The Fallacy in Government Budgeting

For many years, advocates of streamlining government have suggested that government should operate like a business, using phrases like “government should not spend money that it does not have.”  While such phrases may sound appealing, these same business oriented advocates tend to pick and choose which parts of government they think should operate like a business to suit their policy goals, instead of actually applying sound business principles to all aspects of government.

At the state level, the most obvious example of the diametrically opposed methods of budgeting is how most states budget for roads versus how they budget for schools. Not only do most states budget as much road money as road builders request for both new projects and repairs, but specific projects are then put out to bid and states award the contracts based on the amount the road builders claim it will cost to perform the work requested.  This is how business typically works.  A business wants to buy a product or service.  It examines the cost, determines if it has the money, and pays the required cost if it has the money.  Some are so concerned about keeping road money sacrosanct that in Wisconsin, they are moving closer to a Constitutional Amendment to preserve the Transportation Fund from being used for anything other than transportation projects.

When budgeting for education, on the other hand, absolutely no serious consideration is given to how much it costs to educate children properly.  Rather, a pure political decision is made about how much money government is willing to spend on educating children, and then school districts are told to produce high achieving students without any consideration about whether the funding is sufficient to accomplish the desired goal.

Tonight, Governor Walker will announce a biennial budget proposal that calls for vastly increased per pupil funding for children in voucher schools vs. public schools.

The governor’s proposed budget would increase state aid to kindergarten-through-eighth-grade voucher schools in the 2014-’15 school year to $7,050 per pupil from $6,442, an increase of $608 per pupil, or 9.4%…Walker is also rejecting an increase in the state-imposed cap in revenues that public schools are allowed to raise from both the state and local property-tax payers. Before Walker’s tenure, the cap had gone up around $200-plus most years. Two years ago, Walker cut the cap by 5.5%, or about $550 per student.

Leaving aside the issue of the lack of any documented improved educational performance in voucher schools, the budgeting question is this: why is there a complete lack of budgeting analysis about how much it costs to achieve the clearly identified state and federal education standards that are written into law?

There is a method for doing this kind of education budgeting.  It is called, “Adequacy.”  The Wisconsin Alliance for Excellent Schools (WAES) started promoting adequacy funding as far back as 2003.  However, even WAES stopped promoting it as it has failed to gain political traction.  In many states, the failure to adequately budget for successful educational outcomes has resulted in litigation, which has had mixed results.

An additional disparity between business based budgeting and both school and human services budgeting is that business would never appropriately refuse to raise revenue.  No business can survive without bringing in revenue.  Yet, ever since the Reagan taxpayer revolution, those who want to reduce spending on education and human services believe it appropriate to take the government revenue side of the equation off the table.  They should be challenged on business grounds, i.e., if they were running a business would they take revenue off the table?

Ultimately, whether in business or in government, if you want a good product that produces a good result, you have to pay an appropriate price for it.  If that means raising revenue, then raise it in a responsible manner as I described in my prior tax reform blog posts:

It is time to have honest business like budgeting when educating our children instead of using them as political pawns.

For more information on how I can help you accomplish effective, progressive systems change e-mail Jeff Spitzer-Resnick or visit Systems Change Consulting.


Time to Reform State Taxes–Pt. 3: Income Tax Reform

In my previous 2 blog posts, I suggested reforms in state sales tax exemptions which could bring in $1.9 billion in revenue to the State of Wisconsin without raising sales tax rates, and a significant reform to property tax structure to blend those taxes with income to recognize the modern reality that property wealth does not equal actual wealth.  Today’s post will describe a common sense rebalancing of Wisconsin’s state income tax structure, which is long overdue.

While on the face of it, the fact that Wisconsin has 5 income tax brackets may seem like it has a progressive system of taxation, a closer look reveals otherwise. As you can see these brackets are very close together, particularly for all but the very lowest income bracket.

Tax Bracket (Single)
Tax Bracket (Couple) Marginal Tax Rate
$0+ $0+ 4.60%
$10,180+ $13,580+ 6.15%
$20,360+ $27,150+ 6.50%
$152,740+ $203,650+ 6.75%
$224,210+ $298,940+ 7.75%

Thus, an individual, such as Wisconsin’s richest individual, Judy Faulkner, founder of Epic Systems, currently ranked #285 on Forbes Magazine’s list of the 400 wealthiest Americans with a net worth of $1.7 billion, would pay just a slightly higher 1.25% more than one of her lower paid employees, who may clean her office, and may only make $21,000/year (roughly $10.50/hr).

Sadly, rather than making this system more progressive, Wisconsin’s legislature exacerbated the problem by granting huge capital gains tax exemptions in the current budget, which predominantly benefit Wisconsin’s wealthiest citizens.

According to [a] Legislative Fiscal Bureau report, taxpayers with incomes over $150,000 represented only 10 percent of 2009 state tax filers but claimed 52 percent of the capital gains exclusions.

The consequences of this exemption for Wisconsin’s budget are dire.

