Wednesday, February 6, 2013

The wealthy would win big in state sales tax changes

Shift in sales tax would burden the poor and middle class

A lot of talk about increasing the sales tax in Wisconsin happened this week.

First, it was revealed Tuesday by Department of Administration head Mike Huebsch that Gov. Scott Walker had been toying around with the idea of raising the state’s sales tax, eliminating the income tax altogether in favor of a consumption rate of 13 percent. That would raise Wisconsin’s current sales tax by more than eight percentage points.

After word about this got out, Walker went on damage control, assuring everyone that his upcoming budget wouldn’t include such a hike.

But Walker didn’t outright say that such a plan wasn’t imminent. Indeed, his spokesman Cullen Werwie stated, “[Walker] will review the impact of tax policy on job growth in other states as he considers future reforms.”

Translation: it’s still on the table for the future.

With this little exchange still fresh in our minds, let’s examine how terrible an idea this change would actually be.

On earning revenue for the state, the burden would shift largely to the middle class and poor. The wealthy, on the other hand, would be given an enormous break. To put it in perspective, consider a family that has a combined yearly income of one million dollars. Currently, they pay about a 7.3 percent state income tax, amounting to about $73,000.

If the tax plan as proposed by Secretary Huebsch were to be played out, however, to reach that same revenue level, that millionaire family would have to spend more than $550,000 of its yearly income just to pay the same rate of taxation.

By most accounts, millionaires don’t spend their money, they save it. So it’s unlikely that anyone earning a million dollars is going to see the same tax rates under such a plan.

Compare that to what would happen to a family with modest earnings. A family with $30,000 in income in Wisconsin is currently taxed at a rate of about 2.5 percent or $760.

But unlike the millionaires, the couple that earns $30,000 would only need to spend about one-fifth of their income to breach their tax rates under a change to a “sales-tax-only” system as outlined by Huebsch.

In other words, once that couple earning $30,000 spends $5,850 in miscellaneous expenditures, their tax burden would be higher under the system Huebsch discussed than what it is now.

So what’s more likely: that a couple earning a million dollars per year is going to blow more than half of that income, thus sustaining their current tax rate under the 13 percent sales tax model? Or, that a couple earning $30,000 a year might spend a fifth of their income on expenditures that might get taxed, thereby increasing their tax burdens under such a proposal?

The answer should be obvious. The lower-income family is much more likely to spend a fifth of their income -- and thus bear a greater share of the tax burden -- than the wealthier family.

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