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.

Misery loves company

The National Conference of State Legislatures reports that the number of states with budget problems is on the increase, due to what the NCSL calls "anemic revenue performance" (translation: we're not paying enough in taxes).

More than half the states are experiencing budget deficits, including, as we all know, Wisconsin. All but two Midwestern states, Indiana and Missouri, has a gap between revenues and expenditures. Three states, Illinois, Iowa and Minnesota, have budget gaps of 8 percent or more. Interestingly, all but one of those deficit-plagued states, Minnesota, has a Democratic governor, while Indiana's and Missouri's governors are Republicans. (Before you condemn this as a partisan slam, read on.)

Minnesota's governor is Republican Tim Pawlenty, who you may have read is apparently on John McCain's vice presidential short list (perhaps a list of one, in fact). This may not make conservatives happy, because Pawlenty's fiscal record as governor apparently leaves a lot to be desired — the National Taxpayers Union says his tax record "can rightly be described as a disaster for Minnesotans," complete with $1.74 billion in tax increases. Others, however, argue that Pawlenty "has reshaped Minnesota with fiscal restraint and the most taxpayer-friendly administration in the history of Minnesota," and that Pawlenty should not be blamed for vetoes that were overridden by "hostile liberal majorities."

The NCSL reports that few states (but not all, as we discovered Monday) are trying to close their budget gaps by "cutting spending and tapping reserves." This is laudable, if true. It would have been better, of course, for those states to have not increased spending that now needs cutting in the first place. Then again, the NCSL appears to like tax increases, given that they think that either federal gas tax needs an increase or a vehicle-miles-based tax needs to be enacted in an era of $4-per-gallon gas.

Wisconsin's current fiscal woes date back to the 1990s, when Republican Gov. Tommy Thompson decided that a booming economy meant the state could increase spending and cut some taxes. Thompson was clearly preferable to any of his opponents, but taxes and spending were and are too high in this state, and current experience demonstrates that just because you can afford high levels of government spending at a particular time doesn't mean you'll always be able to afford it. But most voters in Wisconsin apparently don't care about either taxes or spending, or they may say they care, but they don't vote like they care.

Patrolling the state budget

One week ago in Oconto, I met state Sen. Dave Hansen (D–Green Bay), who made a valid point about those of us who believe government spends too much money.

Hansen correctly pointed out that there are many people who advocate that government spend less money, without saying what they specifically prefer less government spending.

Some would argue, also correctly, that that is a job for our elected officials. But lest I be accused of hypocrisy, I’m willing to take up the challenge. I should point out that this is a challenge that already has been taken up by Jo Egelhoff, proprietor of FoxPolitics.net and now candidate for the Assembly. Egelhoff has questioned the scope of four-year-old kindergarten, which, thanks to a veto from Gov. James Doyle, now must be offered to all students within any school district that offers it, instead of targeting it to students who would benefit the most.

My proposed budget cut would not only save money, but provide a particular and popular function of government much more efficiently:

Eliminate the Wisconsin State Patrol.

The State Patrol is an odd function of state government, because the State Patrol is not really a law enforcement agency in the same way that county sheriff’s departments are, or for that matter state police departments in other states. The State Patrol, which is part of the state Department of Transportation, “enforces criminal and traffic laws, conducts criminal highway interdiction programs, and helps local law enforcement agencies with traffic safety, civil disturbances and disasters (natural and man-made).” In other words, the stormtroopers of the state highways enforce the laws created by the busybodies in Madison and Washington, including mandatory seat-belt laws at a time when any idiot ought to realize they are safer wearing belts than not, to ridiculous levels, such as, in one case I was told by a trusted source, ticketing someone for driving 3 mph — yes, 3 mph — faster than the speed limit. The State Patrol also operates the state’s truck weigh stations, which rarely seem to be open whenever I drive past them.

State troopers (the State Patrol is authorized to have 399 of them) are sworn police officers, but they have no police responsibilities that aren’t related to motor vehicles, and they are legally subordinate to the county sheriff. (Like all bureaucracies, though, the State Patrol is looking to grow itself, having created a K–9 unit for which it had no legislative authorization. And like other bureaucracies, the State Patrol has a public relations arm that distributes news releases and creates pretty-looking reports in which it takes credit for things for which it doesn’t deserve credit, including a drop in traffic crashes.)

The State Patrol might have more of a reason for existence if its jurisdiction were limited to the state’s four-lane highways, the most traveled roads in the state, but that is not now the case. There is no evidence that crime in Wisconsin (particularly crime of a statewide nature) is at such a level as to warrant expanding police powers to the State Patrol, either. It would be helpful if the State Patrol did its job better as well, in contrast to their apparent performance during a large snowstorm that stranded motorists on Interstate 39/90 for up to 12 hours this past winter.

Other than inspecting tractor–trailers and operating the State Patrol Academy, there is nothing the State Patrol does that county sheriff’s departments don’t do, and could do more efficiently with dollars the state currently spends on the State Patrol. That is already occurring in one place, in fact: The State Patrol is really the State-Except-Milwaukee-County Patrol, because the State Patrol has no responsibilities to patrol Milwaukee County freeways, and if they don’t patrol the freeways of the largest metropolitan area in the state, what is their purpose?

Interestingly, I've talked to a lot of people about this idea — elected officials, political observers, and taxpayers. I've yet to have a single person say that this was a bad idea, particularly the part about giving the money the state spends on the State Patrol to county sheriff's departments. (Perhaps that State Patrol PR arm isn't working so well after all.)

At this point, I’d like to tell you that the state spends X dollars on the State Patrol. I can’t do that, because the State Patrol’s budget is well hidden within the Department of Transportation budget. I do know that county sheriff’s departments, which are responsible for their own counties instead of the whole state, would spend dollars being used on the State Patrol more wisely. In fact, that already happens in Milwaukee County, which gets $3 million in state fund to patrol Milwaukee County freeways.

In a previous state budget, Doyle proposed creating a state police force under the Justice Department, which would have combined the State Patrol, the Justice Department’s Division of Criminal Investigation, and the Department of Administration’s Capitol Police and State Fair Park Police. Such a department perhaps could include the University of Wisconsin police departments on the Madison, Oshkosh, Eau Claire, Milwaukee, Parkside, Platteville, Stout and Whitewater campuses. (I’ll pause while you mull over that bureaucratic snarl.)

That is one of those ideas that seems good in theory until you consider one fact: That statewide police department would be run by the Attorney General. Doyle, who was elected attorney general in 1990, and his one-term successor Peg Lautenschlager grossly politicized the Justice Department as Democrats seem to want to do. The history of Democrat Kathleen Falk, a former associate attorney general and public intervenor (the taxpayer-funded anti-development bottleneck that no longer exists), indicates that that would have continued had Falk not (fortunately) lost to Republican J.B. Van Hollen in 2006. Doyle and Lautenschlager did nothing to assist actual working law enforcement, but did wander off into areas that, whether or not you agree with their positions, were not about law enforcement. (Doyle, for that matter, spent most of his 12 years in office running to replace Gov. Tommy Thompson. Van Hollen seems content to use DCI officers as personal bodyguards during the upcoming Republican National Convention.)

Either the State Patrol should have its responsibilities expanded, or it should be disbanded. In an era of state budget crises but not rampant statewide crime, the latter is the preferred route.