Walker idea to eliminate income (and raise sales) taxes would hurt Wisconsin’s poor

Effective tax rates, already somewhat regressive, would flip overwhelmingly in favor of the wealthy while burdening families with lower incomes

Gov. Scott Walker is all about cutting taxes...except when it comes to the poor. For the poor, he’s all about raising them.

Institute on Taxation & Economic Policy, 2013

Early on in his term, Gov. Walker proposed and passed a budget that included a cut in the Earned Income Tax Credit. The budget that passed into law reduced the amount that Wisconsin’s working and middle class families could claim, effectively raising taxes on Wisconsinites who qualified for the credit.

For a two-parent household with three children earning $40,000 annually, for example, the cut to the EITC implemented by Walker effectively raised their taxes by about 1.3 percent. Overall, the tax credit was reduced by $56.2 million in the 2011 budget.

This week, Walker introduced a new “reform” idea for the state of Wisconsin: possibly eliminating the income tax entirely. And when pressed for how he would make up the difference, Walker suggested that we could do so in a very simple way:

Walker told WisPolitics.com on Tuesday that he is “envious” of other states that have eliminated income taxes, and that he could support raising the state’s 5 percent sales tax rate or eliminating sales tax exemptions to help cover the revenue loss that would result from killing income taxes.

Emphasis added.

Raising the sales tax, of course, would be an increase in taxes that historically hurt the working poor. Indeed, sales and excise taxes make up 6.2 percent of taxes for the poorest of Wisconsinites. For the top 20 percent of income earners, however, they only make up between 0.9 to 2.5 percent.

Overall, sales tax makes up for about two-thirds of the effective tax rate (PDF) that the poorest 20 percent in the state pay. Again, for the richest 20 percent, sales tax makes up about a quarter of what they contribute to taxes, at most.

Eliminating the income tax would greatly benefit the wealthiest of Wisconsinites, but it would do next to nothing for the lowest quintile of earners, and barely anything for the lowest two quintiles (the poorest 40 percent). The effective tax rates (the sum total of all taxes paid, e.g. sales, income, property and so forth) for Wisconsinites earning below $36,000 per year is currently between 9.6 and 10.7 percent. Eliminating the income tax would change those numbers very minimally, reducing the effective tax of this income group to between 8.6 to 9.7 percent.

That’s without raising the sales tax, which experts suggest may have to increase to 12 or 13 percent per purchase, more than doubling its current rate. If we take into account the elimination of the income tax, but double the share of household income dedicated towards sales tax for these families, the effective rate actually rises to between 13.8 and 15.8 percent on the lowest 40 percent of income earners (with the poorer actually paying the higher end of that percentage range).

For the top 1 percent of income earners, eliminating the income tax and doubling their family share of sales tax would be a huge win -- reducing their effective tax from 6.9 percent to 2.2 percent.

Overall, eliminating the income tax would create a huge tax burden on the poor, creating an effective tax that would be more regressive than it is already today in Wisconsin.

Any reductions in the income tax with increases in the sales tax shifts the burden to the poor and middle classes. An outright elimination of the income tax and a substantial jump on sales tax would spell catastrophe for those with modest family budgets in Wisconsin.

It would be irresponsible to go forward with a plan like this, and Gov. Walker should stop any talks about doing so immediately.