Opportunity Zone Rules Hike Concerns Over Tax Breaks for NFL Stadiums

by r Hampton | Feb 20, 2019 | Tax News

Tax Policy – Opportunity Zone Rules Hike Concerns Over Tax Breaks for NFL Stadiums

Earlier this month, OpportunityDb highlighted 15 National Football League stadiums that are in Opportunity Zones. While the Opportunity Zone program is meant to spur long-term investment in economically distressed areas, these NFL franchises are now eligible for capital gains tax breaks on stadium-related investments.

Here are a few examples (you can read the entire article here):

• Baltimore Ravens (M&T Bank Stadium in Baltimore, MD)
  M&T Bank Stadium is an eligible candidate for improvements. In fact, some improvements are already underway. Construction of a new escalator and elevator system is part of a $120 million renovation that may be completed by the start of the 2019 season. Renovations to club level concessions and an upgrade of the stadium’s sound system are already underway as well.

• Las Vegas Raiders (Las Vegas Stadium in Paradise, NV) 
  The new Las Vegas Stadium is a $1.8 billion project that is expected to open in time for the 2020 NFL season. The new construction sits in an opportunity zone tract, potentially making certain investments in the project eligible for Opportunity Zones tax breaks if the developers decide to structure funding under a Qualified Opportunity Zone fund.

• Denver Broncos (Broncos Stadium at Mile High in Denver, CO) 
  Broncos Stadium opened in 2001. There are plans to tear up the parking lots to the south of the stadium to make way for a new entertainment district. So while there are no announced plans to improve the stadium itself, the adjacent district development may very well benefit from the new Opportunity Zones program.

The OpportunityDb article demonstrates that the program’s requirement that investments must “substantially improve” zone property in order to qualify for tax breaks is quite loose. For instance, while an investment may substantially improve the value of zone property, that does not mean the investment will aid zone residents. It’s unlikely, for example, that any tax break given for a new escalator at M&T Bank Stadium will significantly improve the economically distressed communities in Baltimore.

Ultimately, though, the Opportunity Zone program could be written and implemented perfectly, and it would still be unlikely to help economically distressed communities. Evidence suggests other place-based incentive programs fail to create new economic opportunity because they are structured in a way that encourages firms to cross borders for tax breaks. Even worse, place-based incentive programs could actually displace zone residents if the roles brought into a zone aren’t a good fit for residents.

It’s possible that this program could be different, and opportunity zones could be successful. But decades of experience with place-based incentive programs suggests we should be skeptical. For this reason, future rounds of regulation should focus on gathering the data we’ll need to make this determination.

Source: Tax Policy – Opportunity Zone Rules Hike Concerns Over Tax Breaks for NFL Stadiums

Opportunities for Pro-Growth Tax Reform in Austria

by r Hampton | Feb 20, 2019 | Tax News

Tax Policy – Opportunities for Pro-Growth Tax Reform in Austria

Executive Summary 

Making Austria a more attractive place to do business has been a core focus of the new government, which has been in charge since 2017. In contrast to previous governments–which offer up tax reform ideas but managed to implement few—the current Austrian administration is in prime position to implement a comprehensive tax reform. Since economic growth is solid and above-average in comparison to other EU member states, now is an opportune time to follow through with these plans. 

In the 2018 International Tax Competitiveness Index, which compares the tax systems of 35 OECD countries, Austria ranks in tenth place overall, despite only coming in in 15th place on business taxes and 21st on individual income taxes. The government collected taxes equal to 41.8 percent of GDP in 2017, mainly levied through taxes on labor, such as income taxes, social security contributions, and payroll and workforce taxes. 

The income tax system has clear deficiencies. For one, the system is highly progressive with a top marginal tax rate of 55 percent, the third highest in the OECD. The total tax burden on labor, often also called the tax wedge, is the fifth highest. For single workers, the tax wedge is 47.4 percent compared to 35.9 percent in the OECD on average. This means that the average worker in Austria only takes home half of his income. A large portion of the tax burden is payroll taxes, which fund pensions and social insurance programs. 

