Sales tax increase? Not very likely

Todd Berry is nothing if not realistic. His 18 years at the helm of the Wisconsin Taxpayers Alliance have taught him that good public policy often doesn’t get past the gatekeeper of politics.

“The pressure on elected officials in a largely career Legislature is to make people happy and get re-elected,” Berry says. So while his group has identified some troubling trends regarding the state’s sales tax, he’s not expecting lawmakers to embrace reforms.

In February, the start of income tax season, Berry’s nonpartisan research organization released a report on the state’s sales tax. It noted that collections have been anemic, rising an average of just 1.5 percent a year since 2000.

The sales tax remains a major revenue source, generating $4.1 billion for the state last year. But this accounted for just 31.8 percent of general fund tax revenues, the smallest share since 1984. Meanwhile, the portion of the total from state income and local property taxes has gone up. Last year, for example, income tax revenue in Wisconsin rose by 10 percent, according to the alliance.

This is not necessarily bad. Growing income tax revenue reflects economic recovery, and the tax is more “progressive,” in that higher wage earners generally pay a higher share. The sales tax is “regressive,” because it ignores ability to pay.

Brian Dake, legislative director for Wisconsin Independent Businesses, an association that represents mainly small employers, says the sales tax “tends to hit our state’s smallest businesses and the poorest residents hardest.” His group opposes any increase in the sales tax or expansion of the sales tax base. “It is a regressive tax.”

Nonetheless, surveys show that most people consider the sales tax fairer than income and property taxes, perhaps because these are often paid in lump sums.

One factor driving down sales tax collections is spending on online sellers that don’t collect from out-of-state customers. (The law requires taxpayers to pay these uncollected sums, but less than 1 percent do.) This costs Wisconsin between $60 million and $160 million a year.

Berry, of the Wisconsin Taxpayers Alliance, isn’t optimistic that politicians will address the concerns his group has raised about the state sales tax.

Another factor is a shift in spending away from goods, which are mostly taxed, to services, which are often not. In 1963, national stats show, personal consumption spending on goods topped services, 52 to 48 percent. By 2008, services were dominant, 67 to 33 percent.

Exempting certain services can make the sales tax more regressive. For instance, upper income people are more likely to spend on veterinary services and pet grooming, which are not taxed.

Wisconsin’s 5 percent sales tax, coupled with a 0.5 percent add-on in most counties, is lower than in 30 other states, including neighbors Illinois, Minnesota, Iowa and Michigan. But raising the rate is not the only option. Taxing food sold for home consumption, as do 18 states, would generate more than $500 million a year. Taxing computer and legal services would bring in at least $200 million.

Berry says “nobody in the world of economics and public finance disagrees” that a broad base and low rate is the fairest way to tax. He cites studies from other states arguing that broadening the sales tax base and lowering the rate could benefit low-income families, even if food were taxed. But in political circles, he says, such thinking would be “heresy.”

In fact, most legislative movement is toward less sales tax collection, driven by individual interests. A few years back, six lobby groups led by Wisconsin Gun Owners Inc. lobbied to get a tax credit for sales tax paid on gun-club memberships and admissions to gun-club activities. And last year’s state budget caved out a sales tax exemption for equipment used to make or groom snow.

In the current legislation session now grinding to a close, more than a dozen lobby groups, from the Wisconsin Dental Association to Apple Inc., are registered as keeping an eye on any legislation that would extend the sales tax to new areas, just in case.