MADISON — Heading into an election year, Gov. Scott Walker has embarked on a major review of the state’s tax code, including the possibility of eliminating income taxes and raising the sales tax.
Walker told WisPolitics.com on Tuesday that he is “envious” of other states that have eliminated income taxes, and that he could support raising the state’s 5 percent sales tax rate or eliminating sales tax exemptions to help cover the revenue loss that would result from killing income taxes. Income taxes make up about $8.4 billion a year — roughly half of the state’s general fund.
“Any discussion about this clearly should involve an outright elimination (of state income taxes),” Walker told the website.
Walker’s comments come as Lt. Gov. Rebecca Kleefisch and Department of Revenue secretary Rick Chandler have begun holding private, invitation-only discussions around the state about tax reform at Walker’s direction.
The first meeting — last week at Beloit College — came under criticism for barring the public from most of the meeting. About 25 participants had “a candid and robust discussion,” according to Kleefisch spokesman Casey Himebauch.
It’s unclear how many meetings the administration will hold, but the goal is to start a discussion about tax reform, he said.
Walker spokesman Tom Evenson said the public will eventually have a chance to weigh in, and that Walker has no preconceived ideas about what to do.
“Governor Walker’s goal is to lower the overall tax burden every year he is in office,” Evenson said. “(Eliminating income taxes) is simply hypothetical and the governor was speaking of it in that context, as it is just one idea.”
Kleefisch and Chandler will produce a report summarizing what they learn, Himebauch said.
A spokesman for Mary Burke, a Democrat challenging Walker in 2014, said she would propose tax reductions that help the middle class and small businesses.
Politically and fiscally daunting
Ending the state income tax would be a politically and fiscally daunting task, said Wisconsin Taxpayers Alliance president Todd Berry. Making up the lost revenue through the sales tax would require increasing the rate to 12 or 13 percent or finding new things to tax such as food, fuel or professional services.
“A trial balloon for individual income tax elimination is sure to attract political attention,” Berry said. “The devil is in some thorny details with big price tags.”
Democrats and liberal groups pounced on Walker’s talk of raising the sales tax as a way to shift the tax burden from upper income earners to lower- and middle-class consumers.
“Once again Governor Walker is floating the most extreme, anti-middle class policies possible so he can propose a marginally less anti-middle-class policy and appear moderate,” said Senate minority leader Chris Larson, D-Milwaukee.
The 2013-15 state budget includes a $650 million income tax cut that lowered rates and reduced the number of brackets from five to four.
The architect of that tax cut, Rep. Dale Kooyenga, R-Brookfield, said eliminating income taxes is a long-term goal, but not something that could be accomplished in a single two-year budget cycle.
“With federal mandates and political realities, there’s no way we could eliminate enough expenses to do it tomorrow,” Kooyenga said.
The nonpartisan Tax Foundation in Washington, D.C., this fall ranked Wisconsin’s tax climate for businesses 43rd in the nation, though that didn’t take into account the recent income tax cut.
Wisconsin’s 5 percent sales tax ranks 31st-highest according to the Tax Foundation. Adding in county and municipal sales taxes, Wisconsin’s average rate is 5.43 percent, 41st-highest; the highest is 9.44 percent in Tennessee.
In 2011, the state collected $721 per person in sales tax, ranking 26th in the country. Wisconsin collected $1,128 per person in individual income taxes, 10th-highest in the country, and $149 per person in corporate income tax, 16th-highest in the country, according to the Tax Foundation.
Income vs. corporate taxes
Wisconsin collected $7.5 billion in individual income tax, which covers most small businesses, and $900 million in corporate income tax in fiscal year 2013.
Seven states have no individual income tax — Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Tennessee only taxes individual income from interest and dividends.
Tax Foundation economist Lyman Stone said the recent decision by Office Depot to keep its headquarters in Florida rather than move to Illinois, the home of recently acquired OfficeMax, illustrates the benefit of having no income tax.
“Florida has the ultimate major incentive to move: an entire tax is missing,” Stone said. “If a state has a high income tax … it makes it harder for larger businesses to compete out of state as they have to offer a higher wage.”
But proposing to eliminate income taxes while raising sales taxes can be met with stiff opposition from the public. In April, Louisiana Gov. Bobby Jindal scrapped his plan to do just that after holding a series of meetings around his state.
Liberal advocacy group One Wisconsin Now deputy director Mike Browne questioned why Walker would continue with trickle-down economic policies after recent data showed the state continues to fall behind dozens of others in job creation after three years of Republican control of state government.
“You’re increasing a tax burden on those least able to pay,” Browne said of raising sales taxes. “I’m not quite sure what that helps in terms of having a tax code that treats everyone in Wisconsin fairly.”
Scott Manley, vice president of government relations for Wisconsin Manufacturers & Commerce, the state’s largest business lobby, said because the state income tax is such a large part of the state budget, elimination of it would likely require new sales tax revenue, but there would also be more money in people’s pockets to drive the economy and sales tax collections.
“There’s no question our tax structure is working against our competitive advantage in this state,” Manley said. “Whether it’s eliminating the income tax or making a significant reduction … the debate’s not going to happen unless somebody starts the conversation.”