The editor’s opinion from Marketplace, Northeast Wisconsin’s business magazine. (Obligatory disclaimer: Most hyperlinks go to outside sites, and we’re not responsible for their content. And like fresh watermelon, peaches, pineapple, grapefruit, tomatoes and sweet corn, hyperlinks can go bad after a while.)
July 17, 2008
Happy (?) Cost of Government Day
Today, nearly three months later, is Cost of Government Day, as noted by Americans for Tax Reform and by Citizens Against Government Waste — the day our earnings finally match federal, state and local government spending. The national-average Cost of Government Day was Wednesday, but, of course, because Wisconsin has more government spending than most states, our Cost of Government Day is a day later, today, 37th latest among the states.
(Number 37 … why does that sound familiar? … oh, yes. Our state also ranks 37th in business climate, according to CNBC.com. I wonder if they’re related.)
The first point to ponder: We pay one-third of our income in taxes, but government costs total more than half of our income. ATR terms “government costs” as not just government spending, but also costs tied to regulations (which cost $1.16 trillion in 2007, according to the Competitive Enterprise Institute, or an estimated 62.6 days of work, according to ATR). That is what a budget deficit looks like.
That deficit is not caused by insufficient taxation (ATR notes that the federal budget deficit dropped from 3.6 percent of Gross Domestic Product to 1.2 percent of GDP between 2004 and 2007); it’s caused by excess spending. ATR estimates that, had federal spending been tied to the rate of personal income growth, the deficit would have been entirely eliminated by 2006.
“This type of wasteful spending takes money away from real national priorities and contributes to the inefficiencies of government,” said Tom Schatz, president of Citizens Against Government Waste, whose 2008 Pig Book chronicles 11,610 porky projects — defined as “a line-item in an appropriations bill that designates tax dollars for a specific purpose in circumvention of established budgetary procedures — totaling $17.2 billion. Wisconsin’s contribution totals $174.8 million, 1.02 percent of the total, interesting given that Wisconsin has 1.83 percent of the U.S. population. Even in pork, we’re poorly represented in Washington. (The contributions of U.S. Reps. Steve Kagen (D–Appleton), $23.79 million, and Tom Petri (R–Fond du Lac), almost $13 million, can be found by searching here.)
Some readers may think this is either bad methodology (it’s the same methodology the Tax Foundation uses to compute Tax Freedom Day — divide total taxes or spending by total income) or that such rankings don’t really matter. It really does matter, if for only this reason — the fact that Wisconsin is losing high-income residents to states with lower tax burdens.
The source for this assertion is ATR’s study of people moving from state to state and the income they take with them. ATR claims that “Several empirical studies have documented the surge of taxpayers moving from high tax to low tax states over the past 15 years. Indeed, these studies show that taxes are the single largest factor in interstate migration, rather than such factors as weather, employment, family relocation, etc.”
ATR reports that between 1996 and 2006, the 10 highest taxed states lost 2.4 million residents and $69.51 billion in income from people leaving for states not part of that top 10 list. Conversely, the 10 lowest taxed states gained 1.4 million residents from other states not part of that bottom 10 list, with real income gain of $30.5 billion over that decade. Between 2004 and 2006, the nine states that don’t have an income tax gained more than 1 million residents from the other 41 states, bringing with them $37.3 billion in income, according to ATR and the Internal Revenue Service.
Part of this is one of the more unpleasant, but less noticed, changes in Wisconsin’s economy over the past 15 years — the departure of corporate headquarters from Wisconsin, which, you’ll recall, began with the well publicized move of Kimberly–Clark Corp.’s corporate offices from Wisconsin to Texas. (More on that in the near future.) People who work at corporate headquarters make higher-than-average incomes and thus pay higher-than-average income taxes. Corporations make location decisions based on not just business-related taxes, but on personal taxes as well.
ATR's answer is for the 41 states that have income taxes (beginning with Wisconsin, where the income tax began) to phase them out. (I'll pause while you pick your jaw up off the floor after contemplating this state without an income tax.) ATR proposes a combination of states' increasing their sales taxes by 2 or 2.5 percentage points (taking the sales tax up to 7 to 7.5 percent in Wisconsin, plus 0.5 percent in those (misguided) counties with sales taxes) combined with strict budget growth controls of either the increase in state income minus 1 percentage point or the sum of a state's population growth and inflation.
That previous paragraph is a conservative fantasy in this state, of course. Property, income and sales taxes have roughly equal portions of tax collections in this state. Eliminating one would force the state to increase rates so that collections of the other two increased by one-sixth each to make up the difference. Moreover, in an era of growing Internet sales, perhaps the sales tax is an outmoded way to collect tax revenue. Given that property taxes receive the most complaints from state taxpayers, tax changes to increase property taxes substantially would make that option, to say the least, unpalatable to most state legislators. And, as I've argued in this space before, actually cutting taxes and spending is contrary to our state's political culture, including that of the party that is supposed to be about cutting taxes and spending. (Which party was in power in the Legislature when the Taxpayer Bill of Rights referendum proposal died?)
Then again, cutting taxes and government spending seems increasingly a conservative fantasy. As I wrote on Tax Freedom Day, those who want to cut taxes and government spending in Wisconsin have to fight our ancestry and history, plus 2,292 units of government, plus organizations that believe that your taxes aren't high enough. On that cheery note, Happy Cost of Government Day.