Building an Equitable and Sustainable Tax System
For Wisconsin’s economy to work for everyone, we need a tax system that provides enough resources to fund investments in healthy communities and public infrastructure, while providing a level playing field for Wisconsin families and businesses. Our tax system should take an active role in undoing the legacy of racial discrimination that makes it difficult for many families of color to thrive. With targeted reforms, state and local tax policies can expand opportunity and ensure that public resources are invested in a way that broadly benefits everyone.
Right now, Wisconsin’s tax system isn’t living up to its potential to be a powerful tool in promoting equitable opportunity. In its current state, Wisconsin’s tax code is a major driver of economic inequality, and contributes to the increasing concentration of income and wealth in a few hands -- hands that are most likely to be white, due to a long history of racial discrimination. Our slanted tax system isn’t the only reason for Wisconsin’s enormous racial disparities, but it contributes by saddling residents of color with an unfair economic burden that makes it harder for them to succeed financially. Our revenue system is loaded up with a collection of special-interest tax breaks that siphons revenue away from where it is needed most, and instead directs it towards a small number of wealthy, well-connected individuals and big corporations who have rigged the system for their own benefit.
Wisconsin’s tax system provides a significant advantage to wealthy taxpayers over everyone else. The richest residents of Wisconsin pay the smallest share of their income in taxes of any income group, leaving Wisconsin residents with low and moderate incomes to make up the difference. Taxpayers in the top 1% pay just 7.7% of their income in state and local income taxes, compared to 10.1% paid by taxpayers in the bottom 20%.
Here are steps Wisconsin can take to improve its state and local tax system in a way that gives taxpayers of all races, ethnicities, and income levels greater access to opportunity.
Put more money into workers’ pockets
The Earned Income Tax Credit (EITC) puts more money into the pockets of working parents with low and moderate incomes and helps them achieve economic security. The EITC can help make sure that parents can afford to make car repairs they need to get to work, pay for school supplies their children need, catch up on utility bills, and pay for other costs important to family functioning.
The EITC gives a major boost to family health and well-being, reducing the number of low-birthweight babies and lowering rates of cigarette smoking. Children in families that receive the EITC do better and go further in school. The benefits even reach into the next generation, as individuals whose families received the EITC when they were children work more as adults and have higher earnings.
The state is spending $97 million in the EITC this year, through a combination of general tax dollars and federal money allocated to the states to implement anti-poverty measures. Increasing that amount would promote work, alleviate hardship, and partly counteract the effects of racial discrimination in the workforce.
Create an EITC for all
Low-wage workers who don’t have children at home are excluded from Wisconsin’s EITC, a restriction that blocks them from receiving a much-deserved tax break. The result is that low-wage, childless workers pay millions more in state and local taxes than they otherwise would, miss out on the health and economic benefits that are associated with receiving the EITC, and may have difficulties making ends meet. Opening up Wisconsin’s EITC to include all workers with low wages would expand economic opportunity and lower barriers to work for people who do not have a job.
By excluding workers without dependent children from its state EITC, Wisconsin is out of step with other states. Of the 29 states that have state EITCs, Wisconsin is the only state that bars workers without dependent children from receiving the credit. Creating a state credit equal to the federal EITC for childless workers would give those workers a tax cut of $43 million.
Improve and expand targeted property tax relief
The Homestead Credit delivers targeted property tax relief to low-income households, and helps seniors with low incomes afford to stay in their homes. Harmful changes in recent years reduced credit amounts and eligibility, and lawmakers should take action to reverse them. This year, the Homestead Credit will put $71 million back in the pockets of people with low incomes, an amount that has been in steady decline as changes have made it more difficult for people to qualify for the credit.
State and federal tax codes provide far more tax breaks to homeowners than to renters. Because people of color in Wisconsin are much less likely to own their own homes than white residents of the state, the more generous tax subsidies for property owners contribute to the state’s substantial racial disparities. Reversing the cuts to the Homestead Credit would be a small but important step in reducing the structural racism embedded in the tax code.
Eliminate a credit that wipes out income taxes for manufacturers
A tax credit that allows manufacturers and some other businesses to pay next to nothing in income taxes has ballooned far beyond original cost estimates and is slanted to favor a small group of wealthy claimants. Most of the credit goes to multi-millionaires.
This credit will give a $324 million income tax break to manufacturers and other businesses this year. Companies do not need to create new jobs to be eligible to claim the credit. Even businesses that lay off workers, send jobs overseas, and close factories may receive the credit. Eliminating this loophole would require big manufacturers and wealthy individuals to pay their fair share of taxes that are necessary to fund thriving communities, excellent schools, and modern transportation networks.
Don’t favor income from wealth over income from work
Wisconsin gives preferable tax treatment to income earned from investments, taxing that income at a lower rate than income earned from working. Generations of racial discrimination have made it more difficult for people of color to build wealth, and as a result, tax breaks for income generated by wealth disproportionately benefit White residents and widen Wisconsin’s racial disparities.
Wisconsin is one of only nine states that provide a tax break for income derived from wealth. This tax break adds up to $238 million a year and tilts Wisconsin’s state income tax in favor of the wealthy. By eliminating preferential tax treatment for income from wealth, Wisconsin could create a more equitable tax system.
Close the “dark store” loophole
Big box stores are exploiting a loophole that allows them to get away with not paying their fair share of property taxes, and requires homeowners and other owners to make up the difference. National retailers are arguing that the value of a new store in a thriving commercial district should be based on the value of vacant, or “dark” stores in other parts of town. That drives down the assessed value of property for big retailers and requires everyone else to shoulder a larger share of the property tax levy.
Conclusion
There are some bright spots in Wisconsin’s tax code in the form of policies that counteract the overall trend of exploitation of people with low incomes. State lawmakers should build on and expand these policies to make sure that Wisconsin’s tax system is equitable. Otherwise, lawmakers will continue to support a system that thwarts economic opportunity for people with low incomes and people of color and forces them to pay more than their fair share.