The Legislative Fiscal Bureau estimates the new exemptions will reduce revenues by $16.1 million in 2011-12 and $20.2 million in 2012-13. Once fully phased in by 2016, tax collections would fall by over $100 million annually, the bureau estimates.

An examination of other states’ income tax brackets and rates reveals that Wisconsin is not the only state with a barely progressive rate.  There are 7 states which have no income tax, and 7 other states with a completely flat income tax rate, as well as 2 states which have a flat rate on dividends and interest income only. California, Hawaii, Vermont and New York have the most progressive income tax rates with the widest variation and largest number of brackets.  Other states fall somewhere in between.

While there is no magic formula for calculating fair income taxation brackets and rates, just as the last Presidential election was a referendum which determined that the American people recognized that the wealthiest Americans should pay a higher rate of taxes than the rest of us, so too should this same doctrine apply at the state level.

The time for tax fairness is now.  The question remains whether elected officials in Wisconsin as well as other state politicians whose states have flat or barely progressive income tax systems will do so.

For more information on how I can help you accomplish effective, progressive systems change e-mail Jeff Spitzer-Resnick or visit Systems Change Consulting.

Time to Reform State Taxes–Pt. 2: Property Tax Reform

As news leaks out about Gov. Walker’s desire to cut Wisconsin income taxes, it is remarkable that there has been an absence of serious discussion about property tax reform for over 2 decades.  This is surprising given that property tax revenue is the single largest source of tax revenue in Wisconsin and many other states, providing critical funding for schools and other municipal and county based services, including police, fire, and public health services.

Former Gov. Tommy Thompson recognized that there was a property tax problem in Wisconsin when he attempted to put a lid on property taxes over 20 years ago by restructuring how Wisconsin funds schools and local services, instituting revenue caps, which deny school boards and local governmental bodies the power to raise sufficient revenue to fund critical programs.  At the time this system was instituted, the trade-off was that state government pledged to provide much greater support for schools (2/3 funding) and other local services.  Unfortunately, his successor, Gov. Jim Doyle, reneged on that pledge of more state support, and then in Wisconsin’s current budget, Gov. Scott Walker went one step further by reducing the revenue limits drastically (amounting to an $800 cut to schools alone in revenue authority on top of an $800 million state funding cut).

But that is only one side of the story.  What about the people who pay property taxes?  Are they being taxed fairly?

The simple answer is that property taxes are the most regressive tax that Wisconsin and most other states use.  This is for one basic reason.  Unlike centuries ago when property wealth virtually always correlated very closely with income wealth, we no longer live in such a world.  Many examples abound, including:

  • The elderly homeowner who has fully paid off her home, but the value has risen tremendously in the 50 years since she built the home, and now her only earnings are from Social Security.
  • The divorcee, whose divorce agreement left her with a home for which she can make her mortgage payments, but after 5 years of rising property values, she can no longer afford to stay in her home due to rising property taxes.
  • The formerly comfortable middle class family, whose primary bread winner lost his job just before the $7,500 property tax bill came due.

Most of us, myself included, have lost one or more neighbors such as these.  This creates unstable neighborhoods, one of the hallmarks that works against the creation of safe and sustainable places to raise healthy, happy and well educated children.

The problem, of course, is that while virtually everyone agrees that Wisconsin’s property taxes are too high, almost no politicians are willing to make the hard decision about how to replace the revenue which would be lost if we reduced property taxes for those whose incomes clearly cannot afford them.

The answer is actually quite simple.  We can make state property taxes equitable by adjusting them up or down based on the property owner’s income. Of course, many variations could be instituted, including the number of adjustment categories and the percentage of adjustment.  However, any such system can be aligned to be revenue neutral to taxpayers. Moreover, Wisconsin’s system of shared revenue which moves property tax revenue from property rich tax districts to property poor districts can continue to be utilized to provide equity in such a system so that property/income rich neighborhoods contribute to the ability of less wealthy neighborhoods’ ability to fund schools and local services.

Here is an example of how a simple 3 tier property tax system with income adjustments would work:

  • Betty is a 78 year old widow who has lived in the mid-sized 3 bedroom home she and her husband built 45 years ago for $12,000.  She lives in a safe middle class neighborhood with good schools, and her home, though fully paid for, is now valued at $325,000.  That valuation results in a $7,000 property tax liability, which she cannot afford because her only income is her monthly $700 Social Security check.  She will need to sell her home once she has exhausted all her savings by the end of this year because she cannot afford her property taxes. Under my proposal, taxpayers with Adjusted Gross Incomes under $50,000/year would have their property taxes reduced by 50%, reducing Betty’s property taxes to a manageable $3,500.
  • Joe and Tammy have the exact same property value and tax situation, but they both work and each earn $60,000/year for a total of $120,000/year in family income.  Under my proposal, taxpayers with Adjusted Gross Incomes between $50,000-$250,000 would receive no adjustment since those with Joe and Tammy’s income while certainly not wealthy, can afford to pay their property taxes.
  • Sally and Don live in a house with the same property value, but they both hold very high paying jobs, each earning $200,000/year.  Under my proposal, their property taxes would increase 50%, to $10,500, which they can still afford, and which offsets Betty’s discounted property taxes.  Keep in mind that their property tax payment is fully deductible under federal tax law so they will actually receive a larger federal tax deduction under this plan.

