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Wisconsin has not always been a high-tax state.
As late as 1961, state and local taxes here ranked 18th highest in the
nation.
That changed in 1963 when
the full effect of sales and income tax increases enacted by the 1961 state
legislature were felt.
By 1964, the
Badger state ranked first.
Since then, Wisconsin has left the ranks of the top-ten “tax elite” only
twice, and that was in 1968 and 1980 when a combination of tax cuts and surging
personal incomes pushed Wisconsin to 11th place.
In 24 of the 38 years studied since 1962, the Badger State has been among
the top five most-taxed states, including every year since 1991.
Many reasons are given for Wisconsin’s high taxes.
“State and local governments spend too much” is one.
“The state does not get its share of federal money” is another.
Both contribute to Wisconsin’s high-tax status, but they tell only part
of the story.
Surprisingly, despite
a history of high taxes, there has been no comprehensive attempt to understand
why.
This essay summarizes a recent in-depth study by the Wisconsin Taxpayers
Alliance (WISTAX) that fills that gap, providing the first thorough,
quantitative explanation of why our taxes are high.
How High?
In 1999-2000, our combined state and local taxes claimed 12.89% of personal
income, according to the most recent U.S. Census Bureau figures.
This placed the state fourth in the nation behind New York (14.10%),
Maine (13.91%) and Alaska (13.16%).
The
national average was 11.21%.
Unless
stated otherwise, all Census information used in this study is from fiscal 2000.
The 1.68 percentage point difference (12.89-11.21) in tax burdens means that
Wisconsin’s state and local tax collections were $2.4 billion more in 2000
than if they had been at the national average.*(1)
It is this $2.4-billion difference that this paper attempts to quantify.
There are several explanations for the difference.
First, Wisconsin spends more than average, which mean government
revenues, including taxes, have to be above national norms.
Some of this additional spending is due to higher spending on services
that state and local governments typically provide, and some is due to Wisconsin
governments providing services that private entities provide in other states.
In this report, no attempt is made to distinguish between these two
sources of increased expenditures. Second, Wisconsin funds its spending differently than the
nation.
The state relies to a
greater degree on taxes and less on fees and charges, or other revenue sources.
Why?
In the WISTAX study this paper reviews two different approaches used to estimate
the impact of various revenue and spending factors on our tax burden. One was “arithmetic,” the other econometric.
That the two different approaches yielded similar results bolsters the
validity of the findings.
Here, we look only at the first approach which looks individually at the
deviations between Wisconsin and the U.S. average in revenue mix and spending.
We use these differences to estimate the additional tax burden that can
be attributed to a particular factor; for example, lower state fees or higher
education spending.
Revenues
Let’s begin with the revenue side of the equation.
State and local general revenues consist of four revenue sources—taxes,
federal monies, miscellaneous revenues (interest income, special assessments and
property sales are examples), and fees and charges.
This last source includes fees and charges both in and out of higher
education, with the former comprised of tuition and fees collected by public
higher-education institutions.
Because
total dollars from higher-education fees depend not only on the size of the fee,
but also on the size of higher education system (more students means more total
fee revenues), these fees are left until later, and examined in conjunction with
higher education spending.
Table 1 shows how Wisconsin’s revenues differ from national averages.
As a share of personal income and per capita, Wisconsin has higher taxes,
but lower federal revenues, miscellaneous revenues and non-higher education
fees.
In Wisconsin, taxes were
60.7% of general revenues, compared to 56.6% nationally.
Federal Revenues and Taxes.
Wisconsin
received $5.1 billion in federal revenues in 2000, or 3.52% of state personal
income and 16th lowest in the nation on a percent-of-income basis.
Nationally, federal monies to state and local governments averaged 3.75%
of U.S. personal income.
If
Wisconsin had received an “average” amount of federal revenues—equal to
3.75% of state income—it would have had an additional $339.6 million,
increasing that revenue category to $5.4 billion.
Figure 1 graphically displays the impact of this hypothetical change.
Assuming unchanged state and local spending, those dollars could have
reduced the state’s tax burden by that same amount, from $18.547 billion to
$18.207 billion.
It is important to recognize in Figure 1 that, since spending is assumed
to remain unchanged, total revenues also are unchanged.
