Source: Milwaukee Journal Sentinel
Share of income steady as other states worsen; observers divided
By Dave Umhoefer of the Journal Sentinel
Dented by income tax cuts and a marked spending slowdown on education, Wisconsin's national status as a tax hell is fading.
Hell has not frozen over.
But in comparison to other states, Wisconsin's total tax bite on incomes plummeted to just above the national average in newly released figures.
And the Badger State's consistent top-five tax perch has slipped steadily down to 15th in the latest rankings.
Wisconsin even dropped below the U.S. mark on both taxing and spending based on another common measure, dollars per person. That is a first on taxes going back at least two decades. On spending, it's the second straight year.
The Journal Sentinel analyzed 2007 census figures on taxing and spending by state and local governments to reach the conclusions. The data is the latest available.
What's going on? Has Wisconsin really shed its high-tax ways? If so, how? Those who closely watch the rankings agree on much about the new figures but react to them in differing ways.
John Ashley, Wisconsin Association of School Boards executive director, said they are cause for concern, given the limits on school spending increases. Schools are cutting offerings while the public is demanding improved student performance and greater academic breadth, he said.
"We've reached the tipping point in many districts," Ashley said.
George Lightbourn, president of the Wisconsin Policy Research Institute, a conservative think tank, said it's "obviously good that our tax ranking is getting closer to the national average rather than away from it."
But Lightbourn noted taxes are just one component of economic competitiveness - and he thinks the state is lagging in others, such as job and income growth.
The figures offer a broad snapshot that is 2 years old, but they are the only comprehensive source of all state and local public dollars. They confirm trends that began around 2000, and the data is widely viewed as credible by researchers on various sides of the tax debate.
At the same time, the figures do not account for changes since the current recession began. The impact of tax increases enacted this year, therefore, is not reflected in the rankings. Wisconsin, as did some other states, raised various taxes as it struggled with massive shortfalls. How future rankings will shake out remains to be seen.
Tax collections still rising
To be sure, the twin spires of taxation in Wisconsin - the property and individual income taxes - still cut far deeper into incomes here than in most states. Taxpayer anger continues to bubble up over those taxes, in part because they are so visible compared to the sales taxes and user fees on which other states rely more heavily.
Indeed, tax collections continue to rise, just not as fast as in some other states, which helps drive the change in the rankings.
But you have to go back to the early 1980s to find a sustained period in which tax collections took as small a bite out of Wisconsin's collective income as they do now. That bite has held at around 12% of personal income for several years, while some other states have boosted their bite.
The U.S. Census Bureau defines "taxes" to include some license fees, such as motor vehicle registrations. The agency's data includes the District of Columbia.
The new rankings reflect some notable Wisconsin actions, changes by other states and various economic factors, analysts say:
- Individualincome tax: Significant rate cuts in the state's individual income tax were made early this decade during Republican Gov. Tommy Thompson's tenure.
His successors, Republican Scott McCallum and Democrat Jim Doyle, kept those lower rates in place, though Doyle this year also created a new top rate for the highest-income taxpayers.
Income taxes in the 1980s and '90s routinely came in at 40% to 50% higher than the national average. But as part of a recent trend, that gap, while still large, narrowed to 24% by 2007. In Wisconsin now, income taxes collectively take a smaller bite out of the state's total income than in those earlier decades.
Another big factor in the trend: the decision to "index," or annually adjust, tax brackets for inflation.
- Property taxes: Revenue caps on local governments and schools, limits on teacher compensation and increased state aid to schools until 2003 helped moderate property tax collections a bit in the decade. But our national ranking has changed little; the tax takes the 11th-highest bite on income among the states and District of Columbia.
- Corporate income taxes: Collectively, they are middle of the pack among states in terms of their bite on Wisconsin's total income. That's a new development as of 2006 and 2007; they were around 15th-highest for many years.
Experts attribute that in part to distress in the manufacturing sector. Also credited: a Doyle-endorsed change under which only the amount of sales in Wisconsin is considered when deciding how much of the income of a multistate corporation should be taxed by Madison.
- School spending: In 2007, spending at the K-12 grade level tumbled below the per-capita U.S. average for the first time in at least two decades and likely much longer. The state had been in the top 10 for many years, with spending up to 18% more than average. The newest national ranking: 22.
In real dollars, school spending is still going up, of course, but the increase has slowed considerably this decade. The reversal in national rank began in earnest around 2003, when state government began to pare back its commitment to fund two-thirds of local school costs, the biggest state budget item.
- Government spending: Fueled by the education spending slowdown, state and local governments' general spending dipped below the U.S. average per capita in 2006 and 2007. Public sector spending here is basically middle of the pack among states, ranked 23rd. A decade earlier, it was 14th.
- Sales taxes: The state has resisted the urge to follow some other states and raise its general sales tax rate, retaining its low ranking on this tax.
The decisions that contributed to the tax ranking drop tended to benefit the middle class, in keeping with Wisconsin's progressive tradition, said Todd Berry, president of the Wisconsin Taxpayers Alliance, a research organization that has reported on state and local government since 1932.
Jack Norman, research director at the Institute for Wisconsin's Future, a liberal counterpart to WPRI, said the data helps correct the misimpression that Wisconsin is a high-spending, high-tax state. But that's not necessarily good news, he said.
"Nobody is going to proudly proclaim, 'Wisconsin: We dare to be average.' " Norman said. "Nobody wants that. We expect better-than-average government, and we ought to be paying higher than average amounts of money if we expect higher than average services."
Lightbourn, of WPRI, called the tax ranking good news but no cure-all for reversing negative trends on income and job growth in the state.
The new ranking is proof that limits on local spending and reductions in tax rates can make an appreciable difference, said Lightbourn.
State Sen. Michael Ellis (R-Neenah), a longtime critic of both political parties on fiscal matters, acknowledged that tax cuts and spending limits earlier in the decade may have helped drop the ranking.
But he sees a shell game in which the state substituted various fee increases, borrowing schemes and one-time revenues for tough decisions on spending.
"They've renamed the extrication of money from people's wallets 'fees,' " Ellis said. A day of reckoning is approaching, he said, in the form of broad spending cuts or tax increases.
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