State is corporate tax haven, report says

Wisconsin is a corporate tax haven, and businesses are benefiting at the expense of individual taxpayers, according to a new report from the Institute for Wisconsin's Future.

"Too many of Wisconsin’s biggest profit-makers are underpaying taxes, compared with their corporate brethren in other states," according to the report by IWF researcher Jack Norman. "With fiscal crises afflicting state and local governments, it is time to look to the corporate community to pay its fair share to support the critical public structures on which Wisconsin’s prosperity depends."

The study - titled "Broken Partnership: How Wisconsin’s Corporate Sector Underpays State and Local Taxes by $1 Billion" - was released Wednesday (April 11, 2007) just prior to the tax filing deadline. It says Wisconsin’s corporate community is underpaying state and local taxes by more than $1.3 billion each year – the difference between what the business sector actually pays in state and local taxes and what it would be paying if its share of taxes equaled the average share paid by businesses nationwide.

The report says:

In Wisconsin, the business sector pays 35% of all state taxes, according to data from Ernst & Young, a large accounting firm. The nationwide average contribution by business to state taxes is 40%.

If Wisconsin’s corporate community paid an additional five percentage points, enough to bring it up to the U.S. average, it would mean $800 million annually in additional state revenue.

It’s the same story for local taxes. In Wisconsin, the business sector pays 47% of all local taxes, according to Ernst & Young. The nationwide average contribution by business to local taxes is 52%.

If Wisconsin’s corporate community paid an additional five percentage points, enough to bring it up to the U.S. average, it would mean about $520 million annually in additional revenue for schools, counties and municipalities.

As a taxpaying partner in supporting state and local services, Wisconsin’s corporate sector ranks 41st among all the states, according to Ernst & Young.

An additional $800 million annually in state revenue would completely eliminate the state’s structural budget deficit. And that would still leave an additional $500 million in revenue for local governments. That’s enough to completely fund the entire fire protection budget in every Wisconsin community. Or it would be enough to completely fund every county and municipal park and recreation activity in the state.

Alternatively, the $1.36 billion underpayment of taxes by the state’s corporate sector is enough to completely fund the kindergarten-through-high-school education of every child living north of Wausau – 99 separate school districts educating more than 115,000 students.

The report said this not a one-year phenomonen but a long-term trend in Wisconsin:

• Twenty-five years ago, more than 11% of the state’s tax revenue came from the corporate income tax. That dropped to 5% in 2002, before a mild rebound to 6.7% in 2005.
• Thirty years ago, residential property accounted for half of all state property taxes. Today, homeowners pay 70% of all property taxes, as the business contributions have dropped. Many forms of business property are simply exempt from the property tax, including all manufacturing machinery and equipment and all computers, under a definition of “computers” broad enough to include automated bank tellers and computerized cash registers.
• Virtually all services purchased by businesses are untouched by the sales tax. A 5% state sales tax on advertising would generate more than $100 million a year, the Department of Revenue estimates. A sales tax on computer services would yield $123 million. A sales tax on accounting would produce $51 million. A sales tax on advertising would produce more than $100 million.
• There are numerous breaks from the corporate income tax. These include scores of individual business-assistance programs that give tax credits for such things as research ($18 million annually) and investment in so-called development zones (about $14 million).

"No wonder," the study said, "that Forward Wisconsin, the public-private organization that recruits out-of-state firms to invest in Wisconsin, brags on its Web site: 'Wisconsin’s business-friendly attitude is reflected in positive business tax changes that have been made in every biennial legislative session since the early 1970s.' "

The complete report (opens a pdf file)
Institute for Wisconsin's Future

Posted April 11, 2007