The hypothetical increase in federal revenues serves as a
dollar-for-dollar offset of taxes.
As a percent of income, Wisconsin’s tax burden would have fallen from
12.89% of income to 12.66%.
The
$339.6 million difference represents 14.1% of the $2.4 billion difference in
Wisconsin and U.S. tax burdens.
Miscellaneous
Revenues.
A second, smaller
source of general revenues is miscellaneous revenues, such as interest earnings,
special assessments, property sales and “other general revenues.”
In 2000, Wisconsin’s state and local governments collected $2.7 billion
in miscellaneous revenues, or 1.85% of personal income.
Nationally, miscellaneous revenues were slightly higher at 1.97% of
personal income.
Wisconsin had less
interest, property-sale and “other general” revenues, but more special
assessments.
An increase in miscellaneous revenues to the national average (1.97% of
income) would have generated an additional $181.7 million that could have been
used to reduce taxes.
That amount
represents approximately 7.5% of the difference between the state’s tax burden
and the nation’s.
Fees
and Charges.
State and local
governments also charge user fees for various services they provide.
These fees range from automobile license fees to campground fees to
charges for copying documents.
In
2000, Wisconsin’s state and local governments collected $2.9 billion in fees
and charges outside of higher education.
That
total represented 2.03% of state personal income.
Many other states use fees and charges to a greater extent than
Wisconsin.
Nationally, these
averaged 2.16% of personal income.
If the Badger State had used fees and charges to the same extent as the
U.S., state and local governments would have raised an additional $190.3
million.
Assuming spending remained
unchanged, those dollars would have reduced state and local taxes by that same
amount.
Lower fees and charges
outside of higher education accounted for 7.9% of the tax gap between the U.S.
and Wisconsin.
Taken together, Wisconsin’s greater reliance on taxes, rather than on:
a) federal dollars, b) miscellaneous revenues, and c) fees and charges,
accounted for $711.6 million, or 29.5% of Wisconsin’s higher tax burden (See
Figure 2).
Spending
If less than 30% of the
difference between Wisconsin’s tax burden and the national average is due to
revenue-mix differences, then more than 70% must result from higher spending
here relative to the nation.
As
mentioned previously, this could arise from spending more on services typically
provided by government, or from providing services other state and local
governments may not provide.
In fiscal 2000,
Wisconsin’s direct general expenditures were 21.4% of personal income,
or more than two percentage points higher than the national average of 19.3%.
Per capita spending here totaled $5,735, 7.4% more than the national
average of $5,334.
Table 2 compares
Wisconsin spending to national averages.
Census Bureau information allows further analysis of this spending effect
by broad program area, with particular attention paid to K-12 and higher
education.
These two spending areas
are particularly important because they account for more than 35% of state-local
direct general spending in Wisconsin, and data on enrollments, spending and
revenues allow comparisons of Wisconsin spending to the national average.
K-12 Education.
Wisconsin
spends significantly more per student on K-12 education than the national
average.
On a per capita basis,
Wisconsin’s 2000 K-12 spending ($1,453) was 11.9% higher than the U.S. average
($1,298).
However, relative to
population, Wisconsin has fewer K-12 students.
After adjusting for the number of students, the gap increases.
In 2000, Wisconsin’s public school revenues totaled $8,884 per student,
12.6% more than the national average of $7,892.
Given the number of Wisconsin public school students, the $992 per
student revenue difference means that, had Wisconsin been average, school
districts statewide would have generated $870.7 million fewer revenues for K-12
education than they did.
(Revenues
are used here so that we can ignore any gap between revenues and spending.)
To estimate the tax impact of the higher K-12 spending, we assume that
all state aids to Wisconsin school districts are derived from state taxes.
Under that assumption, 89.4% of Wisconsin school district revenues come
from state and local taxes.
The
rest are from fees and federal monies.
Applying that percentage to the $870.7 million spending difference gives
an approximate $778.4 million tax burden resulting from the above-average K-12
revenues.
That total is higher that
the entire revenue-mix difference ($711.6 million) discussed previously.
Wisconsin’s above-average K-12 education spending represented 32.2% of
the $2.4 billion difference in Wisconsin’s tax burden relative to the
nation—the single largest factor.
Higher Education.
Wisconsin
also spends more on higher education.
