception-- repeal of property tax/rent credit (to fund the sales tax rebate). 14 State and Local Tax Burden by Tax Type • Property tax burden: at its Wisconsin State and Local Taxes as % of Personal Income, highest in FY94 (4.9%), Select Taxes, FY1985-2003 dropped to 4% in FY97 when 6% the state assumed two-thirds Property 5% of school costs. 4% • Individual income tax burden: Individual fairly constant between FY85 3% Sales and FY91; rose steadily from 2% FY91 to FY98, and dropped 1% after that (tax cuts). FY00 Corp. was an exception (repeal of 0% property tax/rent credit) FY85 FY86 FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 • Sales tax burden: stayed at 2.5% of income despite increase in the number of counties and stadium districts imposing the tax. 15 Tax Rankings: How Does Wisconsin Measures-Up? Tax Rankings of State and Local Taxes, FY00 Per $1000 of Personal Income • Individual Income Tax: 4th (out of 43 states) • State and Local Sales Tax: 31st (out of 46 states) • Property Tax 11th (out of 50 states) • Corporate Income Tax: 24th (out of 46 states) • TOTAL - State and Local 4th (out of 50 states) • Important Note: These rankings are now out-of-date. They rely on data from 2000. We hope to have new rankings by this summer from the Census Bureau. 16 How does Wisconsin rank in terms of government spending? Rankings of State and Local Expenditures, FY00 Per $1000 of Personal Income • Higher Education: 17th • K-12 Education: 8th • Welfare Programs: 21st • Highways: 17th • Public Safety 11th • Hospital & Health 33rd • Natural Resources 24th • Government Administration 26th • TOTAL (State and Local) 17th 17 D. OPTIONS FOR REDUCING PROPERTY TAXES Possible Criteria for Evaluation of Tax Policy Changes • Fairness - Does this revenue source treat like taxpayers the same (horizontal equity)? • Equity - Does one group of taxpayers bear too much of the burden with regards to this new/enhanced revenue source (vertical equity)? • Efficiency - Is this revenue source expensive to collect? What kind of effect will it have on the state’s economy? • Reliability - Will this revenue source grow over time? Is it volatile? • Political Sustainability - How much of a political cost would be associated with defending this new revenue source for schools? • Impact on State/Local Partnership - Does the change weaken local control? If so, is that a problem? • Timing Issues - How quickly can something be done? What impact will timing have on taxpayers? 19 What will it take to reduce property taxes? • In FY03, roughly $6.9 billion in property tax revenue was raised in Wisconsin. • To have a meaningful impact on the average homeowner’s property tax bill, a significant amount of alternative funding must be found. • In order to reduce the average property tax bill by 5% in Wisconsin, $345 million in other funding would be needed. • In order to reduce the average property tax bill by 10% in Wisconsin, $689 million in other funding would be needed. • In order to reduce the average property tax bill by 15% in Wisconsin, $1,034 million in other funding would be needed. • In order to reduce the average property tax bill by 20% in Wisconsin, $1,379 million in other funding would be needed. 20 Option #1: Broadening of Sales Tax Base • Under current law, a 5% state sales and use tax is imposed on sales of tangible personal property and selected services. • Under this proposal, the sales tax would be expanded by imposing a tax on additional services and repealing the exemptions of sales of some tangible personal property. • Extending the sales tax to services would distribute the cost of public services more broadly and equitably to consumers of public services. • However, many of the current exemptions were enacted for social purposes (example: food). • Additional sales tax revenues could be used to reduce property taxes through a number of mechanisms - additional school aid, removing certain function from the property tax and/or increasing shared revenue payments to municipalities. 21 FY2002 Cost $ millions Example of Sales Tax Exemptions Goods: Food 455.0 Motor fuel 240.0 Prescription drugs and medicines 107.0 Fuel & elec. for residential use during winter 99.1 Tractors and farm machinery 31.6 Manufacturing machinery & equipment 167.0 Caskets & burial vaults 4.1 Cloth diapers and diaper services 0.04 Services: Physicians, dentists, other health professionals 320.0 Advertising services 108.8 Computer services 151.0 Legal services 87.0 Architecture, engineering&surveying services 63.0 Accounting services 50.0 Beauty, barber, nail,other personal care services 22.6 Janitorial services 23.0 22 Option #2: Increase in Sales Tax Rate • Under current law, a 5% sales and use tax is imposed on sales of tangible personal property and selected services. • Under this proposal, the state sales tax rate would be increased by an undetermined amount and the proceeds dedicated to property tax relief. • The increased sales tax burden would be distributed across taxpayers, thereby providing a rough match between the beneficiaries of the educational system and the taxpayers that bear the cost burden. • Lower income taxpayers generally spend a greater share of their incomes on taxable products than upper income taxpayers. However, the regressivity of the sales tax is mitigated somewhat by exemptions for necessities (example: food.) • A 0.25% increase in the Sales Tax Rate would increase GPR by the