In sum, while property taxes are indeed too high, they remain a critical component to funding critical local programs and services, including public education, so eliminating them is not really an option without a steep hike in income or other taxes.  By making them equitable as I have suggested, we will allow more people to remain in their homes, helping to maintain and create stable neighborhoods, without any loss of revenue.

Now the question is whether political leaders will have the courage to adopt real Property Tax Reform, such as the system I have proposed.

For more information on how I can help you accomplish effective, progressive systems change e-mail Jeff Spitzer-Resnick or visit Systems Change Consulting.

Time to Reform State Taxes–Pt. 1: Sales Tax Exemptions

With the constant fiscal crisis in Washington, all eyes have been focused on federal taxes.  Unfortunately, that has taken attention away from very serious inequities in our state system of taxation.  Since I am most familiar Wisconsin taxes, I will focus on how Wisconsin needs to reform its system of taxation in order to treat its citizens fairly and fund the services its citizens need most.  As so much reform is needed, I will divide this topic into 3 separate blog posts: Sales Tax Exemptions; Reforming Property Taxes; & Income Tax rates.

It is important to look at Sales Tax exemptions first, since revenue from Sales Taxes represents the largest single source of Wisconsin’s revenue, by far.  The latest data shows that Sales Tax collections represented over 47% of Wisconsin’s revenue. Given Wisconsin’s heavy reliance on the Sales Tax, it is worth examining whether Wisconsin numerous special interest Sales Tax exemptions represent sound policy.

By law, every two years, the Wisconsin Dept. of Revenue must produce a Tax Exemption Device Summary.  While many tax exemptions, such as food and medicine, represent sound public policy, it is worth considering whether the following tax exemptions are worth maintaining at such great cost.

  • Newspapers, periodicals and shopper guides: $18.2 million
  • Caskets and burial vaults, and funeral services: $15.8 million
  • Tractors & Farm Machinery: $35.5 million
  • Personal Property and Supplies Used in Farming: $187.6 million
  • Fuel & Electricity Used in Farming: $28.9 million
  • Veterinary Services and Medicine: $28.4 million
  • Semen for Livestock Breeding: $3.4 million
  • Machinery & Equipment Used in Manufacturing: $190.8 million
  • Fuel & Electricity Used in Manufacturing: $87 million
  • Catalogs & Catalog Envelopes: $2.4 million
  • Trucks, tractors, busses and other vehicles sold to common carriers: $28.6 million
  • Motion Picture and TV Film and Advertising Materials: $15 million
  • Labor Input into Construction: $459 million
  • Trade-Ins and Lemon Law Refunds: $94.5 million
  • Beauty, Barber, Nail and other personal care services: $26 million
  • Dues Paid to Business Associations and Fraternal Organizations: $13.2 million
  • Health Clubs: $17.1 million
  • Legal Services: $114.5 million
  • Architectural, Engineering, Testing Laboratory and Surveying Services: $98.1 million
  • Accounting Services: $51.3 million
  • Business computer services: $148 million
  • Management, Consulting and Technical Services: $84.1 million
  • Scientific Research and Development Services: $35.8 million
  • Advertising: $64.6 million
  • Investigation and Security Services: $15.6 million
  • Commissions to Real Estate Brokers: $27.9 million
  • Repair of Real Property: $42.9 million
  • Janitorial Services: $24.5 million
  • Disinfecting and Exterminating: $3 million
  • Sewerage Services: $29 million

TOTAL VALUE OF THESE EXEMPTIONS=$1.99 billion, or significantly more than the $1.6 billion cut to public education in the current budget.

Please note that these are not all of Wisconsin’s Sales Tax exemptions, just those that I believe are worth a second look, especially when one considers that Wisconsin cut $1.6 billion out of its current public education budget.  While there may be merit to some of these sales tax exemptions, remember that it does not matter what your personal or business income is, the tax exemption exists for rich and poor alike, since sales taxes are regressive flat taxes.  Sadly, ever since the Reagan tax revolution, legislators of both parties are reluctant to take a serious look at the long history of special interest tax exemptions.

This list should cause Wisconsin citizens, legislators and the Governor to pause and consider whether it is in the public interest to exempt bull semen, hair extensions, health club dues, and yes, attorneys, architects and accounting fees paid largely by the wealthy from the category of taxes which funds virtually half of all Wisconsin government services.  I further suspect that a similar list exists in most States which also merits debate and examination. The time for that examination is NOW.

For more information on how I can help you accomplish effective, progressive systems change e-mail Jeff Spitzer-Resnick or visit Systems Change Consulting.