Wisconsin Budget Solution: Tax the Rich

You heard it here first: Tax the rich and solve budget shortfall

By Marc V. Levine Feb. 26, 2011 MJS Op-Ed

One of the most pernicious myths surrounding the Wisconsin budget showdown is Gov. Scott Walker’s claim that the state is “broke,” there is nothing to negotiate and the only solution is to mandate massive reductions in public employee compensation and to abolish their collective bargaining rights.

This is nonsense. Wisconsin has not gone into the red because of excessively generous pay and benefits negotiated by unions for state and local employees. Our deficit has grown because the Great Recession blew a hole in the state budget, as it did in virtually every state in the country.

Nor are excessively generous compensation packages for state employees holding back the recovery: Careful studies by the Economic Policy Institute as well as University of Wisconsin-Milwaukee economists Keith Bender and John Heywood show clearly that public-sector employees are less well-compensated than comparably educated and experienced private-sector workers in Wisconsin.

Most assuredly, Wisconsin isn’t “bankrupt” because public-sector unions here have the right to collective bargaining. There are 13 states with no collective bargaining rights for public workers; eight of them have larger budget shortfalls than does Wisconsin. In Texas, for example, a non-collective bargaining state whose low-tax, “open for business” economic policies are vaunted by the right, the state’s deficit as a percentage of the total budget is over twice that of Wisconsin’s.

Clearly, Walker is using the relatively modest fiscal strain facing Wisconsin as a pretext to roll back basic worker rights and undermine public employee unions as a political force. Moreover, beyond this indefensible demonization of public employees as the primary cause of the state’s budgetary shortfall, Walker’s plan makes no macroeconomic sense.

As Wisconsin struggles to recover from the Great Recession, an economic downturn propelled by lack of consumer demand, Walker intends to significantly reduce the purchasing power of 300,000 middle-class consumers and taxpayers. The negative ripple effects of this austerity and shrinking consumer spending will cost Wisconsin thousands of private-sector jobs and stifle the state’s economic recovery.

The immediate crisis, according to Walker, is a $137 million shortfall in the current biennial budget. “We’re broke; we don’t have the money,” says the governor, and only slashing the compensation and bargaining rights of public employees can get us through the crisis. (Let’s ignore for the moment the inconvenient fact for Walker’s “we’re broke” trope that at the same time he was slashing compensation for teachers, he was increasing the deficit by bestowing $117 million in business tax breaks.)

The reality, of course, is that Walker’s plan is not the only way to fill the $137 million gap; it is a policy choice which, to borrow from Warren Buffett, represents “class warfare . . . but it’s the rich class that’s making war, and we’re winning.” Rather than attacking the living standards of middle class teachers, prison guards and health care workers, Wisconsin policy-makers can easily close this budgetary gap – and reduce surging inequality in the state – by temporarily raising taxes on the superwealthy and corporations.

As economist Dean Baker points out, the tax increase “only needs to be temporary, since the state budget should be fine once the economy recovers.” Business tax cuts in Wisconsin in recent years have reduced the share of state revenues provided by corporate taxes to almost half the level of 20 years ago. By one measure, from the pro-corporate Council on State Taxation, our business tax burden ranks 12th-lowest in the country.

Moreover, as a study by the Institute for Wisconsin’s Future documented, Wisconsin corporations underpay state and local taxes by more than $1.3 billion annually: This is the difference between what businesses actually pay in state and local taxes and what they would be contributing if paying at the average national rate.

Clearly, stanching “corporate tax leakage” ought to be at the heart of any serious deficit reduction strategy in Wisconsin. Instead, Walker wants to further reduce corporate taxes. The accompanying chart illustrates how a modest temporary 1.5% income surcharge on Wisconsin’s superwealthy could generate over $168 million, easily filling the $137 million budgetary gap that Walker claims can only be met by eliminating collective bargaining. Ninety-nine percent of Wisconsin taxpayers would be unaffected by the surcharge; it would apply only to the richest 1% of Wisconsinites, and only on annual income above $260,000, with the largest amount raised from those making more than $1 million annually.

In short, contrary to the governor’s repeated claims, Wisconsin does have options. Walker has made a choice: He would rather mandate 8% compensation cuts on teachers and abolish collective bargaining than levy a temporary 1.5% income surcharge on the superwealthy. Walker’s choice, however, damages the state’s social fabric, contributes to growing inequality in the state, and harms our prospects for future economic prosperity. We can do better.

To be sure, Wisconsin still needs to manage a $3.6 billion deficit in the 2011-2013 budget cycle. But rather than trying to meet that challenge by attacking middle-class workers and by gutting spending on, say, public education, we would be better served by a balanced plan that makes spending cuts where they would be prudent, and raises revenues in ways that reduce inequality and are least damaging to the most vulnerable.

There’s been much rhetoric about the need for “shared sacrifice” and “belt tightening” to meet the state’s budgetary challenge; it’s time for reality to match some of that rhetoric and end the class warfare being waged against Wisconsin’s workers and middle class.

Marc V. Levine is professor of history, economic development, and urban studies at UWM and is founding director of the university’s Center for Economic Development.