following amounts: FY06 $214.8 million FY07 $230.4 million 23 Wisconsin has a low sales tax rate compared to other Midwest states. STATE TAX RATES, MAXIMUM LOCAL RATES, AND TOTAL STATE-LOCAL RATE OF NEIGHBORING STATES State Maximum Local Maximum State/ Local 1 Rate Rate Rate Illinois 6.25 2.50 8.75 Iowa 5.00 2.00 7.00 Michigan 6.00 --- 6.00 Minnesota 6.50 1.00 7.50 Wisconsin 5.00 0.60 5.60 1 Highest local rate known to be actually levied by at least one jurisdiction. Includes local taxes for general purposes and those earmarked for specific purposes (e.g. transit). Taxes applying only to specified sales (e.g. lodging or meals) are excluded. Note: According to the 2000 rankings of tax burden (as a percent of income), Wisconsin had a higher sales tax burden than Illinois and Minnesota. This is primarily due to tax base differences as well as income levels in the varying states. It is also important to note that these rankings are out-of-date. 24 Option #3: “Optimal” Sales Tax • Some tax policy experts have called for a sales tax that would be applied to all consumption expenditures while expenditures by businesses would be exempt. • Under the current sales tax, untaxed products are treated preferentially relative to taxable products. • Under an “optimal tax”, the preference given untaxed products would be eliminated and the burden would be shared by all consumers. • In addition, exempting taxes on sales to businesses would result in a fairer tax in that it would avoid pyramiding in sales taxes. • Such a change would also increase the burden on individuals while reducing the burden on businesses. • An optimal sales tax would require an extensive educational effort to inform all taxpayers of the many changes in what is taxable under the sales tax. • Based on an analysis by DOR, adopting the “optimal sales tax” could 25 lead to an increase of $3 billion in General Purpose Revenue. Option #4: Remove certain functions from the property tax • Another approach would be to find an alternative way to fund certain types of local governments. • Two likely candidates would be counties and technical colleges which tend to rely less on the property tax than municipalities and school districts. • Counties: Repeal their authority to levy a property tax. Provide additional sales tax authority (i.e. higher rate or broader base) On a statewide basis, a 2% sales and use tax would produce about the same revenue ($1.5 billion) as counties levied in property tax in calendar year 2003. Revenue raising capacity varies significantly from county to county which could lead to inequities in ability to spend. Not all counties currently have a sales tax (58 of 72 counties currently have a sales tax). • Technical Colleges: Repeal their authority to levy a property tax. Provide for another local option tax (possibly sales tax.) On a statewide basis, a 0.7% sales and use tax would have produced about the same revenue ($542 million) as technical college districts levied in 2003. 26 Option #5: Implement Streamlined Sales Tax Project • Currently, products purchased over the internet are subject to the sales and use tax in Wisconsin. • However, a U.S. Supreme Court decision prevents states from requiring e-retailers from collecting the sales tax at the point of sale. • As a result, taxpayers are supposed to report their e-purchases on their income tax forms. • Compliance is very low which results in Wisconsin-based retailers being at a cost disadvantage when it comes to competing with e- retailers. • The Streamline Sales Tax Project seeks to fix this inequity by addressing the concerns identified in the court decision so as to allow Congress to allow states to require collection of the sales tax at the point of sale. • When fully implemented, improved compliance could increase state revenues by as much as $200 million per year. • This additional revenue could be earmarked for additional school 27 spending and/or property tax relief. Option #6: Increase the Cigarette Tax • Wisconsin ranks 21st among the 50 states in its cigarette tax rate (77 cents per pack which generated $293.7 million in FY03.) • Among our neighboring states, only Minnesota and Iowa have lower rates (48 cents and 36 cents respectively.) • A 10 cent increase in the tax would increase General Purpose Revenues by $34.22 million in FY06. These additional funds could be directed toward property tax relief. • The cigarette tax is a regressive tax in that it constitutes a higher share of income for a low-income person than for a high-income person. • The cigarette tax isn’t a very reliable revenue source. Following increases in the rate, revenues tend to fall slightly in future years as purchases of taxable cigarettes in Wisconsin declines. • Tax avoidance through the purchase of cigarettes via the Internet is a growing problem in Wisconsin and around the rest of the country. • Other states have successfully raised their cigarette tax to fund specific functions such as early childhood care and education. 