On corporations, Austria boasts a higher tax rate than any neighboring country other than Germany and Italy. Though the 25 percent corporate tax rate is significantly lower than the 34 percent Austria was boasting before a reform in 2005, it still is above-average in global comparison. The Austrian system also does not allow the full costs of capital assets to be deducted from a company’s net income. Thus, taxes are levied on both business profits as well as partially on business costs. While businesses can indefinitely carry forward net operating losses to offset future profits, they cannot carry unused losses backwards to help offset tax liabilities. Finally, a minimum tax on companies, regardless of their income, is in place, which can prevent smaller enterprises from achieving economic success. All of this nonetheless only comprises for 5.9 percent of Austria’s tax revenue.  

To be sure, there are reasons why Austria’s tax system is internationally recognized as relatively pro-growth. There are no damaging wealth or inheritance taxes, its property taxes are efficient and much less distortive than those in other developed countries, and Austria’s consumption taxes, including value-added taxes, are simple, comprehensive, and well-designed. 

A reform of the Austrian tax system then has to focus on corporate and individual income taxes. On corporate taxes, eliminating taxes on retained earnings—as countries like Estonia have done–a reduction of the corporate tax rate to 20 percent, improving the treatment of capital investment and net operating losses, and eliminating the minimum tax, would lead to Austria becoming more competitive and more attractive for companies interested in settling in the country. 

As for individual income, reducing the progressive tax system to a flatter, broader tax base with a lower rate is of the utmost importance. For instance, Austria could include a 20 percent flat tax on income which could be revenue neutral when applied to a broad tax base. In addition, indexing tax brackets for inflation and eliminating special tax treatments for the 13th and 14th salaries could be beneficial, too. Austria should also move toward a system that does not punish savings and investment. After the important reform of the social insurance system in 2018, there is now also an opportunity to lower social security contributions. These measures would reduce the cost of labor significantly. 

Instead of focusing on the introduction of distortionary measures like a digital services tax, the Austrian government should use its unique opportunity and implement a comprehensive tax reform. By lowering taxes and simplifying the tax code, Austria would become more competitive internationally, and be a place companies as well as individuals want to do business and live in. 

 A Menu of Tax Reform Solutions

The history of tax reform in Austria is a long one. Unfortunately, reforms of the past either increased the burden on taxpayers or were much less ambitious than they needed to be. Nonetheless, many of these changes were sold as the “biggest tax reform of all time.” Overall, the effects of these attempts were disappointing. Many more comprehensive reforms would have been necessary to have a significant impact. 

The last reform of Austria’s tax system, which occurred in 2015 and 2016, is a good example. This reform was also labeled the “biggest tax reform of all time” by its proponents, but consisted mostly of changes to income tax brackets. Most experts agreed that it lacked crucial elements, like provisions to limit bracket creep, and ignored the urgent need for structural reforms. Without these important changes, it was just another attempt at turning some small cogs and selling it as a great success. As expected, the last “biggest tax reform of all time” failed to have a significant impact. 

Now, with the new government in Austria, there might be a chance to deliver tax reform that deserves to be called significant. One thing is for sure: if Austria wants to remain competitive in the future, there are several reforms it must undertake.

Tax systems should be neutral towards consumption and investment while minimizing economic distortions. High marginal tax rates and multiple layers of taxation for the same income can impact the growth outlook for a country. Each of the following options would move Austria closer to an optimally designed tax system.

Corporate Taxes

Eliminating Taxes on Retained Earnings. Some countries, including Latvia, Estonia, and Georgia, have adopted tax systems that are completely neutral toward business investment and only tax business earnings when profits are distributed to shareholders. Austria could change its corporate tax base from net earnings less costs and allowable deductions to one that only includes distributed earnings. This could be paired with eliminating shareholder taxes on dividends, resulting in a single layer of tax for corporate earnings levied when those earnings are distributed.

Lowering the Corporate Tax Rate. The Austrian corporate tax rate is above the OECD average and higher than all but two of its neighbors. Lowering the corporate tax rate to 20 percent or below would allow Austrian businesses to be more competitive with their international counterparts. 

Improving Treatment of Capital Investment. Capital investment is vital to long-term economic growth, but Austria lags its peers in capital productivity. Providing the ability to fully deduct the cost of acquiring new machinery and equipment in the year it is acquired will minimize the distortions of the current straight-line depreciation system. Shortening the asset lives for buildings and structures will also improve the system. Importantly, changes to depreciation schedules take into account the time value of money and the way the current system inflates taxable profits.

