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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Lottery Advertising: You Be the Judge. Or the Statistician.

Wisconsin state budget bills are usually 1,000 or more pages in length and contain many small items that receive little or no attention.  That is not to say, however, that serious questions cannot arise from the minutiae.

One example from the new 2017-19 budget makes the point.  In the Department of Revenue section of the 632-page “Executive Budget” book is this request:

“The Governor recommends increasing the lottery general program operations appropriation by $3 million in each year to be spent on current and additional informational activities to maintain and increase overall ticket sales.  This will ensure continued property tax relief for Wisconsin homeowners through the lottery and gaming credit.”

At the same time, the Wisconsin state constitution, Art. IV, Sec. 24 (6)(a) reads:

“The expenditure of public funds or of revenues derived from lottery operations to engage in promotional advertising of the Wisconsin state lottery is prohibited.  Any advertising of the state lottery shall indicate the odds of a specific lottery ticket to be selected as the winning ticket for each prize amount offered.”

According to Merriam-Webster, advertising is “the action of calling something to the attention of the public especially by paid announcements”; the definition of promotion is “the act of furthering the growth or development of something.”

How do you reconcile the budget’s $6 million biennial spending request and Article IV, Section 24?

If you’re not legally inclined, consider some statistics.  According to a mid-2016 report from the Legislative Audit Bureau, the Wisconsin lottery spent about $7.5 million on “product information” in each of the prior three fiscal years.  During this same period, growth in lottery sales averaged 0.7%.

In 2003, the lottery spent $4.5 million on product information and generated $96.68 in sales per dollar spent.  In 2008, it increased informational spending to $7.5 million and sales per dollar were $65.96.  Since then, informational spending has remained unchanged and sales per dollar averaged about $70.

Given this abbreviated history, how do you evaluate the relationship between informational expenditures and lottery sales?

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More questions as state budget nears

New figures from the Department of Revenue (D0R) may raise more questions about the upcoming 2017-19 state budget.
Tax collections from July to November 2016 grew just 1.2% over the same period in 2015. That figure is lower than the 2.3% growth recently projected for the entire fiscal year. If the trend continues with no offsetting actions, the state would risk running a budget deficit for the current fiscal year, which ends in July.
Estimates of state revenues have been moving steadily downward. Initially, the state budget called for collections of $15.21 billion in fiscal 2016 and $15.79 billion in 2017.
In January 2016, the nonpartisan Legislative Fiscal Bureau lowered those estimates to $15.17 billion and $15.65 billion, respectively. DOR reported in November that collections for fiscal 2016 were actually $15.09 billion. Revenues of $15.44 billion were projected for fiscal 2017.
Wisconsin isn’t the only state facing potential budget strains. The National Association of State Budget Officers (NASBO) reported in December that revenues came in under-budget in 25 states in fiscal 2016 – the most since the Great Recession – and many expect the declines to continue into fiscal 2017.
As of December, 24 states reported that general fund revenues were coming in below forecast for 2017, the highest number since fiscal 2010.
Unlike Wisconsin, however, 29 other states reported continuing contributions to their “rainy day” funds. Wisconsin has made no contribution to its Budget Stabilization Fund since 2013. The state is projecting to end the 2017 fiscal year with a balance of about $104 million – or roughly enough funds to operate for two days.

Gov. Scott Walker (R) is expected to release his budget in February, setting the stage for nearly four months of budget deliberations by the Legislature.


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