State Lottery Gets Gift from Taxpayers

In the spirit of the holidays, state leaders gave the Wisconsin lottery a $48 million gift in the 2017-19 state budget. The gift will help keep down homeowners’ property tax bills this year and next. But it may come with several lumps of coal. One is the unusual use of state income and sales taxes to subsidize lottery expenses, and the other may be an end-run around the state constitution.

The $48 million transfer from the state’s general fund—supported mainly by income and sales taxes—to the separate lottery fund was nestled snugly into the budget bill, and drew little attention when it was passed in the fall. The tax money will pay some lottery costs, specifically compensation to retailers for selling tickets. This beefs up the amount available for lottery tax credits to homeowners.

More property tax relief is, no doubt, welcome. But there is a hitch because the lottery is different from other state programs. Until voters amended the state constitution to permit the lottery, Wisconsin had banned all gambling for nearly 140 years. At the time of the constitutional amendment, the lottery was intended as a freestanding fund that relied solely on its own sales to operate. Shifting $48 million in general fund revenues to the lottery breaks with that understanding.

Unlike other transfers between separate funds when state leaders moved money to stabilize shaky budgets, the lottery does not appear to need such support. Though lottery sales peaked in the mid-1990s, they have remained relatively constant since and have risen modestly in recent years.
Instead, the motivation appears to be an effort to increase the lottery property tax credit. Lottery credits were initially projected to decline in 2017-19; lawmakers and the governor may have wanted to avoid such a drop just before the 2018 elections. Thanks to the transfer, appropriations for the credit will increase $8 million in 2017-18 and $40 million in 2018-19, to almost $207 million, the highest in almost 20 years.

The boost could prove short-lived, however, if past experience is a guide. In the 1999-2001 budget, lawmakers attempted to pour $440 million of general tax money into the lottery, a move that drew fire from both the attorney general and a prominent tax attorney. They reasoned that, because the lottery credit is constitutionally targeted only to homeowners—and not to businesses or other property owners—using general fund taxes rather than lottery proceeds to fund the credit could violate the state constitution. Wisconsin’s constitution requires that all types of property be taxed uniformly.

Then-Gov. Tommy Thompson (R) echoed those concerns when he vetoed the provision, citing “grave doubts” about its constitutionality. Thompson also said he did “not believe we should be paying administrative expenses of the lottery with general tax dollars on a permanent basis.”

If similar questions arise about the latest budget move, both the Wisconsin lottery and property taxpayers might eventually discover that their pre-election property tax treat was actually two lumps of coal—a questionable tax subsidy of the independent lottery fund and a violation of the state constitution.

 

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FoxConn Project Poses Unasked, Unanswered Questions for Local Officials

Much has been written about state incentives to bring high-tech manufacturer FoxConn to Wisconsin.   Little has been written about proposed local incentives.  The local commitment will likely be significant, so what follows are a few questions that local officials may want to consider.

A Foxconn TID?

The FoxConn plant would be located in a tax incremental finance district (TID) in a Racine or Kenosha county municipality. A TID allows a municipal government to borrow by issuing bonds to pay for infrastructure, such as roads, lighting, sidewalks, and sewers in the district. In some cases, the local government can also provide cash incentives to a developer.  Over the next 20 or so years, property taxes collected within a TID are mostly used to repay borrowing.  Pending legislation asks lawmakers to extend the life of a Foxconn TID to 30 years.

Questions for Locals

Typically, the process of approving a TID takes months or years. Given the desire to place the FoxConn project on a fast track for approval, these questions take on additional urgency.

Q1:  How much local investment will be needed, and do the one or two participating municipalities have the fiscal capacity to handle such a large investment?

State officials have said the FoxConn “campus” is expected to be at least 1.58 square miles, or roughly the size of Belleville in south central Wisconsin.  While the plant would occupy a major part of that area, the district would still require significant infrastructure, especially since the plant is likely to be built on undeveloped land.  The project could require a record amount of local investment—and borrowing—but how much?

Q2:  How risky would this unusual TID be?