Eliminating Minimum Taxes on Business. The current policy of applying minimum taxes on businesses has very little revenue impact as those taxes can be credited against future tax liability. These taxes can be a squeeze on small or growing businesses that may have negative earnings in a difficult year. Removing this barrier to business growth could have immediate impacts for some sectors.

Improving Treatment of Net Operating Losses. The current limit on net operating loss carryforwards results in some businesses not being taxed on their average profitability. Allowing businesses to offset taxable earnings with the full value of their operating losses would result in a more neutral tax system. 

The above options would result in the following changes to Austria’s overall and corporate tax ranking in the International Tax Competitiveness Index.

Individual Income Tax

Flattening the Tax Structure. The progressive income tax system of Austria is particularly steep. If tax systems are too progressive, they can disincentivize workers to earn more, since they may lose out in the end by having to pay an even larger share in taxes. Flattening the system is one option to prevent this. A 20 percent flat tax, for instance, could even be revenue neutral when applied to a broad tax base.

Reducing the Top Marginal Tax Rate. At 55 percent, Austria’s top marginal income tax rate is the third highest among OECD countries, behind Sweden at 61.8 and Denmark at 55.8 percent. Austria’s rate kicks in for those earning more than one million euros annually. Having such a high marginal tax rate creates serious economic distortions and can incentivize tax avoidance. It can also lead to higher-income individuals seeking to move away to other countries instead of living and investing in business and financial operations domestically.

Indexing Tax Brackets for Inflation. When inflation occurs, but the tax brackets in a progressive income tax system are not adjusted, this can cause so-called “bracket creep.” Since prices rise, but the tax brackets stay the same, taxpayers potentially pay more over time. In Austria, the “bracket creep” problem could be solved by indexing tax brackets to inflation, so that tax brackets adjust from year to year.

Eliminating Special Tax Treatment of 13th and 14th Salaries. The 13th and 14th month salaries for holidays in the summer and for Christmas in winter are taxed differently than the twelve other monthly payments. The system for the 13th and 14th salaries is hard to fully grasp; it’s an added layer to an already complicated tax structure. Eliminating these special tax treatments and lowering taxes overall would make the system more transparent.

Adopting a Universal Savings Account. Broad-based income taxes are not neutral between saving and consumption. A system that is neutral between choices of savings and consumption taxes income one time and allows returns to savings to be tax-exempt. A universal savings account would allow individuals to save their after-tax earnings without facing an extra layer of tax on the gains to those savings.

Lowering Social Security Contributions. Payroll taxes, which finance pensions and social insurance programs, are a major contributor to the cost of labor, making up 36.2 percent of pre-tax labor costs. After important reforms to the social insurance system by the current government, including simplifications and spending cuts, a reduction in contribution levels is also in order. This would reduce the cost of labor, making Austria more competitive internationally, and let workers keep more of their income.

The above options would result in the following changes to Austria’s overall and individual tax ranking in the International Tax Competitiveness Index.

Consumption Taxes

Simplifying and Broadening the VAT Base. A well-designed VAT can be one of the more efficient ways for a government to raise revenue, but exemptions or special rates create distortions. Austria should continue to adopt reforms to its VAT that subject more categories of goods and services to the standard VAT rate rather than special rates. A broader tax base could allow for a lower standard rate.

Avoiding Burdensome New Taxes

Rejecting a Digital Services Tax. The current debate at the global level regarding the taxation of profits generated from intangible assets has led some countries to propose narrow taxes on revenues of certain businesses. Digital services taxes are inherently distortive and discriminatory, representing a significant departure from the principles of sound tax policy: simplicity, transparency, neutrality, and stability.

Source: Tax Policy – Opportunities for Pro-Growth Tax Reform in Austria

Taxpayers will file QBI deduction computation with IRS next year

by r Hampton | Feb 15, 2019 | Tax News

IRS Tax News – Taxpayers will file QBI deduction computation with IRS next year
The IRS posted a draft of a form that affected taxpayers will submit with their 2019 tax returns showing how they computed their qualified business income (QBI) deduction under Sec. 199A.
Source: IRS Tax News – Taxpayers will file QBI deduction computation with IRS next year

Virginia on the Verge of Approving Its First Local Option Sales Tax

by r Hampton | Feb 14, 2019 | Tax News

Tax Policy – Virginia on the Verge of Approving Its First Local Option Sales Tax

Virginia is on the verge of creating local option sales tax authority for precisely one jurisdiction, and it’s been flying completely under the radar. Halifax County, population 35,000, is about to upend Virginia’s sales tax system and potentially open the door to local option sales taxes across the Commonwealth.

