Yesterday, the news we all expected finally came down: state tax receipts are expected to be $1.6 billion lower over the next two years, bringing the current budget deficit up to $6.6 billion.
Most of the coverage of this shortfall will be forward looking, and focus mainly on what steps legislators going to take to make up the shortfall. But it’s also instructive to look at how we got where we are.
Here’s a list of the percentage reduction in tax collections over the previous year for the three largest categories:
Income Tax: -8.3%
Sales Tax: -3.3%
Corporate Tax: -28.0%
The income tax reduction hurts the most, since the income tax is the largest single tax collected. The 8.3% one year reduction accounts for 86% of the $1.6 billion additional shortfall.
But I would call your attention specifically to the Corporate and Franchise Tax, which is down a whopping 28% from last year. This represents a $282 million reduction from previous estimates.
It’s not too difficult to figure out why business taxes are down. If you’ve picked up a newspaper in the last year, you know that business receipts are plummeting, leading to an unemployment rate of 9.4% in Wisconsin.
But secretly, liberal groups are cheering, as plummeting business tax receipts strengthens their most common – and also most inaccurate – talking point: that somehow businesses aren’t paying their “fair share” of the tax burden. Liberal groups like the Institute for Wisconsin’s Future advocate for higher business taxes on the premise that businesses are paying less in taxes and individual taxpayers are paying more, as a percentage of the total tax burden. With businesses taking on large losses, and therefore paying less in income tax, it skews the ratio even more in favor of these groups, who like to argue that businesses are “dodging” their tax burden.
This was an incredibly weak argument to begin with. The business/individual tax ratio could be skewed for any number of reasons. If the economy was doing well (as it did through the 1990s), individual income could grow at a more rapid rate than business receipts. As a result, it would appear that individuals were paying more as a percentage of taxes, even though it meant that incomes around the state were actually doing very well. Conversely, business taxes could drop, as they are now, if businesses leave the state or close down. This doesn’t mean businesses are paying less of their income in taxes, just that there are fewer of them and that they have diminished receipts on which to pay taxes.
Yet earlier this year, liberal groups had their way and sucessfully lobbied for a massive new tax (called combined reporting) on the same businesses that we now know are swimming in red ink. Shockingly, the $282 business tax shortfall expected by the Legislative Fiscal Bureau actually includes the combined reporting tax receipts. So even though they increased business taxes by $186 million, receipts are still $282 million short.
It doesn’t take a genius to figure out that this punitive new business tax may have actually cost us as much revenue as it created. New business taxes force higher unemployment, which gives us fewer taxpayers. Higher business taxes also lead to more expensive goods, which could harm state sales tax receipts.
Furthermore, higher corporate and franchise taxes also force businesses to either move to another state (or country) or scale back their operations, thereby diminishing revenues on which they pay taxes. (The same phenomenon occurs when states drastically increase cigarette taxes – fewer people buy cigarettes – at least legally – and tax receipts actually drop.)
But this is a dream scenario for lefty groups, which sets a spiral of taxation into effect. They raise taxes on businesses, which causes business tax receipts to drop. Then, they argue that businesses aren’t paying their fair share, and lobby for even more business taxes. The circle is complete – and forces the remaining individual taxpayers in the state to pick up the tab when unemployment skyrockets and business tax receipts drop to virtually nothing.