Scott Walker’s Tax-Cut-Driven Economic Plan

After his 2011 election, Wisconsin Gov. Scott Walker aggressively pursued and helped pass a series of tax cuts in 2011, 2013, 2014 and 2015. His policies pushed the state into bad fiscal straits and there is no evidence that tax changes enacted under his leadership have had the positive impact on the state’s economy that he promised. In addition, Gov. Walker has hinted that he favors repealing state and federal income taxes, a move that would make the tax system substantially more regressive.

Record as Governor of Wisconsin

How did Wisconsin’s fiscal situation get so bad that it had to skip $100 million in debt payments earlier this year? The answer is Gov. Walker’s relentless push for ever more wasteful tax cuts.

When Gov. Walker took office in January 2011, Wisconsin faced a significant budget shortfall. The Center on Wisconsin Strategy and other public interest groups called his budget proposal a betrayal of Wisconsin values. The final legislation reduced the Earned Income Tax Credit (EITC), thus increasing taxes on the state’s poorest working families, and the budget capped growth of a property tax credit for low-income families. That budget also included an estimated $135 million in tax breaks in just one year, with these breaks set to become more costly year after year. These breaks took the form of a domestic production activities credit, two different capital gains tax breaks for the rich, and a variety of new sales tax exemptions, including for snowmaking and snow grooming equipment.

Earlier in the budget process, Walker had sought to repeal combined reporting, an important reform that requires companies in the state to report their income for tax purposes on the total profit of all their combined subsidiaries, regardless of the state in which they are located. Ultimately, the Governor was not able to repeal the provision, but lawmakers agreed to cut taxes on corporations by allowing them to carry forward losses and deduct their liability in future years, thus reducing their tax bills by an estimated $40 million annually.

In late 2013, the Governor notoriously toyed with the extremely regressive idea of eliminating the state’s income tax and increasing the regressive sales tax rate to compensate. ITEP crunched the numbers and found that the new state sales tax rate would have to be 13.5 percent to ensure a revenue neutral tax change. Ultimately, lawmakers put aside the income tax elimination plan for unspecified reasons.

His proposed budget for 2013-15 included a plan to cut the bottom three income tax rates. Lawmakers signed a tax cut proposal into law that reduced income tax rates and reduced the number of tax brackets from five to four. According to the Legislative Fiscal Bureau, these tax cuts cost $647.9 million over two years.

In October 2013, with an unexpected $100 million budget surplus, Gov. Walker signed a law that added $100 million in state aid to local school districts over the next two myears—which, due to the state’s strict local revenue limits, meant that local governments receiving the new aid were forced to reduce their property taxes dollar for dollar. This was a short-sighted approach to tax cutting because the forecasted $100 million surplus could be just a memory in future years, but the new state aid will be permanently on the books. As the Wisconsin Budget Project (WBP) points out, using a one-time budget surplus to fund a permanent property tax cut is a recipe for long-term fiscal difficulties.

Walker’s January 2014 budget proposal included yet another round of tax cuts. His proposal, which ultimately passed in March, included $537 million (over two years) in property and income tax cuts. He proposed the tax cuts as a way to “return the state’s surplus to the people who earned it.” The cuts included $404 million in across the board property tax cuts and $133 million in income tax cuts that resulted from lowering the bottom income tax rate from 4.4 to 4.0 percent and reducing the Alternative Minimum Tax.

Taken together, these three tax cut packages cut taxes for all income groups according to an ITEP analysis, but did not meaningfully change the state’s regressive tax system. Between 2011 and 2014, these cuts did however blow a $2 billion cumulative hole in the state’s budget.

The governor’s most recent budget, released in early 2015, proposed expanding a property tax credit and included deep cuts to K-12 education, higher education and conservation efforts. This year’s legislative session was especially contentious and there was much push back to his proposals. In fact, much of his proposed cuts to K-12 education were restored. Ultimately, the governor was able to pass about $262 million in additional annual cuts in revenue, including an increase in the school levy tax credit, increased school aid that required offsetting property tax cuts, the near elimination of the alternative minimum tax and an increase in the standard deduction.

The stated goal of Gov. Walker’s tax cuts is that they will help the state create jobs and lead to economic growth. The problem, however, is that this strategy has not worked out all that well. While his tax cuts have not delivered significant growth, they have forced the underfunding of the real long term drivers of economic growth like the state’s education system and infrastructure.

Approach to Federal Tax Reform

Unlike many of his rivals for the Republican nomination, Gov. Walker has not laid out any clear vision for how he would change the federal tax system as president. Talking broadly, Gov. Walker has outlined his admiration for President Ronald Reagan’s approach to taxes, which he says means lowering the tax rate and simplifying the tax code. In another interview, Gov. Walker said that he thought eliminating the federal income tax “sounds pretty tempting.” He did not however provide any sense of how he would fill in the $1.4 trillion dollar hole in the annual budget that such a move would create.

In talking about taxes on the campaign trail, Gov. Walker relates his strategy to that used by the department store Kohl’s, in which they lower the prices of goods in order to sell a higher volume of goods to consumers. He calls this strategy the “Kohl’s Curve” and believes that for the tax system it means we should lower the tax rate and expand the number of people who pay taxes. This new Kohl’s Curve is supposed to mirror the Laffer Curve, which has been used to promote failed tax-cutting economic policies throughout the country.