The overtaxing deficit

Originally printed in Marketplace Aug. 5, 2008

What a year Wisconsin state government has had, and we’re just past the seven-month mark.

Just since New Year’s Day, the Legislature (1) dealt with a $652 million budget deficit by cutting just $69 million in spending, requiring Gov. James Doyle to cut an additional $201 million, while doing nothing about the (2) $2.15 billion deficit that exists when measuring state finances by Generally Accepted Accounting Principles or the (3) $1.7 billion structural deficit, the result of pushing state spending out of one budget cycle and into the next through accounting tricks. Those who win the legislative elections Nov. 4 could be said to be the real losers because they get to deal with all that.

State government’s bad year got even worse July 11 when the state Supreme Court ruled that the state Department of Revenue had overtaxed Menasha Corp. specifically, and other businesses generally, to the tune of $265 million in overpaid sales taxes and interest. Menasha Corp. had held that the software it purchased was not subject to the sales tax (custom software is not, but non-custom software is). In order, the Department of Revenue said the software was subject to the sales tax, the Tax Appeals Commission said it was not, a Dane County circuit judge said it was, the state Court of Appeals said it was not, and the Supreme Court agreed with the Court of Appeals.

Menasha Corp.’s part of the overpayment is $300,000, plus an additional $300,000 in interest. The Milwaukee Journal Sentinel reports that “dozens of other companies” believe they have overpaid software sales taxes as well. That $265 million figure may just be a starting point.

You could take all of the wages of every Department of Revenue employee (as reported in 2007), about $11 million, and that would cover all of 4 percent of the $265 million. Doyle, other state elected officials, and the Assembly and Senate total about $6.78 million in salaries. Combine the two groups, and if you didn’t pay any Department of Revenue employee, the governor, the attorney general, other statewide elected officials and any senator or representative, the state could have Menasha Corp.’s overpaid tax bill paid off in just 15 years.

Chief Justice Shirley Abrahamson, one of the three dissenting justices, said “Taxpayers will pick up the tab left by those who have escaped taxation as a result” of the decision. Apparently Chief Justice Abrahamson believes that no one should ever take advantage of a tax exemption or deduction because that would be “escap[ing] taxation.” That is also analogous to saying that an innocent person who is reprieved from a death sentence has escaped capital punishment.

The point is that Menasha Corp. should not have had to pay — was not legally obligated to pay — the additional sales tax. The Tax Appeals Commission made that exact ruling. (Isn’t it nice to know that the state Department of Revenue sees fit to ignore the law?) The fact that the state now owes Menasha Corp.$600,000, and may owe other similar companies more money, is the fault of the Department of Revenue, and thus state government.

This is the sort of the thing that, had a similar incident occurred in the private sector (say, a company the size of Menasha Corp. suddenly found itself owing $265 million in unpaid taxes, interest and penalties), would have resulted in firings, and probably not just one. I don’t think this is the result of some faceless bureaucrat misreading the law — this was probably a policy decision high up in the Department of Revenue to keep assessing tax on this particular variety of software until someone made them stop. It certainly makes one wonder how many other businesses — and, for that matter, individuals — are paying more taxes than they are legally required to merely because some DOR bureaucrat told them they had to.

This is also a perfect example of the kind of messing around that occurs in taxing entities or activities that should not be taxed — for instance, corporate income and personal property. The property tax is supposed to pay for government activities tied to property — for instance, police and fire protection. (Schools too, although the School Taxes Off Property organization wants schools funded by something other than the property tax — namely, ending all exemptions from taxes, which means STOP advocates reducing taxes by increasing other taxes.) It’s not clear to me, for instance, why Menasha Corp. has to pay sales tax at all for something that is required for them to conduct business.

For that matter, as I’ve argued in this space before, it’s not clear to me why businesses should have to pay taxes other than what funds strictly property-based services. In addition to the savings for companies in the cost of complying with our tax system, the savings from not paying corporate income or personal property taxes could go in one or more of three directions — more investment in the company, more pay for employees, or more dividends for shareholders. Any combination of those three is preferable to giving state government and our elected officials more money to waste. The benefits any business provides the areas they’re in, beginning with providing jobs — in addition to the 1,200 jobs it provides, Menasha Corp. has donated more than $1 million to Fox Cities-area charities in the past year — far exceeds whatever taxes a company pays.

Ending corporate taxes would have the additional advantage of ferreting out hidden taxes, because, as we all know, businesses don’t pay taxes, they pass them on to customers or their shareholders. Every dollar a business is taxed — whether legally or, in the case of Menasha Corp.’s overpayment, not — is one more dollar in the price of a product, one less dollar that can be spent on the company (including employee pay), or one less dollar that can be passed on to shareholders. It’s amazing how many people don’t understand that, and yet that is an incontrovertible fact.

Correction and clarification: The original version of this commentary, printed in the Aug. 5 Marketplace, incorrectly reported that Menasha Corp. was overtaxed $265 million; corrections have been made in the online version of this commentary. The state Department of Revenue now estimates that the overtaxed amount to Menasha Corp. and other companies totals $277.6 million.