Most TIDs are “successful”:  Property taxes collected over the life of a district are sufficient to pay off borrowing.  A FoxConn plant would likely be a boon to the region and the host municipality.  The plant and other businesses created in the TID could generate billions in tax base sufficient to repay the municipal investment.  A recent TID created in Verona for Epic Systems was repaid ahead of schedule and provided a tax windfall to local governments in the area.

That said, some TIDs are not successful. If the TID does not generate enough tax revenue, local taxpayers are responsible for remaining debt.  One concern with a high-tech TID is rapid change.  What if technology leapfrogs FoxConn, and it is left with an obsolete product and a plant it must abandon?  Is a plant the size FoxConn proposes marketable to another buyer?  If not, would its value drop significantly? Would tax revenues be insufficient to repay municipal investment in the TID?

Q3:  If a local TID fails, what happens? Does the state pick up the tab?

The governor and state legislators propose to partially protect municipal taxpayers from a failed TID.  If pending Foxconn legislation is approved and a local TID fails, the state would have a “moral obligation” to pay up to 40% of municipal investment.  Should lawmakers commit to absorbing local borrowing costs, regardless of project size?

Q4:  A final question relates to timing:  How long will it take for local government to approve a TID?

State officials say FoxConn would like to break ground as soon as possible.  According to the state Department of Revenue, the process of creating a TID takes a minimum of two months. With Foxconn needing 1,000 acres of contiguous land, would a TID require a longer period of time for a municipality to design, approve, and implement such a large and complex TID?  Given the magnitude of the project, might local officials in a small community less experienced with TIF need extra time and advice to do their due diligence?  In short, can a sound, workable TID plan be developed and a district created in the short time state officials envision?

As the project moves from concept to implementation, many of these questions may be answered. But given the stakes involved—with jobs, tax incentives, and a potentially huge impact on the communities involved—local officials would do well to keep them in mind.

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Some Thoughts on the Trump Tax Proposal

The President’s tax proposals are drawing attention from the media, politicians, and the public. They offer potential for major change, but still lack detail. Tax legislation is complicated, and details ultimately matter. Nevertheless, the early ideas merit a few observations.

The Committee for a Responsible Federal Budget (CRFB) had a short but wise take on them. On the positive side, the tax proposals are a step toward needed simplification of a convoluted tax code. There are huge hidden compliance costs associated with complexity that Americans bear every year in paying attorneys, accountants, and software professionals.

It is also widely recognized that the U.S. needs a lower corporate tax rate to be competitive with other countries―and to stop the exit of American corporate headquarters. Such a move would help “repatriate” corporate profits whose American taxation is being deferred while “abroad.” We also need a tax code that is economically neutral and, therefore, more conducive to economic growth. The American economy is slow-growing; increased growth pays dividends in terms of more job opportunities and government revenue.

On the negative side, the CRFB is justifiably concerned about the tax plan’s impact on U.S. debt, which is already hitting $20 trillion and counting. With Social Security, Medicare, and Medicaid all facing cuts in the next 15 to 20 years and federal borrowing costs climbing, any tax plan has to be real reform that doesn’t balloon the debt and damage the economy.

From a state perspective, the tax package’s proposed loss of the federal deduction for state-local taxes could adversely impact states with high income and property taxes. In both cases, Wisconsin’s are 15 to 20% above the national average.

However, there are other points to keep in mind. First, the proposed doubling of the standard deduction will reduce itemizing, which less than a third of filers now do. Second, significant tax-rate reductions cannot be ignored. The combination of lower rates, a higher standard deduction, and fewer itemized deductions could still mean savings for a number of “typical” taxpayers. Loss of a deduction does not always mean a tax increase.

Critics of the state-local tax deduction ask an important question: Should the federal government and taxpayers across the country subsidize spending in states that have relatively high taxes? In effect, current federal policy encourages states to spend more, with the majority of extra costs falling on state residents, and not on the federal government.

Opponents of the state-local tax break also argue that the IRS code with its deductibility of income and property taxes rewards states for maintaining unbalanced tax systems that overtax income, work, and saving while encouraging wasteful consumption. One recent poll on this subject showed Wisconsin residents were far more favorably disposed to the sales tax than to income and property taxes, even calling it “more fair” than the other two.

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