There are already local sales taxes of a sort in Virginia. The state rate is 4.3 percent, with a mandatory 1.0 percent local add-on, administered by the state and disbursed to local governments. A further 0.7 percent is imposed in planning districts that meet certain criteria: a population of 1.5 million or more, at least 1.2 million vehicle registrations, and at least 15 million transit rides per year. That revenue is deposited into local transportation authority funds in the two planning districts which currently qualify, Northern Virginia and Hampton Roads.

A big shift came last year, when the legislature created a new 1.0 percent sales tax for the Historic Triangle, consisting of Williamsburg, James City County, and York County. It, perhaps, could be said to lay the groundwork for what Halifax County is now seeking.

The 1 percent statewide add-on, though distributed to local governments, is not meaningfully local. The 0.7 percent planning district add-on and the 1 percent levy for the Historic Triangle, while local, are not optional. And no local government currently has the authority to impose its own local option sales tax. That, however, would change under HB 1634, which passed the House 74-23 and reported from the Senate Finance Committee on a 9-4 vote with one abstention.

As introduced, the bill would give Halifax County the option of imposing a local sales tax of up to 2 percent. A Senate committee amendment reduced the maximum rate to 1 percent, a discrepancy that would have to be taken up by the House should the bill pass the Senate in that form. Whatever the final rate authorization, the bill seems to be well on its way to passage—and it’s attracted almost no notice.

The tax authority of one small county in Southside Virginia might not seem that pressing an issue, but its consequence could be considerable. If Halifax County can impose its own local sales tax, why not everyone else? (As a Dillon Rule state, localities would still have to rely on the General Assembly to grant them this authority, collectively or individually.)

The Halifax County sales tax is intended to fund the construction of a new high school, no doubt a worthy cause, but it represents a major change in tax policy in Virginia. And with a county property tax rate of 4.8 mills on fair market value, it’s not as if Halifax is maxing out its existing tax authority. By contrast, the rate in Fairfax County, a Northern Virginia jurisdiction, is 11.5 mills, and in Richmond City it’s 12 mills. In fact, Halifax County enjoys some of the lowest effective rates on real property in the Commonwealth. If this is the foot in the door for a local option sales tax, saying no to other localities won’t be easy.

Local sales taxes have their place, and this isn’t the first time they’ve been discussed in Virginia. In the past, however, they’ve generally been talked about in terms of a potential grand bargain to eliminate other, less competitive local taxes (like the BPOL, a local gross receipts tax). With HB 1634, Virginia is on the verge of embracing local option sales taxes, not as a considered alternative to other existing taxes, but as just another revenue option for which local governments can petition Richmond.

Source: Tax Policy – Virginia on the Verge of Approving Its First Local Option Sales Tax

Ready to go on BEPS 2.0?

by r Hampton | Feb 14, 2019 | Tax News

Tax Policy – Ready to go on BEPS 2.0?

Yesterday, the Organisation for Economic Co-operation and Development (OECD) released a consultation document in connection with its continuing efforts under the Base Erosion and Profit Shifting (BEPS) project Action 1 to address the challenges of taxation in the digitalizing economy. The document provides an outline of proposals that the Inclusive Framework (IF) on BEPS (a group of 128 countries) is considering for ways to change international tax rules. This consultation document allows interested parties an opportunity to provide feedback on the policies until March 1. A public consultation on these policies will be held in Paris from March 13-14.

The policy options outlined in the document are motivated by multinational business models and their tax practices that can result in low or no tax liability due to the location of business profits in certain jurisdictions that apply either a very low or zero corporate tax rate. The options are grouped into two pillars and answer two separate policy questions.

The first pillar includes policies to allocate more taxable profits to market countries relative to what results from the current system. The policy question for pillar one is, what profits should be taxable in a market country? If a digital services company has no employees, buildings, or equipment in a country, but has lots of sales generated through marketing efforts over the internet, what profits from those sales should be taxed in the market country? Pillar 1 is mainly, then, about reallocating the tax base among countries using different metrics and methods. The consultation document describes three alternatives that the IF is considering.

