CWERB - Special Report: Wisconsin's Tax Capacity and Tax Effort and What is the Next Step in Property Tax Relief?

WISCONSIN'S TAX CAPACITY AND TAX EFFORT

Wisconsin's state and local tax effort in 1986 was 134, while its tax capacity was 86 (100 represents the U.S. average.) These numbers represent a 6-point increase in tax effort and a 3-point decrease in tax capacity from the previous year. The 48-point gap of tax effort over tax capacity in 1986 was the largest of any state.

The 1986 information, the most current available, came from a recently released report of the Advisory Commission on Intergovernmental Relations, a federally funded government-research organization.

Figure 1 shows Wisconsin's ranking from 1975 through 1986. The 1986 figures reversed the recent trend of a growing or stable tax capacity and a declining tax effort. Since the figures are for 1986, they do not reflect the resurgence in the Wisconsin economy that has occurred in the last 18 months nor the income tax reduction enacted in 1987.

Tax Capacity

A state's capacity is a measure of the economic resources of the state based on its tax base, such as value of property, amount of income and amount of sales. Using 100 as the U.S. average, the chart (Figure 1) shows that Wisconsin's 1986 tax capacity of 86 was 14 percent below the U.S. average. Wisconsin ranks 39 among the 50 states. From 1975 through 1980, Wisconsin's tax capacity was close to the U.S. average. With the recession of the early 1980s, it decreased to a low of 87 in 1982 and 1983. This was followed by a rise to 89 in the next 2 years. The 1986 Wisconsin tax capacity of 86 is the lowest since the measuring system was initiated.

Since the tax capacity measure includes all state and local taxes, the property tax is included. It makes up 33 percent of total state and local taxes, and any change in the property tax base from one year to the next will affect the tax capacity. In 1986, the equalized value of taxable property in Wisconsin decreased by 2 percent. This was the first decrease since 1940.

A major reason for the decline in property values was an 18 percent decrease in farmland values. Other states that had a decrease in agricultural values also showed a lower tax capacity.

FIGURE 1

WISCONSIN'S TAX CAPACITY AND TAX EFFORT
1975-1986

Tax Effort

In 1986, Wisconsin's tax effort (the degree to which a state uses its tax base compared to the U.S. average) was 134, or third highest exceeded only by New York (152) and Alaska (168).

The tax effort numbers for the other Midwestern states were: Michigan, 118; Iowa, 113; Minnesota, 108; Illinois, 106; Ohio, 103; and Indiana, 94.

Difference between Capacity and Effort

In 23 states, tax capacity equaled or exceeded tax effort. These states were primarily in the northeast, southwest and west. Wisconsin was one of the 27 states where tax effort exceeded tax capacity. This was the same situation in all the Great Lakes states.

In 1986, Wisconsin's tax effort exceeded its tax capacity by 48. New York which had the largest gap in previous years was second at 45. The gap figures for the other Midwestern states ranged from 29 in Iowa to 6 in Minnesota.

From 1975 through 1980, Wisconsin's tax effort exceeded its tax capacity by 15 to 21points. It could be argued that Wisconsin taxpayers were willing to pay a premium of about 17 percent to support a higher level of state and local government services. If that assumption was correct, then the tax effort number should have declined as the tax capacity dropped. However, the gap widened to 50 points in 1983, closed slightly to 44 in 1984 and was 48 in 1986.

Future

These unfavorable comparisons reaffirm the Wisconsin Expenditure Commission’s concern of how much government Wisconsin taxpayers can afford. It should send a message of caution to state and local officials.

The tax effort could show a decrease when 1987 and 1988 figures are released if state and local government spending has not grown as fast as it did in other states. Since taxes are directly related to spending, controlling spending will help control tax effort. The tax capacity index number should increase in 1987 and 1988 as the effect of a strong economy is reflected in the tax base.

At the April 4 election, voters turned down the constitutional amendment to amend the property tax uniformity clause by an unofficial 700-vote margin. . . . The legislature, which has been "slow" until the constitutional amendment was voted on, must now proceed with the budget.

With the constitutional amendment defeated and, with it, the Democrats' 3 percent solution of payments to individuals, the legislature may turn once again to increasing state payments to local government as a means of property tax relief. According to the 1986 report of the Wisconsin Expenditure Commission, Wisconsin since 1965 consistently ranked among the top 6 states in the amount of state payments to local units of government. In 1986-87, the amount of revenue, received by local government from the state was $720 per capita. This was 28 percent above the

U.S.

average. On the basis of per $1,000 of personal income, the Wisconsin amount was $52, or 34 percent above the

U.S.

average.

If the rationale for the comparatively high state payments was to provide property tax relief - it has not worked. Wisconsin property taxes per $1000 of personal income were the 12th highest among the 50 states - 30 percent above the

U.S.

average. This information is shown in Table 1.

The Wisconsin Expenditure Commission concluded that payments to local governments have the effect of stimulating local spending, as well as providing property tax relief, and this increased spending occurs regardless of the form of state payment - state aids, shared revenues, or property tax credits.

The table also shows another fact the legislature should consider in making fiscal decisions. In 1986-87, personal income per capita was $13,909, or 5 percent below the U.S. average, while state and local government spending as a percent of income was 11 percent above the

U.S.

average.

On the basis of these facts, the Wisconsin Expenditure Commission recommended the state develop a long-range plan that recognizes its citizens' ability to pay for government services and improves Wisconsin's competitive position among the states. To do this, the commission recommended that the growth in state and local spending be restrained over a 6-year period, with the ultimate goal that Wisconsin's government spending as a percent of per capita personal income be at the

U.S.

average by 1992-93.

TABLE 1
WISCONSIN COMPARED TO OTHER STATES
STATE AND LOCAL REVENUES, EXPENDITURES AND DEBT
1977-78 and 1983-84 to 1986-87
State and Local

In total taxes, Wisconsin ranked 11th among the 50 states on a per capita basis or 7 percent above the U.S. average, and 5th, or 13 percent above the

U.S.

average, on the basis of per $1,000 of personal income. Among the major taxes, Wisconsin's individual income tax ranking was 9th on a per capita basis and 7th on per $1,000 of personal income, although both rankings have dropped in the most recent year. Income tax collections per $1,000 of personal income were 55 percent above the

U.S.

average. Only in the general sales tax was Wisconsin's ranking below the

U.S.

average.

Wisconsin's relative ranking is listed by major category of spending. Elementary and secondary education, which is the largest single category of spending at $694 per capita, was 8 percent above the U.S. average and Wisconsin ranked 12th. On the basis of per $1,000 of personal income, it was 13 percent above the U.S. average and ranked 14th. In the other major categories of spending, higher education, public welfare and highways, Wisconsin's percentage above the U.S. average was even higher.

State spending financed by general taxes has been restrained the last several years and fell within the Wisconsin Expenditure Commission's guidelines of increases of no more than 3.8 percent to 4.6 percent per year. Local school district costs have been going up at a faster rate. In the last 9 years, school district costs have increased an average of 6.4 percent per year. Therein lies the political rub. Any attempt to control school costs faces powerful political opposition, especially from the Wisconsin Education Association Council (WEAC).