New Revenues Won’t Erase Structural Deficit

MADISON—Over this and the next two years, state budget legislation enacted or pending would increase taxes and fees $2.82 billion, according to a new report from the Wisconsin Taxpayers Alliance (WISTAX). Now in its 78th year, WISTAX is a nonpartisan organization dedicated to public policy research and citizen education.

Of the $2.82 billion in increases, $1.11 billion became law in February as 2009 Act 2. The bulk of these revenues stems from a new tax on hospitals, additional taxes on multistate companies ("combined reporting"), and expansion of sales taxes on prewritten computer software.

The 2009-11 state budget proposes additional net tax and fee hikes of $1.71 billion. The first major area of increase affects individuals, small businesses, and investors who pay income and related capital gains taxes. Wisconsin would raise its top tax rate on joint income above $300,000 ($225,000 single) from 6.75% to 7.75%. Also, Wisconsin currently excludes from taxation 60% of capital gains; the budget would reduce that to 40%. The combination of the higher income tax rate and the reduced capital gains exclusion would most impact capital gains of high-income filers. Currently, a dollar of capital gain above $300,000 in income is taxed at 2.70%. The budget would raise that amount by almost two percentage points (or 72%) to 4.65%.

The second area generating significant revenues—$343.6 million, if approved—is additional tobacco taxes. The per pack rate on cigarettes would increase from $1.77 to $2.52 and would be third highest in the U.S. Whether the state would indeed collect the projected revenue is unclear, depending on how many smokers quit or evade the tax.

"An important question about the new $2.82 billion of new taxes and fees is whether they would erase Wisconsin’s recurring budget problems," notes WISTAX President Todd A. Berry. "Unfortunately," Berry continues, "the Legislative Fiscal Bureau projects a ‘structural deficit’ of $713 million when the state begins budgeting anew in 2011-12. If no corrective action were taken, that figure would grow to $1.57 billion in 2012-13."