• Define the tax base for reallocation by measuring user contributions, then allocate that base to market countries with an allocation metric (potentially revenues).
• Define the tax base for reallocation by assessing marketing intangibles investment, then allocate that base to market countries with an allocation metric (potentially sales or revenues).
• Reallocate the tax base among countries based on a definition of significant economic presence and multi-factor formulary apportionment including sales, assets, employees, and (potentially) users.

The second pillar is a global anti-base erosion proposal that would set a minimum effective tax rate in response to a policy concern that profits from intangible assets are often subject to no or very low rates of taxation. The proposal follows the approach of the U.S. Global Intangible Low Tax Income (GILTI) policy that was part of the U.S. tax reform of 2017. Additionally, the proposal would include a tax on base-eroding payments. Together these would set a minimum tax on income of multinationals. Though the consultation document discusses the mechanics and some ramifications of these proposals, the actual minimum rate is not mentioned.

Pillar 1 Policies

User Contribution

The user contribution approach follows an argument made commonly by the UK government that users of digital services contribute significant value to digital firms and that value creation should give rise to taxing rights in the country that the users are located. The specific business models targeted by this approach are social media platforms, search engines, and online marketplaces. As an example, if a digital company has 100 million users located around the world, but with taxable presence in only the country where the firm is headquartered, this proposal would envision a method of allocating a portion of that company’s profits to the countries where the users are located. This calculation would require multiple assumptions about the value created by the users, and the consultation document admits that:

It could be argued that the value created by user contribution and engagement of users does not constitute value created by the business, and instead constitutes value created by third-parties, that are more akin to suppliers than employees, and are remunerated at arm’s length through the provision of a free service.

The document also notes that the proponents of this option dispute this argument.

Marketing Intangibles

The approach to reallocate taxing rights based on marketing intangibles follows a theme that the U.S. Treasury has been arguing recently. Instead of impacting a defined set of business models, this approach would impact a broad range of multinational businesses. Footnote 4 of the consultation document points out that “…marketing intangibles may include, for example, trademarks, trade names, customer lists, customer relationships, and proprietary market and customer data that is used or aids in marketing and selling goods or services to customers.”

The theory behind this approach is that businesses possess brands, customer lists, and customer relationships that are either developed directly in connection with a market or are valuable because of the market. Because of this, the option proposes to allocate some taxable income of multinationals to market countries based on the value derived in the market in the form of marketing intangibles. That tax base would then be divided among countries based on some metric like sales or revenues.

A drawback to this proposal as discussed in the document is that some marketing activities occur outside of market jurisdictions and apply to all sales of a business rather than being designed for specific sales in a specific market. Identifying marketing intangibles directly associated with a market (and resolving disputes over whether an intangible is particular to that market or in general) will likely create difficulties in administering a system that follows this proposal.

Significant Economic Presence

A third approach to allocating taxable income described in the consultation document is to define taxable nexus to include “significant economic presence.” Rather than a physical presence nexus standard where taxing rights might arise due to the presence of physical assets or employees in a jurisdiction, this approach would allocate taxing rights based on a broader set of non-physical items. According to the document, metrics for establishing significant economic presence could include:

• The existence of a user base and the associated data input
• The volume of digital content derived from the jurisdiction
• Billing and collection in local currency or with a local form of payment
• The maintenance of a website in a local language
• Responsibility for the final delivery of goods to customers or the provision by the enterprise of other support services such as after-sales service or repairs and maintenance
• Sustained marketing and sales promotion activities, either online or otherwise, to attract customers

The allocation of profits to an entity with significant economic presence in a jurisdiction would be done in a formulaic manner with attention paid to the global profit rate of the company, and apportionment factors of sales, assets, employees, and (potentially) users.

Each of the Pillar 1 policies would result in a shifting of where and how much taxes are paid by a variety of multinational corporations. However, the details that are left to be worked out could significantly impact how taxing rights are ultimately allocated among countries.

