Experts To Wisconsin: Save the Income Tax, Close the Loopholes


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As part of the governor’s campaign to redistribute wealth to corporations and the state’s wealthiest citizens, Wisconsin lawmakers last year reduced the state's Earned Income Tax Credit (EITC) for low income, working families.  Now, leading Republican legislators have signaled their intention to build on this tax hike for the poor by dramatically cutting income taxes for the best-off Wisconsinites next year.

To that end, a joint House-Senate committee convened a hearing on income tax reform this week that was generally understood to be designed to give cover to legislative leaders' goal of replacing the state's graduated income tax with a flat-rate income tax (thus undermining the most progressive feature of any tax system, the graduated income tax).

Matt Gardner, Director of the Institute on Taxation and Economic Policy, was one of four panelists invited to testify before this hearing, and neither he nor any of the witnesses offered meaningful support for the lawmakers’ plan. Gardner's testimony pointed out that graduated income taxes (PDF) are the most sustainable long-run funding source available to states, and that moving to a flat rate income tax would actually slow revenue growth over time. Gardner also explained that the alleged “volatility” of this revenue source (e.g. revenues dip during economic downturns) is more a fiscal management problem than a tax problem. Most states maintain a rainy day fund that functions like a family savings account – it grows in good times and is there to help during bad times. Most states should also be significantly expanding their tax base by expanding the sales tax to services, modernizing their gas tax and closing loopholes in the personal and business tax codes. Gardner also reminded legislators that they should not consider relying on a broader sales tax to make up revenues lost to income tax cuts because sales taxes (PDF) are volatile in the short run as well as regressive, putting the heaviest burden on the lowest income households.

Instead, Gardner advised that the first step toward reforming Wisconsin's income tax should be eliminating loopholes such as the state's 30 percent capital gains tax break. Other panelists agreed.

It’s not necessarily what all of the lawmakers wanted to hear; we will learn when they return to session in January, 2013, if they decided to listen anyway.

 

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