Any discussion about tax reform, a popular subject these days (see page 1), should begin with our SWNews4u.com poll, which asked which tax people wanted reduced most. Responses as of Tuesday morning:

Income taxes: 15.
Business taxes: 1.
Property taxes: 34.
Sales taxes: 4.
Taxes don’t need to be cut: 15.

I find it fascinating that in a state that has been seen inside and outside the state as a tax hell forever — and a state with, according to the Tax Foundation, the fifth highest state and local taxes in the U.S. — one-fifth of people who responded to our admittedly unscientific survey believe that taxes don’t need to be cut. That may be a sign of the number of people who get paychecks from state or local government, but the 2010 and 2012 election results indicate a different political emphasis in this state.

The more interesting number, though, is the highest vote total on this list. According to the state Department of Revenue, the average property tax bill is twice as large as the average state income tax bill. The latter is deducted every pay period, while the former shows up in your mailbox, although those with mortgages are paying them as the year goes along anyway.
This comes up because (1) it’s an election year, (2) the state has a projected surplus of more than $900 million, (3) Gov. Scott Walker a few months ago floated the idea of ending the state income tax, and (4) UW–Platteville hosted a forum on the subject Thursday (as you read on page 1), with Lt. Gov.  Rebecca Kleefisch and state Department of Revenue Secretary Rick Chandler. Walker’s trial balloon is likely to be popped before it attains cruising altitude because the income tax generates more than half of state revenues, and the combination of things that would need to happen — substantially increasing the income tax, substantially increasing property taxes, and severely cutting state and local government spending — are all politically unpalatable.

Property taxes have been a problem in this state since about 1850. (Wisconsin became a state in 1848.) The income tax was enacted in 1911 in large part because of complaints about property taxes. The sales tax was enacted at 3 percent in 1962, then increased to 4 percent in 1969, then increased to 5 percent in 1982 for property tax relief. Ditto the legalization of county sales taxes in the early 1980s. And as a result, property taxes are seen as too high, and we have the fifth highest state and local taxes in the nation. (And really no good alternative way to finance government, since we lack, for instance, oil underground.)

The history of failing to reduce property taxes by other taxes demonstrates why proposals to reduce some taxes by raising others should be opposed. One elected official at the UWP meeting suggested that sales taxes should be increased to get more money from tourists. Another elected official floated the idea of allowing cities to institute their own sales taxes. No one brought up at the meeting that sales taxes are paid by everybody who buys something, not just tourists. No one also brought up the rule of economics that if you want less of something, you tax it.

Others brought up the fact that sales tax covers products, but not services. Extending the sales tax to things not currently covered might be acceptable, if it was part of a sales tax rate reduction.

What is interesting is that the property tax situation by one measure is better than it used to be. A quarter century ago, when I was first writing about taxes, three of the state’s 11 highest property tax mil rates were in Grant County. Five years later, in a comparison of property tax mil rates, the 10 highest mil rates were over $30 per $1,000 assessed valuation.
Today, property tax bills as of 2011–12 average about $19 per $1,000 assessed valuation. That, however, is a number of more theoretical interest. The more pertinent number is your property tax bill, which in Wisconsin averages $2,938, according to the Department of Revenue.

The problem with focusing on property taxes, though, is that income taxes have a bigger impact in an area where Wisconsin has lagged behind for a long time — business climate. This state is behind in such areas as start-ups and incorporations. As a result this state has trailed the national average in per-capita personal income growth since the late 1970s. Since most businesses are not organized as what are called “C corporations” (as in Internal Revenue Service subchapter C), most business owners pay personal income taxes on whatever money their businesses make, and Wisconsin has steeply progressive income taxes.

Kleefisch and Chandler have been hearing about the state’s business taxes, and one business person specifically said that income tax reform is the most important reform to make because taxes on business (including personal income taxes) encourage business to not locate in Wisconsin. The specific problem with the size of our taxes is that in order to get businesses to move here, tax incentives have to be offered. Wisconsin has relatively few tax incentives to offer business compared to our neighbor states. On the other hand, a new George Mason University study suggests that tax incentives are less successful in attracting businesses than low taxes to begin with.

During a discussion about taxes, the issue of tax fairness always comes up. Progressive taxes make people with more money pay a larger percentage of their money in taxes. Sales taxes, because they are set on the same percentage of an item’s price for everybody, are said to be not fair, even though sales taxes appear to be the tax least objected to, based on evidence beyond the SWNews4U.com poll. Property taxes are claimed to be not fair, but with the exception of those who have paid off their houses, I suspect, and banks would probably confirm, that there is a direct relationship between the value of a house and its owner’s income.

I suspect I will write more on this topic, but not this week.