NEWS BLOG (WSAU)  The Walker Administration is talking behind the scenes about eliminating the state income tax. It would be offset with an increase in the state sales tax. The proposal is revenue-neutral if the sale tax rises from 5-cents to 13-cents.

This is the classic shift to a consumption tax. We pay when we consume something (by making a purchase), instead of when we create something (through or work and labor).

There’s nothing wrong with the change – but there is one challenge. State government needs to recognize what it is, and how to deal with it. Then the proposal gets my ‘green-light’.

Sales tax revenue swings wildly from week-to-week and month-to-month, whereas the income tax doesn’t. There’s a psychological component to making purchases. When people aren’t feeling good about the economy, they don’t buy as much. If I think the economy is lousy and my hours might be cut back at work, I may not buy a new computer. I’ll hold off on remodeling my kitchen or buying a new car if I don’t feel financially secure. The most stable purchases – food – is generally exempt from sales tax. The big-ticket items, which bring in the most sales tax, ride up and down on the waves of consumer sentiment and the overall economy.

The income tax tends to be a more-stable revenue stream. Either you’re working or you’re not. Indeed income tax revenue does go down when unemployment is high, but the tax collection hinges on only one event: whether you’re hired or fired.

So, under a sales tax model there will be times when state government will be flush with cash and other times when the treasury will be bare. The solution: the state needs a larger rainy day fund, and the disciple not to use it for unnecessary spending. Government has a mixed record on things like that. If we can get that level of fiscal discipline from our leaders, there’s no reason why Wisconsin’s income tax can’t be thrown on the scrap heap.

Chris Conley
2.6.13