Two New Studies Bust State Tax Myths

Two studies released this month (March 2006) bust the myths that Wisconsin's business taxes are high and that government growth is out of control.

In the first study, a paper by University of Wisconsin-Madison Professor Steve Deller and UW-Oshkosh Professor Craig Maher updated a 2004 study titled "Changes in Public Sector Employment with a Focus on Wisconsin 1993 to 2004."

"The results clearly suggest that Wisconsin’s public sector, as measured by employment, is not 'out of control' and growth in the public sector is a natural by-product of growth in the overall economy," they reported. Their study found:

• The size of government in Wisconsin, as measured by public sector employment, is on par with the national average.
• Wisconsin’s growth in public sector employment is consistent with the average of the other 49 states.
• Nationally, growth in state government employment has been stagnant for an extended period of time, whereas growth in local government has tended to more closely parallel total employment growth. For Wisconsin, the growth in state government employment places it near the bottom of the 50 states and near the average for local government.
• In Wisconsin there has been significant investment in employment in the corrections sector.
• Growth in public sector employment is highly correlated with total employment growth. The implication is that as the economy grows the demand for public services, particularly at the local level, also grows.
• The growth rate in public sector employment tends to be lower than total employment growth.

In the second study, the Associated Press released an analysis concluding that Wisconsin businesses saw their profits grow more than twice as fast as their state and local tax bills in the 1980s and 1990s.

Citing a Federal Reserve analysis, the AP said Wisconsin ranked among the bottom one-third of states in 2000 when calculating state and local taxes as a percentage of business profits.

The AP attributed the favorable tax climate for business in Wisconsin to more aggressive use of tax shelters, more profitable companies and a relatively constant tax burden. It suggests that the tax situation for businesses in Wisconsin has improved even more since 2000, the last year included in its analysis. It notes that since 2000, the Legislature and governor have approved a series of tax breaks for businesses. They include a change in the state's formula for figuring corporate taxes, new credits for fuel and electricity, and venture capital breaks.

Other recent studies also have confirmed that Wisconsin is not a high-tax state:

• A February 2006 report by University of Wisconsin-Madison economics Professor Andrew Reschovsky notes that, using the sum of all taxes and fees relative to personal income, Wisconsin is a rather average state. According to the U.S. Census Bureau, Wisconsin ranks 23rd, only a few tenths of a percentage point above the national average.
• A December 2004 report by the Institute for Wisconsin's Future found that Wisconsin's government spending and taxes are actually closer to the middle than the top, ranking only 18th highest in the nation; Wisconsin is at the median level of spending among its neighboring states; Wisconsin spending has moved steadily downward in relation to the national average; taxes now take a smaller bite of total income than in the 1980s or 1990s; and Wisconsin’s top income tax rate is the lowest it has been since 1931. That study also found that a series of tax exemptions over the last 30 years has significantly cut business property taxes, which in turn has increased the taxes paid by homeowners. Homeowners accounted for less than 50% of total property taxes paid in 1970, compared to nearly 70% today.

Posted March 21, 2006