Pillar 2

The second policy pillar in the consultation document is a global anti-base erosion proposal that would effectively set a minimum effective tax on profits of multinationals. The policy document assesses the current policy environment as risking “un-coordinated, unilateral action, both to attract more tax base and to protect existing tax base, with adverse consequences for all countries, large and small, developed and developing.” This is a glancing reference not only to tax competition as countries work to improve their tax policies and attract more business investment, but also to policies like digital services taxes and other base expansion regimes that tend toward double taxation. Without specifically mentioning a particular policy, the consultation document is direct in saying, “Unilateral measures…can lead to double taxation and may even result in new forms of protectionism.”

In this context, the document describes both an income inclusion rule and a tax on base-eroding payments. This seems to follow the pairing of the U.S. policies of GILTI and Base Erosion and Anti-Abuse Tax (BEAT) which are both worldwide minimum taxes on different types of income. The income inclusion rule would allow a jurisdiction to tax a foreign subsidiary if that subsidiary’s income is subject to a low effective tax rate. The tax on base-eroding payments would separately deny deductions or treaty relief unless those payments were subject to a minimum effective tax rate.

Altogether, these two proposals would set a floor on tax rates applied to the international income of companies. What is left out of the consultation document is what the minimum rate would be.

Conclusion

The OECD IF has a good deal more work to do to come to a clear, detailed proposal for reallocating taxing rights and applying a minimum tax on the income of multinationals. The consultation period will allow businesses and policy groups to analyze the current proposals from a number of angles including the economic and behavioral effects. The policy options described in the consultation document will impact business decisions in a variety of ways while raising the cost of capital and potentially hurting global capital and trade flows. The Tax Foundation will continue to review this document and will be following up with more analysis of the various options.

Source: Tax Policy – Ready to go on BEPS 2.0?

Wisconsin Tax Options: A Guide to Fair, Simple, Pro-Growth Reform

by r Hampton | Feb 13, 2019 | Tax News

Tax Policy – Wisconsin Tax Options: A Guide to Fair, Simple, Pro-Growth Reform

Executive Summary

Wisconsin has struggled with its tax system for decades. The state has always been marked by high property tax burdens, but in its effort to “fix” them has leaned on corporate and individual income taxes to a sizable degree as well.

Wisconsinites are often flummoxed by why taxes are so high here—government services have a good reputation, but it isn’t always clear they are worth the price tag. Still other taxpayers feel they should be grateful as at least fiscal matters aren’t in as dire of straits as in Illinois. In recent legislative sessions, the legislature and administration have made strides to improve the roughest edges of the state’s tax system, but comprehensive tax reform has not been at the top of the agenda. We believe it ought to be.

Over the last year, our team of economists and tax experts at the Tax Foundation joined with Wisconsin’s own Badger Institute to investigate what can be done about the state’s tax system. Over the course of 12 months, our team met with over 100 stakeholders from all walks of Wisconsin life, including small business owners, local government officials, trade associations, industry representatives, state legislators, accountants and tax attorneys, and everyday taxpayers. We also reviewed the history of the fiscal system, previous tax reform studies, and historical revenue and economic trends.

The result is this book, which is meant to help Wisconsin achieve the goal of true tax reform—reform that benefits all taxpayers and sets the state on a competitive path in the region and in the nation. It’s meant to start the conversation about what Wisconsin does well, but also what it could do better—by recognizing strengths, diagnosing challenges, and prescribing real, workable solutions.

During our meetings across Wisconsin, several themes emerged:

• Individual income tax rates are high. At 7.65 percent, Wisconsin’s top individual income tax rate is among the highest nationally and regionally, and taxpayers are aware. This issue is especially acute in Milwaukee, where firms must compete for top professional talent with other states, and taxes can influence relocation decisions.
• Corporate tax rates are high but are significantly abated by the Manufacturing and Agriculture Credit (MAC). This credit shields manufacturing and agriculture firms from much of the burden of the state’s high tax rates, but many industries do not have access to it, and this unequal treatment discourages diversified investment in the Badger State.
• For many Wisconsin taxpayers, property tax burdens are a persistent political concern, but attempts at fixes have been costly. While property taxes are a local revenue stream, the state government has tried all sorts of levers to ameliorate the property tax burden, including reimbursing local governments for property tax credits, providing property tax credits on state income tax returns, and offering direct subsidies to local governments in the form of a “shared revenue” program.
• Wisconsin is a member of the Streamlined Sales Tax Project and adheres to the U.S. Supreme Court’s standards for online sales tax collection. The state began remote sales tax collection in 2018 and now has the opportunity to apply this new revenue stream toward comprehensive tax reform.

