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Q & A: Tax Cuts Worsening Wisconsin’s Budget Problems
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Nick Johnson, Vice President for State Fiscal Policy, discusses the budget situation in Wisconsin:
Nick, Wisconsin has been getting quite a bit of national press lately because of its governor’s proposal to strip many public workers of collective bargaining rights. The debate there is centered on the state’s budget. What’s going on with it?
Wisconsin, like just about every other state, is facing significant budget problems. This is because the recession has hit states really hard and caused a record drop in revenues. So states are really struggling to find the resources that they need to maintain quality schools, safe communities, health care, and other things that residents really want and need.
You’ve also pointed out the role of tax cuts in widening the state’s budgets problems and suggest that merits a close look.
Yes, that’s right. Earlier this year, Wisconsin enacted a package of tax cuts that actually worsen the budget gap for the upcoming two-year fiscal period in Wisconsin. In addition, Governor Walker is expected to announce further tax cuts, perhaps as soon as today, when he releases his budget for the upcoming period. During the campaign he proposed repealing the state’s corporate income tax entirely. Repealing the state’s corporate income tax would make the state’s budget picture a whole lot worse even than it already is.
Proponents of corporate tax cuts say they boost economic growth and corporate investment. Would Governor Walker’s proposed cuts be good for Wisconsin’s economy?
The evidence does not support that argument. Here’s why: states have to balance their budget. So the revenue that states lose from say, corporate tax cuts, has to be made up for by greater cuts in public services. The services that states provide, education, health care, public safety, transportation, are critical to, not only quality of life, but also to making this state attractive to businesses that want to invest and grow. Every dollar that you cut out of education, because of a corporate tax cut, is a dollar that can’t be spent on creating the high quality, 21st century workforce that we know, from business executives, is what they really need.
There’s another issue with corporate income tax cuts. A lot of the benefit from a corporate income tax cut will go to multi-state corporations and there’s no guarantee at all that they will spend that money in-state. Much of it could go to out of state shareholders, or to increase their investments in other states. So from a state perspective, it’s particularly not helpful to cut corporate taxes.
And the reality is that in most states corporate income taxes make up too small a share of overall state and local taxes to really affect corporate investment decisions in the long run.
So, what can Wisconsin do to boost its future prosperity and address its financial problems?
One of the things that Wisconsin can do is try and bring back some of the tax revenue that’s been lost due to the recession by taking a more balanced approach to its budget and looking at the tax code and figuring out ways to get more revenue out of existing taxes. For instance, by closing loopholes, eliminating tax deductions, tax credits. These are things Wisconsin did in 2009 to bring its budget back into balance then and could do similar sorts of things at this time.
The other thing that’s really important for Wisconsin to do is not to throw the baby out with the bath water, not to make cuts in areas like education and healthcare that are essential for a strong recovery and long-term prosperity.