Feeling Squeezed? – Part 2

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July 9, 2008

People feel squeezed between rising costs and stagnant wages. Folks are looking at ways to cut costs. With the second installment of property taxes coming due soon, people ask me “Why are property taxes so high?”

Wisconsin relies on property taxes to pay for state and local services more than many other states. Wisconsin ranks 9th of all states in property taxes[1].

Not only do we pay more than most other states, over the years property tax has shifted away from businesses (including agriculture) to residents. In the 1970s, Wisconsin had a 50/50 split in property tax collection between business and residential property. Now the split is 70/30 with the heavier burden falling on owners of residential property[2].

Property tax accounts for nearly 40% of all the dollars collected by state and local government. It is a major way we pay for schools, local government, and technical colleges. Ninety-nine percent of the money collected through property taxes goes to fund some level of local government[3].

While property tax accounts for the largest share of money used by local government, individual income tax accounts for the largest share of state dollars. Fifty percent of the state’s general fund comes from individual income tax. For comparison, less than 7 percent of the state’s general fund comes from corporate income tax[4].

We frequently hear of Wisconsin’s high tax ranking. Usually the ranking refers to property or income taxes. But this is only part of the story.

When we compare what Wisconsin pays per person in taxes ($4,025) to the national average ($4,039) we are about average[5]. This is due to Wisconsin’s low sales tax.

We rank 33rd among all states in sales tax at a rate of 5%[6]. Tennessee, for comparison, has a 9.75% sales tax and relies on the sales tax for 80% of all state spending.[7]

Wisconsin tends to fund services based on taxes rather than fees. Admission to parks, college tuition and toll roads are all examples of fees collected by states. Some states fund vital services through fees. The motor vehicle registration fee is a good example of a fee increase passed this past year. When costs rise, states raise fees to avoid raising taxes.

But fees are paid by taxpayers too. Adding together fees and taxes, Wisconsin ranks 18th out of fifty states[8]. This is close to average – and the ranking parallels our ranking in income – a measure of how much we can afford to pay. Wisconsin ranks 19th in median household income.[9]

Wisconsin seems to have a match between how much we pay in fees and taxes (18th) and how much we earn (19th). So why does it seem as if we are paying too much?

Part of the problem is who is paying and who is not. We know more property tax dollars are coming from residential owners than commercial owners. The same is true for income taxes.

Wisconsin ranks lower than 26 other states in corporate income tax[10]. A study released in December reported nearly fifty thousand corporations filed tax returns with the Department of Revenue.

The same study reported two out of three of these corporations paid zero in taxes. The report concluded if large companies paid state and local taxes as they did when they reported federal income, Wisconsin would have collected over $1.3 billion each year.[11]

Do we tax too much in Wisconsin? We do have higher property taxes, especially on residential property. Individuals pay higher than average income taxes. But taxes on business are below the national average. Two thirds of the states have higher sales taxes. And our fees are below average.

Next week I will take a look at what options Wisconsin might consider in modernizing our mix of taxes.

[1] Wisconsin Taxpayers Alliance. Comparing states: Part One, Taxes. Focus (10) May 30, 2008. p.1.

[2] Fontaine, Jon & Jon Peacock, The property tax in Wisconsin: Burdens on taxpayers. Wisconsin Budget Project. p.2.

[3] Wisconsin Taxpayers Alliance. Property Taxes: Freeze or thaw? The Wisconsin Taxpayer. 75:6 (June 2007) 2 and Kreye, Joseph. Governing Wisconsin. Wisconsin Legislative Reference Bureau. (22) May 2007.

[4] Kreye, Joseph. Governing Wisconsin. Wisconsin Legislative Reference Bureau. (22) May 2007.

[5] Ibid.

[6] Ibid.

[7] Tennesseans for Fair Taxation. Tennessee has the nation’s highest sales tax. http://www.fairtaxation.org/facts/sales_tax_rank.php

[8] Wisconsin Taxpayers Alliance. Comparing states: Part 1, taxes. p. 1.

[9] U.S. Census Bureau. State rankings. The 2008 Statistical Abstract: The national data book. 2008. http://www.census.gov/compendia/statab/ranks/rank33.htm

[10] Wisconsin Taxpayers Alliance. Comparing states: Part 1, taxes. p. 1.

[11] Institute for Wisconsin’s Future. Wisconsin’s Revenue Gap: An analysis of corporate tax avoidance. December 2007. p. 4.

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