Our conversations with Wisconsinites from all walks of life were instrumental in our development of four comprehensive tax reform options tailored to the Badger State’s unique strengths and challenges. Informing every page of this book are the insights and perspectives we gained from those who interact with Wisconsin’s tax system on a daily basis.

With these valuable perspectives at the forefront of our minds, we undertook this project as an independent national organization familiar with tax developments in many states, with the view that tax systems should adhere to sound economic principles, including simplicity, transparency, neutrality, and stability. Positioning Wisconsin for the future means creating a tax code that can grow with the state, not hold it back. A tax code better aligned with growth, opportunity, and job creation is in the interest of all Wisconsinites.

While economic efficiency is only one lens through which to analyze a tax code, it is an important one. After all, there are many ways to generate a dollar of tax revenue, but some taxes are more harmful to the economy than others and should be mitigated wherever possible.

Major tax studies consistently find that taxes have a negative impact on economic growth, and that this impact varies across tax types and structures. Among major tax types, corporate income taxes tend to be the most harmful to economic growth, since they penalize capital investment, followed by individual income taxes, which impact individuals’ labor and savings decisions.[1] Property and consumption taxes are less harmful because ultimately, it is production, innovation, and entrepreneurial risk-taking that drive economic growth.[2] Within each of these taxes, moreover, the decisions states make— to carve out tax bases, incentivize or penalize certain economic decisions, or create or reduce complexity—have an effect as well. For example, Mullen and Williams (1994) found that higher marginal tax rates reduce gross state product growth.[3]

Each of the four comprehensive tax reform options presented in the pages ahead tackles Wisconsin’s tax dilemmas through a slightly different angle, but all four options present bold reforms and prioritize progress in key areas in which the state’s economic wellbeing is most at stake.

We hope that this book and its recommendations will provide useful information and observations for policymakers, journalists, and citizens in the Badger State as they evaluate the state’s fiscal system. We are thankful to the Wisconsinites who spent time with us talking about Wisconsin’s taxes. Without their input, this publication would have been far less rich and meaningful. We are also grateful to the Wisconsin Department of Revenue for providing data to assist in estimating the fiscal impact of our proposed reforms.

Our Objective

We hope these solutions guide the tax reform conversation in Wisconsin by providing a framework upon which legislators and citizens can make further decisions. Each “option” in the menu of choices we present is designed to ensure the state builds a tax system for a diversified economy and positions itself as a destination for investment, entrepreneurs, and talented individuals in the years ahead.

Menu of Tax Reform Options

Our menu of comprehensive tax reform options is designed to allow legislators and taxpayers to reimagine their tax system to build an economy for the long term. Each of these plans streamlines the tax system, removes or consolidates duplicative provisions, and positions Wisconsin for long-term growth. They are designed with economic growth in mind, consistent with the literature on the economic effects of different tax types and structures.[4] These plans are roughly revenue neutral, but if policymakers desire a net tax reduction or increase, rates can be dialed up or down accordingly.

Option A would transform Wisconsin’s income tax into a streamlined, simplified flat tax, balanced by modernizing and increasing the sales tax. These changes would align the state’s tax rates with competitor states, resembling changes enacted in the past decade in Indiana. It includes:

• A flat income tax rate of 4.82 percent
• A standard deduction that conforms with the new federal standard deduction created by the Tax Cuts and Jobs Act (TCJA), including elimination of Wisconsin’s sliding scale so that the standard deduction becomes available to all taxpayers regardless of income
• A repeal of the personal exemption
• A moderately broadened sales tax base with a statewide rate of 5.75 percent, slightly higher than it is today
• A slightly lower corporate income tax of 7 percent
• Improvement in Wisconsin’s ranking on our State Business Tax Climate Index from 32nd to 12th

Option B would recraft Wisconsin’s tax system in a similar fashion to state-level tax reforms in other states, simplifying and reducing income and business taxes while broadening the sales tax to match today’s economy. It includes:

• A consolidated income tax structure with rates of 4, 5, and 6.8 percent at thresholds of $0, $10,000, and $40,000
• Conformity with the generous new federal standard deduction
• A repeal of the personal exemption
• Moderate sales tax base broadening at the current sales tax rate of 5 percent
• A reduction in the corporate income tax rate to 4.6 percent
• Improvement in Wisconsin’s ranking on our State Business Tax Climate Index from 32nd to 14th

Option C would set Wisconsin apart as the only state in the region with no corporate income tax, making the state stand out as one of the few with no taxes on investment and job creation. Income tax rates are consolidated and reduced while the sales tax is broadened at the current rate. It includes:

• A full repeal of the corporate income tax, one of the biggest impediments to growth in the Badger State
• Large sales tax base broadening paired with a slightly higher sales tax rate of 5.2 percent
• A consolidated income tax structure with rates of 4, 5, and 6.8 percent at thresholds of $0, $10,000, and $40,000
• Conformity with the generous new federal standard deduction
• A repeal of the personal exemption
• Substantial improvement in Wisconsin’s ranking on our State Business Tax Climate Index from 32nd to 6th

Option D simplifies and stabilizes Wisconsin’s existing tax system, broadening bases and adopting growth-friendly reforms while retaining progressivity, reducing business taxes, and keeping the current sales tax rate. It includes:

• A graduated individual income tax with rates of 4, 5, and 7.5 percent at thresholds of $0, $20,000, and $150,000
• Elimination of the marriage penalty in the standard deduction but retention of the sliding scale as it exists under current law
• Retention of the current law personal exemption
• Moderate sales tax base broadening while maintaining the current 5 percent sales tax rate
• A reduction in the corporate income tax rate to 4 percent
• Improvement in Wisconsin’s ranking on our State Business Tax Climate Index from 32nd to 14th

Improvements Included in All Options

In addition to the specific changes listed above, Options A, B, C, and D each include the following structural improvements to Wisconsin’s tax code, designed to move to more neutral treatment of business and individual activities while improving the state’s competitiveness in the region and nation:

Individual Income Tax

• Repeal the state’s marriage penalty by doubling bracket widths for married couples and repealing the married couple credit
• Repeal the itemized deductions credit, as a more generous standard deduction available to all taxpayers (in Options A, B, and C) will reduce dependency on this credit

Corporate Income Tax

• Conform to the TCJA’s new full expensing allowances under Internal Revenue Code (IRC) Sec. 168(k)
• Repeal the 3 percent surcharge levied on top of the corporate income tax and instead fund the Wisconsin Economic Development Corporation (WEDC) through the General Fund
• Conform with new federal standards for treatment of net operating losses (NOLs) under the TCJA
• Eliminate the throwback rule in the corporate income tax Sales Tax

Sales Tax

• Pursue sales tax base expansion (as detailed above and in Chapter 5)
• Share revenues from local flow-down of state base expansion between counties and municipalities
• Use revenue from the new online sales tax Supreme Court ruling to help pay for comprehensive reforms

Each of our reform solutions would improve Wisconsin’s performance on our State Business Tax Climate Index overall and in the corporate tax, individual income tax, and sales tax components.

Other Important Considerations

• Continue toward repeal of taxes on tangible personal property
• Allow property tax limits to continue working
• Consider tolling of Wisconsin’s highways
• Repeal minimum markup law, which drives up gas prices
• Reform the state’s unemployment insurance tax system

Above is a brief excerpt from Wisconsin Tax Options: A Guide to Fair, Simple, Pro-Growth Reform. To download our full reform guide, click the link below.

Download The Full Book

Notes

[1] Jens Arnold, Bert Brys, Christopher Heady, Åsa Johannsson, Cyrille Schwellnus, and Laura Vartia, “Tax Policy for Economic Recovery and Growth,” The Economic Journal 121, no. 550 (February 2011).

[2] See William McBride, “What is the Evidence on Taxes and Growth?” Tax Foundation, Dec. 18, 2012, https://taxfoundation.org/what-evidence-taxes-and-growth.

[3] John K. Mullen and Martin Williams, “Marginal Tax Rates and State Economic Growth,” Regional Science and Urban Economics 24, no. 6 (December 1994).

[4] Karel Mertens and Morten Ravn, “The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States,” American Economic Review 103:4 (June 2013). 

Source: Tax Policy – Wisconsin Tax Options: A Guide to Fair, Simple, Pro-Growth Reform