September 12, 2012
“We’ve really got a mess,” Todd Berry told the group. Lawmakers are “mucking up the tax code with a lot of stuff nobody uses.”
Mr. Berry is the president of the Wisconsin Taxpayers Alliance. He was among four experts who testified at a recent Symposia Series on State Income Tax Reform.
I serve on the Steering Committee of this group and spent time this summer with my colleagues grappling with how to reform taxes. We learned Wisconsin’s tax code fails on many fronts. Chief among the failures is the unusual complexity of the state’s income tax.
“Wisconsin has a more complex system than other states,” said Matt Gardener, the Executive Director of the Institute on Taxation and Economic Policy (ITEP). “The complexity of the income tax makes people mad.”
Wisconsin has over 70 different deductions, credits and exemptions buried in the tax code. Almost none of them are subject to cost benefit analysis.
Mr. Berry told the group over the past 10 years the number of tax-breaks has doubled. Many of these tax credits pay people to do things they would have already done without being paid by the state.
Take the Historic Rehabilitation Credit. Professor Andrew Resckovsky, a UW Madison economist, told the committee most people in his historic Madison neighborhood would put in a new furnace or fix the roof without the 25% tax credit they received from the state.
“Would people have done this anyway?” he asked the lawmakers. “What is the public benefit? Is there a public benefit that outweighs the cost?”
“Tax breaks are spending,” said Mr. Gardener. We need information on the success and failure of tax breaks. Lawmakers should ‘sunset’ tax breaks every 5 to 10 years. Then ask, “What is working and what is not?”
Most tax breaks are passed with no time limit or ‘sunset’.
“If you sunset the credits,” said Mr. Gardener, “You will not ask ‘which should I get rid of?’ you will ask, “which should I keep?’”
I asked the experts how Wisconsin should move forward on tax reform.
On this question there was surprising agreement among all of the presenters. The experts agreed we should simplify the tax code. This means few exemptions, deductions and credits.
Joe Henchman, Vice President of the Tax Foundation, cautioned that there is a tension between tax rates and tax breaks: “If you fail to close tax breaks, you will have to raise rates.”
Taxes should be economically neutral; treating one business-type the same as another. If you make the same as your neighbor, you should pay the same in taxes.
“We want a tax that grows with the economy but is not volatile,” said Professor Reschovsky.
Volatility or the up and down swings in revenue from the income tax can also be managed with proper budgeting – like using a ‘rainy day’ fund to save money in good times. A broad base in a tax reflects the whole economy as near as possible without carving out certain parts of our economy.
Finally, with a broadened base, tax rates should be kept low. In this way, no one type of business or taxpayer unfairly bears a greater burden than another.
My legislative colleagues often see tax breaks as somehow “free”. This is because tax breaks are not a line-item in the state budget. But reducing someone’s taxes means someone else pays more. In a free market economy, tax policy should not pick winners and losers.
Lawmakers often seek to achieve policy goals through tax changes. An example of this is the very popular dairy modernization tax credit. Farmers can modernize facilities and lower their taxable income. The goal is laudable. It is in the state’s interest to have one of its key industries modernized.
But the experts offered a new way of thinking. Perhaps we should put more money into grants that achieve our policy purposes and re-evaluate those grants every budget cycle. This way spending is much more transparent.
As Mr. Henchman of the Tax Foundation said, “Ask yourself, ‘if it was a grant program would you appropriate this money?’” “Every ‘carve-out’ you do drives up the rates on everyone else.