28 Option #7: Increase Other Excise Taxes • Beer Tax Wisconsin currently imposes an occupational tax on the sale of fermented malt beverages (beer) at the rate of $2 per barrel. The rate was last raised in 1970. The beer tax generates $9.5 million (FY03) An increase in the rate by 50 cents per barrel would generate $2.5 million. • Liquor Tax Wisconsin currently imposes an occupational tax on the sale of liquor. The current tax rate is $3.25 per gallon. In FY03 the tax generated $33.4 million. The rate was last increased in 1986. An increase in the rate by 50 cents per gallon would generate $5.7 million. • Wine Tax Wisconsin imposes an occupational tax on the sale of wine. The rate varies based on the amount of alcohol. In FY03 the wine tax generated $2.7 million. The rate was last increased in 1986. An increase in the rate on low alcohol wines of 10 cents would generate $1.3 million. • All alcohol related excise taxes are regressive. 29 Option #8: Use Gas Tax to Fund School District Transportation Costs • School districts are required by state law to furnish transportation services to public and private school pupils. • School districts that provide these services are eligible for categorical aid. • The aid payment is based on transportation rates which have not been changed since FY81. • In FY03 transportation aid totaled $17.7 million. • Based on school district budget data, the total cost of transportation in FY03 was $340.5 million. • Each 1 cent increase in the gas tax generates $42 million in additional revenue. • Transportation costs vary significantly across districts so some districts would benefit more than others from this policy change. 30 Option #9: School District Option Income Tax • This proposal would create a school district income tax to fund education, equal to 10% of the net income tax. • Between 1918 and 1961, Wisconsin had several individual income tax “surtaxes” to finance various programs/projects. • A local/regional income tax would be more progressive than a sales tax and state and local income taxes are deductible for federal income tax purposes, whereas the sales tax is not. • Since 1976, Iowa has allowed school districts to impose a surtax on net tax, the rate of which is determined by each school district but may not exceed 20% (the surtax must be approved through a referendum.) • According to 2002 school district income tax data, a 10% surtax would generate $441 million statewide. • To help ensure that inequities in tax burden do not appear under this proposal, the use of the income surtax should be “capped” and limited to reducing a particular school district’s property tax contribution to school funding under the current school finance system. • Recent advancements in technology would allow for the implementation of a school district surtax. 31 Option #10: Increase Wisconsin’s Top Income Tax Rate • Another income tax related option would be to increase the top individual income tax rate of 6.75% and dedicate the additional revenue to property tax relief. • Single individuals with income in excess of $126,420 and married couples (joint filers) with incomes in excess of $168,560 pay tax at the top rate. • A .25% increase in the top rate would increase General Purpose Revenues by $33 million annually. • This proposal could be deemed as a effort to “soak the rich.” Others also argue that high taxes on the wealthy can dampen economic growth by discouraging high wealth, high skill workers from locating in a particular state. • The counter argument is that wealthy individuals - especially those with extremely high incomes - can afford the additional tax burden. • In 2000, Wisconsin ranked fourth nationally in terms of income tax burden (per $1000 of personal income.) 32 Option #11: Changes to Corporate Income Tax • The Corporate Income and Franchise Tax raises approximately $500 million per year (5% of GPR.) • A number of corporate income tax credits have been created over the years to provide economic incentives to various types of industries. • The corporate income tax is highly volatile. Since it is linked to corporate profits it fluctuates with changes in the business cycle. • Options for change include: Reversing the recently adopted Single Factor Apportionment formula change (revenue impact = +$45 million annually.) Adoption of Combined Reporting (revenue impact = +$75 million) Elimination of a series of corporate income tax credits (revenue impact = +$12 million) • Regardless of which change were adopted the volatility of the corporate income tax would not make it a good funding source for K- 12 education. • Also, the corporate income tax is subject to intense inter-state competition which means Wisconsin needs to be careful not to put 33 itself in a non-competitive situation. Summary • None of these options are “perfect” - each has its own strengths and weaknesses. • Weighing the trade-off’s between policy options is always important. • Property taxes remain a sore point among Wisconsin residents. • As the population of the state ages, property taxes will likely become even more unpopular because retired residents on fixed incomes see little direct benefit from the school system and growth in property taxes is especially burdensome. • Sales taxes tend to be regressive but lack transparency and are paid sporadically which makes them less painful. • Income taxes tend to have the closest link to “ability to pay” but Wisconsin already relies heavily on the income tax to fund the cost of government. • Many tax policy experts advocate for a system of taxation that relies on a broad mix of taxes with no single tax rate being so high as generate resentment among residents. • Such an “optimal system” should also balance the needs for taxpayer 34 equity and fairness and generate a reliable stream of revenue.
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