Wednesday, August 26, 2015

Tax and spin: Most families in Wisconsin, it turns out, would save on taxes by moving to Minnesota

FROM MINNPOST.COM

On Tuesday, Scott Walker will bring his presidential campaign to Minnesota, where he’ll give a speech on the Affordable Care Act and attend a fundraiser. At those events, Walker will no doubt boast about his conservative record as governor of Wisconsin: an ambitious if sometimes polarizing set of public policies that have reduced government spending, curtailed collective bargaining rights and — as he is sure to remind people — reduced the state’s taxes by more than $2 billion.

Just as predictably, Walker is likely to be asked more than a few questions about the state where he’ll be holding forth, a place where his counterpart, Democratic Gov. Mark Dayton, has pursued the sort of agenda that might cause Walker to break out in hives: expanding union membership, increasing school funding and  — most notably — implementing a tax hike on the wealthiest Minnesotans.

Comparing the two states under the two men over the last few years has become something of a national sport, after all, a favorite pastime among journalists, academics and politicians alike. Even President Barack Obama has gotten in on the act. Before an audience in La Crosse last month, he paraphrased the local paper by saying that Minnesota was “winning this border battle” when it came to the states’ respective economic fortunes.


And yet, despite all the ink spilled about both Walker and Dayton and their records, almost all of the assessments overlook a longstanding but seldom-discussed fact about life on either side of the St. Croix River: that a majority Minnesotans actually pay a smaller share of their household income toward taxes than Wisconsinites.

The primacy of property taxes
How can that be the case?

In 2013, Walker delivered on one of his big campaign promises when the Wisconsin Legislature passed a bill that compressed five income tax brackets into four and lowered all rates, reducing the average rate from 6.4 percent to 5.9 percent.

That same year, Minnesota went in the opposite direction, with the Legislature passing a Dayton-led initiative to add a fourth state income bracket for individuals earning over $150,000 or couples earning over $250,000. The rate, of 9.85 percent, was among the highest in the country, and it meant the state’s average income tax rate would go from 6.8 percent to 7.5 percent.

But those high-profile changes only affected the income tax, not sales tax or, importantly, property tax — the key factor in comparing the overall tax burden between Minnesota and Wisconsin.

For years, Wisconsin has had some of the highest residential property taxes in the country. The result is that across every income bracket, homeowners in Wisconsin pay a higher share of their income to property taxes than those in Minnesota, according to data compiled by the Institute on Taxation & Economic Policy, a nonpartisan think tank that studies tax policy. To take just one example, the taxes on Walker’s $360,000 home in suburban Milwaukee County were more than $8,000 in 2014.

In fact, for all but the top earners, Wisconsin homeowners who work in Minnesota would often fare better by staying on this side of the river, largely because property tax rates are low enough to make up for higher income tax rates. As a report from the National Center for Policy Analysis noted last year: “While a renter would fare worse in Minnesota thanks to the higher income tax, homeowners would fare better because of Minnesota’s lower property tax rate.”

Walker didn’t create the higher property taxes, but he also hasn’t been able to do much about them, either. The reason lies in Wisconsin’s state constitution. Unlike Minnesota and all but seven other states, Wisconsin is required to tax all property equally, be it commercial or residential. That means Wisconsin can’t shift any of the tax burden from homeowners to owners of other types of property, as many states do (including Minnesota).

As a result, Wisconsin’s high property tax essentially wipes out any savings most taxpayers would see due to the lower income, sales and excise taxes compared to Minnesota. In fact, the only group that faces a higher tax burden in Minnesota than in Wisconsin are families with household incomes over $200,000.

Small businesses benefit
Just as the Wisconsin’s tax-code restrictions hurt homeowners compared to those in Minnesota, they help business, because they bear a smaller share of all property taxes in the state.

Small business owners in Wisconsin have another advantage over their counterparts in Minnesota: Because many small businesses are known as “pass-through entities” whose owners pay their corporate tax on their personal income tax form, they benefit from Wisconsin’s lower income tax rate vs. Minnesota’s.

Given all that, one might expect business to be flocking to Wisconsin. But two years after the states’ biggest tax changes took effect, there’s little evidence to suggest any such migration is happening.

David Ross, president and CEO of the Duluth Area Chamber of Commerce, says he doesn’t see businesses moving across the border to Superior, despite Wisconsin’s efforts.

That’s partly because moving a business can be risky, Ross said, if for no other reason than political ideology can change with each election. Instead, what’s reliable is a quality work force — the main incentive for businesses to locate in an area, he said, as is quality of life.

“All of these wild incentives from these different states are often from a state that is the least attractive,” Ross said. “The cost of government is certainly, within a state, an important factor to keep in mind. (But) people want to live in a community where there’s a strong public school system, where it’s a safe place to raise a family, where there’s strong recreation. I think those states that are focusing on cost of government are in a bad place. We’re promoting much more lifestyle and a place to live, not just a place to work. ... So I am not impressed with the position of Walker. We have done nothing other than become stronger, our state as an economic entity, since his election.”