In
census data, higher education includes all public universities and colleges,
including technical colleges.
In
2000, Wisconsin’s public higher education institutions spent $602 per capita,
compared to the national average of $477 (see Table 2).
There are two main reasons for the higher spending here.
First, Wisconsin’s higher education system is 22% larger than the
national average.
In the fall of
1999, Wisconsin had 34.7 full-time equivalent students in public higher
education institutions for every 1,000 residents.
Nationally, the ratio was 28.5.
Second, Wisconsin spends more per student than the national average.
In 2000, Wisconsin’s higher education spending was $17,353 per
full-time equivalent student.
Nationally,
spending was $601 per student lower at $16,752.
Again, these figures cover all types of postsecondary students, including
high-cost technical and graduate students.
A third factor that affects the tax burden is Wisconsin’s level of tax
support of public higher education.
In
1996-97, the last year for which data were available, Wisconsin state-local tax
support of higher education totaled 43.1% of higher education revenues (National
Center for Education Statistics).
Nationally,
that share was 39.5%.
Data from the
UW System and Wisconsin Technical College Board show government support for
higher education in Wisconsin has declined by about one percentage point since
1996-97.
However, we have no
information on national changes during this same time.
The first two factors drive Wisconsin’s higher education spending above
the national average.
Because of
that higher spending, state and local taxes are higher. The third factor shows how Wisconsin’s higher education
funding is more reliant on state taxpayers, and less on students.
This also increases tax burdens.
Because the state spends more per student on higher education, Wisconsin
taxes were approximately $48.2 million higher,*(2)
accounting for 2.0% of the Wisconsin-U.S. tax difference.
Wisconsin’s larger higher education system raised state taxes by about
$239.3 million and accounted for 9.9% of the tax gap.
Finally, because Wisconsin uses tax revenues to a higher degree than
other states to support higher education, taxes here were about $23.9 million
higher, or 1.0% of the gap.
Taken
together, Wisconsin’s higher education revenue and spending decisions
accounted for $311.4 million, or 12.9%, of the tax gap.
Other Spending.
Spending
differences outside of education accounted for the remaining 25.4% of the
difference between state and U.S. average tax burdens.
The category with the biggest difference between Wisconsin and U.S. per
capita spending, in both dollars and percentage, was state and local roads and
highways.
Wisconsin spent $505 per
capita on roads and highways in 2000, which was $145 per person, or 40.3%, more
than the national average.
Wisconsin’s
state and local governments also spent 13.9%, or $22 per person, more on natural
resources and parks, 11.8% ($19) more on sewer and solid waste, and 10.7% ($19)
more on corrections.
The Badger
State spent 24.2%, or $110 per person, less on public health and hospitals.
Wrapping Up
When the various aspects of Wisconsin’s approaches to revenues and
spending are pulled together, a clear picture of the state’s finances emerges.
Wisconsin’s $2.4 billion of higher taxes can be attributed to:
- Fewer federal revenues—$339.6 million in additional
taxes, or 14.1% of the Wisconsin-U.S. difference in taxes;
- Fewer miscellaneous revenues—$181.7 million, 7.5% of
the tax difference;
- Lower non-higher education fees—$190.3 million, 7.9%
of the tax difference;
- More spending on K-12 education—$778.4 million,
32.2% of additional taxes;
- A larger higher education system and lower student
tuition and fees—$311.4 million, 12.9% of Wisconsin’s additional taxes;
and
- Higher spending in other areas, most notably local
streets and roads—$614.0 million, 25.4% of the state’s higher taxes.
These insights can also be summarized numerically.
Table 3 shows that revenue-mix accounts for $0.7 billion ($711 million)
of the $2.4-billion gap between Wisconsin’s taxes and the U.S. average.
The corresponding figures for spending are $1.7 billion and 70.5%, with
K-12 education the single largest individual category.
The summary above is quite general.
It is important to remember that the above table is quite general.
If these categories were examined in greater detail, spending in any one
area would not be uniformly high.
Rather,
it is driven by specific factors. For example, three items explain most of Wisconsin’s higher
K-12 spending.
State school
districts spend 52% more on employee benefits (but not on salaries) than the
national norm.
Wisconsin has
smaller student-teacher ratios.
