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OPINION - What to do with the surplus

by Chris Conley

NEWS BLOG (WSAU) Wisconsin has a $911-million surplus. And now there’s a feeding frenzy in Madison on how to spend it. Some of the ideas are good; others not so good.

Here’s what I’d propose:

First, the state has two programs that are running deficits. Erasing that red ink would cost about 10-percent of the surplus. The state’s share of medicaid payments are about $80-million short, and the welfare-to-work program has a shortfall of $12-million. Both should be taken care of, with an important caveat: this should be a one-time budget repair, not a permanent increase for these programs. These programs should be reformed so they stay within their budgets in the 2015 budget cycle.

This still leaves a surplus of more than $800-million. Scott Walker has already hinted that most of the money will be given back to taxpayers in the form of property tax and income tax relief. The governor’s line that “it’s the people’s money, and I think we should give it back to them” is focus-group tested and is a winning position. But it may not be the best choice.

Governor Walker has been thinking about doing away with the state income tax. It would make him a conservative hero, and would be a fabulous launching pad for his presidential campaign. I think this money should go into a transition fund, easing the way from an income-tax state to a sales-tax state. Here’s the underlying issue: the income tax is a more stable source of revenue than the sales tax. (You pay income tax unless you’re fired from your job... so as long as you're working, you're paying the tax; but you generate sales tax only when you buy things -- and the purchase of big ticket items swings wildly based on how you feel about the economy. So in hard economic times, sales tax revenue tends to drop much faster than the income tax.)

So what would a transition fund look like? For a sales-tax to income-tax transition to be revenue neutral the sales tax would have to climb to a politically unfeasible 13.5%. Suppose the governor proposes eliminating the income tax to be replaced with a 7.5% sales tax. The $800-million in the transition fund would be divided into thirds, and could be used in 2015, 2016, and 2017 to cover up to $235-million in shortfalls that the sales tax revenue might not cover. In theory, during those three years the state’s economy would grow to the point where a 7.5% sales tax would be sustainable. And it should be… a family that earns $50,000 would save about $2,400 in state income taxes. If you get paid bi-weekly, you'd have $100 extra in each paycheck. Giving most families a “raise” of that level would stimulate a tremendous amount of consumer spending. It would give the sales tax transition a viable foothold.

I'd make the case that you won’t get the instant gratification of a tax cut this year, but you'll get the long-term benefit of living in an income-tax-free state down the road.

There are some ideas that I don’t like. “Give the money to the schools?” No. Most schools were made whole via cost savings under Act 10. School districts that didn’t take advantage of the Act 10 savings should not expect to be bailed out because the state suddenly has a surplus. “Use it to repair our crumbling infrastructure.” Well, first of all, nothing is crumbling in Wisconsin. We already have a dedicated fund for road work from our gas tax. The highway lobby should not get to double-dip from the general fund. “Set up a disaster relief fund for tornadoes and storms.” Interesting idea, but there’s a problem. Most natural disaster damage is covered by insurance. If the state sets aside money to cover those losses, businesses and homeowners will be willing to accept more risk and carry less insurance in case a disaster strikes.

This is the people’s money. Someway, somehow it should flow back to the taxpayers. And our governor deserves credit for turning Jim Doyle-deficits into Scott Walker-surpluses.

Chris Conley

Image: US $100 bills, Reuters, via wsau.com