Legislature should adopt permanent, pro-growth structural reform

Wisconsin should consider using some of its surplus revenue for expensing reform

CONTACT: Badger Institute President Mike Nichols, 262-389-8239 or [email protected] (mailto:[email protected])

By Katherine Loughead

Last month, the Wisconsin Department of Revenue released data ([link removed]) showing the state’s general fund tax collections for fiscal year (FY) 2019 were up nearly $1.2 billion, or 7.4 percent, from FY 2018, and nearly $703 million higher than anticipated ([link removed]) when the state’s FY 2018-19 budget ([link removed]) was adopted.

As noted in a memo ([link removed]) from Wisconsin Revenue Secretary Peter Barca, much of this collections influx is attributable to a one-time phenomenon in which many businesses, where feasible, postponed earnings from 2017 until 2018 to take advantage of the new, lower federal corporate tax rate under the Tax Cuts and Jobs Act (TCJA). This contributed to a drop in state corporate tax collections in FY 2018 and an influx in collections in FY 2019, not just in Wisconsin, but across much of the country.

Some Revenue has already been dedicated to the Budget Stabilization Fund and Individual Income Tax Cuts
In any fiscal year in which actual tax collections exceed estimates, current Wisconsin law requires half the excess be deposited into the state’s budget stabilization fund to provide an important cushion for future recessions or other unanticipated revenue shortfalls. Notably, legislation enacted in 2017 ([link removed]) excludes from this calculation excess sales and use tax revenue attributable to the influx in online sales tax collections following the U.S. Supreme Court’s 2018 South Dakota v. Wayfair decision. That recurring revenue has since been dedicated to corresponding reductions to the state’s two lowest statutory marginal individual income tax rates.

As a result, an estimated $321.7 million will be sent to the budget stabilization fund for FY 2019, which will nearly double the fund’s
current balance ([link removed]) of $327.4 million. An additional $59.2 million in FY 2019 Wayfair revenue will be dedicated to downward adjustments to the two lowest marginal individual income tax rates for tax year 2019, as prescribed by 2019 Wisconsin Act 10 ([link removed]) .

Wisconsin Should Consider Dedicating Remaining Revenue to Expensing Reform

After these allocations to the budget stabilization fund and individual income tax rate reductions are made, the general fund is expected to have a balance of $74.05 million in undedicated funds. In the past, surplus revenues have sometimes been used to offer one-time tax cuts to Wisconsinites. With Wisconsin having the 15th highest ([link removed]) state tax collections per capita, it is understandable that policymakers would seek to return surplus revenue to taxpayers. It’s important to keep in mind, however, that strategic, permanent structural reforms–not temporary tax cuts–are the types of changes that foster long-term economic growth.

Our recent guide to tax reform in Wisconsin ([link removed]) outlines four approximately revenue-neutral options for comprehensive tax reform that rely on sales tax base broadening to bring down overall rates and significantly improve the state’s economic competitiveness. Short of comprehensive reform, however, there are still plenty of ways the state can make incremental improvements to its tax structure to increase the state’s attractiveness as a destination for investment in the Midwest region and in the nation at large.

One especially pro-growth reform would be to conform to Internal Revenue Code (IRC) Section 168(k), which allows investments in short-lived assets (machinery and equipment) to be fully claimed as an expense in the first year, rather than incrementally over the depreciable life of the asset. By removing a barrier that currently hinders investment, a full expensing provision would make it easier for businesses to purchase new machinery and equipment in the short-term, thus promoting growth and enhancing productivity over the medium- and long-term. Unofficial estimates from the Wisconsin Department of Revenue have indicated conformity with IRC Sec. 168(k) would carry modest short-term costs but that the fiscal effect would turn positive after a few short years. It is worth noting that the federal Section 168(k) expensing provision is
scheduled to phase out ([link removed]) between 2023 and 2027, so Wisconsin would be well-advised to decouple from the phase-out and simply provide full expensing on a permanent basis.

As of January 2019, 16 states (including neighboring Illinois)
conform to the federal provision ([link removed]) , thus allowing immediate expensing of short-lived assets at the state level. Three additional states (including neighboring Minnesota) conform to the federal provision with partial addbacks, allowing a given percentage of the bonus depreciation offered at the federal level.

Read the original post here ([link removed]) .

Katherine Loughead is a policy analyst with the Tax Foundation and is primary author of the 2019 Badger Institute Report "Wisconsin Tax Options ([link removed]) "

============================================================
We believe competitive free markets, limited government, private initiative and personal responsibility are essential to our democratic way of life. The Badger Institute is a nonprofit, 501(c)(3) tax-exempt organization and does not receive government funding. Our work is funded solely through tax-deductible gifts from foundations, companies and individuals. We appreciate your support.
** Contribute ([link removed])
** Facebook ([link removed])
** Twitter ([link removed])
** Website ([link removed])
Copyright © 2019 Badger Institute, All rights reserved.
You are receiving this email because you opted in via our website.

Our mailing address is:
Badger Institute
700 W. Virginia St., Suite 301
Milwaukee, Wi 53204
USA
Want to change how you receive these emails?
You can ** update your preferences ([link removed])
or ** unsubscribe from this list ([link removed])
.