And,
due to a building boom in the 1990’s, the state spends more on capital
expenditures and debt.
Similarly, two factors explain the greater higher education spending
here.
First, Wisconsin’s public
university and technical college system is about 22% larger than average.
Second, resident tuition for both systems is low, and, thus, taxpayer
subsidies are high.
Wisconsin’s extensive state and local road system also contributes to
higher taxes. Road and highway spending here is 40% above the national
average.
Although weather is a
factor, a more important factor explaining Wisconsin’s state-local road
spending is the fact that Wisconsin is sixth in paved road miles per capita.
Although, they were not examined in this essay, other forces may
contribute to our high taxes.
One
is Wisconsin’s unique state-local relationship and the role it plays in
Wisconsin’s higher spending.
Other
WISTAX research has shown that Wisconsin’s increasing tendency to tax at the
state level but spend locally has likely led to higher local expenditures.
State aid may act as an incentive to spend by reducing the “tax
price” of any state-subsidized service provided by local governments or
schools.
Specifics aside, it is worth ending where we began.
Certainly there are arithmetic answers to the question “Why Are
Wisconsin Taxes High.”
Revenue
mix, K-12 education, colleges and universities and highways all play a role.
But what first led Wisconsin to exhibit these priorities?
One cannot ignore that the state’s Yankee/immigrant heritage laid the
groundwork for our current levels of government spending and taxing.
The state’s long-held view of government as an active participant in
society influenced spending decisions throughout the last century.
And the tradition of strong local governments meant services are still
provided in a decentralized manner, which requires higher state taxes to find
local spending and property taxes.
For
further information:
The
interested reader may be interested in reading the more extensive research study
in which this report is based.
It
is available at www.wistax.org.
Also
of interest may be the following references:
Buenker,
John D. (1998). The History of Wisconsin; Volume IV; The Progressive Era,
1893-1914. Madison, WI:
State Historical Society.
Doudna,
Edgar G. (1948). “The Making of Our Wisconsin Schools 1848-1948,
Wisconsin
Journal of Education.
Elazar,
Daniel J. (1972).
American
Federalism:
A View From the States.
New York, NY: Thomas Y. Crowell Company.
Hines,
James R. and Richard H. Thaler (1995).
“Anomalies:
The Flypaper Effect,”
The Journal of Economic Perspectives.
Volume 9, Issue 4, pp. 217-226.
Hoeveler,
David J. Jr. (1976).
“The
University and the Social Gospel:
The
Intellectual Origins of the “Wisconsin Idea,”
Wisconsin Magazine of
History. Volume 59 (Summer),
pp. 282-96.
Kingston,
Alan W. (1984).
A History of
Wisconsin’s General State Aid Formula for Elementary and High School Districts.
National
Center for Education Statistics. Digest of
Education Statistics, various years. Washington D.C.: U.S. Government
Printing Office.
Nesbit,
Robert C. (1973).
Wisconsin: A
History. Madison, WI: The University of Wisconsin Press.
Ranney,
Joseph A. (1994).
“The
Transformation of Wisconsin’s Tax System, 1897-1925,
Wisconsin Lawyer.
Toepel,
M.G. (1952).
“The Community of
Governments in Wisconsin,” in The Wisconsin Blue Book, 1952.,
State of
Wisconsin.
United
States Census Bureau. Census of Governments, 1957-97. Washington D.C.:
U.S. Government Printing Office.
United
States Census Bureau.
Government
Finances, various issues. Washington D.C.: U.S. Government Printing Office.
United
States Department of Transportation (2001).
Highway Statistics 2001.
Washington D.C.: U.S. Government Printing
Office.
Wisconsin
Coordinating Committee for Higher Education (1965). A Comprehensive Plan for
Higher Education in Wisconsin.
January.
Wisconsin
Legislative Reference Bureau (1985).
A
Legislative History of Shared Revenue in Wisconsin, Research Bulletin
85-RB-1.
Wisconsin
Taxpayers Alliance (1961). “State Executive Budget Proposed for 1961-1963,”
The
Wisconsin Taxpayer.
Vol. 29,
No. 3.
Wisconsin
Taxpayers Alliance (1962).
“Wisconsin’s
New Tax Law,” The Wisconsin Taxpayer. Vol. 30, No. 2.
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