1. Who Pays Taxes in Wisconsin? A Study of Tax Burden, Tax Year 2001 Wisconsin Department of Revenue January 19, 2005

2. What is tax burden? Why is it important? Who is legally liable for a tax is not always the person who bears the burden of the tax. Tax Impact = household or business that is legally liable to pay the tax. Tax Incidence = household that ultimately pays the tax Tax Burden = Taxes as a % of income The purpose of a tax burden study is to assess the overall progressivity of state and local taxes in Wisconsin.

3. Measuring Tax Incidence Vertical Equity – do wealthier households pay a larger share of their income in taxes than poorer households? Progressive Regressive Proportional Horizontal Equity – do households with the same ability to pay face the same tax burden?

4. Methodology for Studying Tax Burden Estimates distribution of $15.1 billion in 2001 taxes across 2.43 million households –Taxes account for 88% of all state and local taxes collected in 2001 –Households include tax filers and non-filers –Income includes taxable and non-taxable sources Taxes Analyzed Include : –Property Tax (41%) –Individual Income Tax (29%) –Sales Tax (25%) –Corporate Income and Franchise (2%) –Utility Taxes (2%)

5. Methodology (cont.) For most taxes, the impact=incidence, i.e., the household is unable to shift the tax to others. For business taxes, three sets of assumptions used to capture the full range of shifting possibilities: –Regressive: all business taxes shifted; business owner bears none of the burden –Progressive: business owners bear full burden –Plausible: detailed analysis by business sector

6. Individual Income Taxes Income taxes were progressive across all income levels: –Poorest 20% of households received a refund due to the earned income tax credit. –Highest-income households paid 5.3% in income taxes

7. Sales Taxes 67% of sales tax initially paid by consumers, 33% paid by businesses Sales tax regressive across all household groups : –Poorest households paid between 3.6% and 4.4% of income on sales tax, with 3.5% of their income going to sales taxes paid on their direct purchases (the rest resulting from shifting) –Top 1% of households paid between 1.5% and 1.9%

8. Corporate Income & Franchise Tax –Roughly proportional for all but the highest-income taxpayers. –Minor effect due to low effective tax rates (.15%). –64% of the corporate income tax is exported – paid by non- residents (business owners and consumers).

9. Utility Tax Residential users estimated to pay 42% of total; business users 58% of total 2001 utility taxes Slightly regressive but small burden across households – poorest households paid.18% while highest-income households paid.10% of income in utility taxes.

10. Property Taxes: Before and After Refundable Credits Property tax accounted for largest tax burden for 90% of households; property tax on housing accounted for 85% of total property tax Homestead, farmland tax credits effectively reduced property tax for lowest 20% of households (from 7% to 5.3%) Even with credits, property tax is regressive with poorest households paying higher share of income than higher-income households. Homestead participation is low – estimated that 43% of qualifying households claimed the credit

11. Bottom Line: Total Taxes Overall, Wisconsin’s system of state and local taxation is proportional to slightly progressive for 99% of Wisconsin households. The progressive nature of the individual income tax makes up for the regressive nature of the property and sales taxes. Business taxes have little effect on overall picture.

12. The Federal Offset Effect –Federal law allows a personal income tax deduction for certain state and local taxes paid. Thus, part of the burden of state and local taxes are, in effect, exported to the federal government for those Wisconsin tax filers who itemize their deductions for federal tax purposes. –The value of the deduction depends on the state and local taxes paid and the effective marginal federal tax rate. –Since the federal marginal income tax rates are progressive, the tax benefit of itemized deductions increases with income. Since higher income households receive a greater reduction in their state tax burden, the federal offset has a regressive influence on the state tax system.

13. The Federal Offset Effect on Incidence of Total Wisconsin State and Local Taxes Federal offset for state and local taxes - $1 billion in 2001 Before the offset, total state and local taxes were slightly progressive for 99% of households. After the offset, taxes were progressive for 60% of households (income below $44,100), proportional for the next 30% (income betw. $44,100-$93,400), regressive for higher income.

14. Conclusions Since few major changes have occurred in WI tax law, the study reflects Wisconsin’s current tax structure: –Overall, the Wisconsin tax structure is slightly progressive to proportional for 90% of Wisconsin households, regardless of shifting assumptions. –Sales and utility taxes are regressive across all income groups. –Corporate income and franchise tax is roughly proportional, and the burden is small. –Individual income tax is progressive across all income groups. –Property tax is regressive across income groups.

15. Conclusions (cont.) Refundable tax credits significantly increase the progressivity of the WI tax structure: Earned income tax credit enhances progressivity of income tax Homestead tax credit reduces regressivity of property tax Homestead credit participation is low Federal offset reduces WI tax burden by $1 billion but has regressive influence on tax structure since it disproportionately benefits higher-income households With modification, the tax incidence model can be used to evaluate the distributional aspects of prospective tax law changes and initiatives

16. END OF PRESENTATION