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Taxes and Spending

It is important to frame the discussion of taxes and spending in a setting of global competiveness for Wisconsin jobs. This should be done with an eye toward our children and grandchildren and thoughts on where they will be employed in the future. Lowering taxes is clearly an important component in keeping, creating, and attracting jobs to Wisconsin.

To understand how to significantly reduce taxes in the State of Wisconsin one must first recognize that the state constitution requires a "balanced" budget. It follows that in order to reduce taxes; spending will need to be addressed simultaneously.

To control government spending, spending must be addressed at the macro level. For more than a generation in Wisconsin, government spending has grown faster than inflation. The Neumann administration will start by limiting the growth rate of spending to 1% less than the rate of inflation.

This will not disrupt the present system to the point where the promised reductions cannot be accomplished. Rather this is an incremental reduction in real dollar spending that over a period of time will dramatically alter the look of taxes and spending in Wisconsin.

For the record, this is very similar to what was done while Mark Neumann served in the U.S. Congress from 1995-1999. The result was a balanced budget, repayment of debt, the largest tax cut in history, and the creation of literally millions of jobs. This historical chart shows that the federal budget was in balance only for a short time over the last 40 years – and it is no coincidence that this occurred while Mark Neumann served in the U.S. Congress.

On the revenue side, one must look at both inflation and real growth in the economy. No one can guarantee what these numbers will actually be over the next five to ten years. Some numbers, which would be considered conservative in most circles, are 2% real growth in the economy and 3% inflation.

Revenues to the state typically grow at the same rate as inflation. This is relatively easy to understand when one thinks about getting a pay raise equal to the rate of inflation. The higher pay level means more taxes are paid to the state.

Similarly, revenues also grow by the rate of real growth in the economy. This also is relatively easy to understand in that as real jobs are created to fuel the real growth these folks will also add the taxes collected by the state.

It follows that revenues will actually grow by the sum of inflation and real growth in the economy. Using the 3% inflation number and the 2% real growth number then it follows that revenues will grow by 5% per year.

Note that if spending increases at 1% less than inflation or 2%, and revenue is growing by 5% then there is a difference of 3% that can and will be used for purposes of tax reduction. This would accumulate to a 24% tax reduction in Wisconsin over eight years, as shown in this chart.

In order to have the discipline to actually use the 3% for tax cuts rather than additional spending, the focus will need to remain on the importance of reducing taxes in keeping and attracting the jobs of the future in the global marketplace where we compete. The focus must remain on the impact on our children and grandchildren having opportunities in Wisconsin rather than a foreign nation.

This plan must be tempered by the reality of the present administration. The revenues collected do not actually equal the spending in the current budget process. There are many examples of where this is true.

One example is the bail out money received to fund the current operations budget. Given the debt levels at the federal level it is highly unlikely that this money will be available for the next budget cycle.

Another practice that distorts the current budget process is the taking of funds from an account they were intended for and spending the dollars in other areas creating future shortfalls. An example is the money collected from gas taxes that was to be spent on infrastructure has been reallocated to other areas causing the money needed for infrastructure to be borrowed or bonded.

These gimmicks and short term fixes must be overcome before the true tax reduction plan can be put into place.

Now one must ask the all important question. What does this mean for Wisconsin's future?

Where our children and grandchildren will be employed will determine where they raise their families. Reducing taxes in our great state is one important step in making Wisconsin globally competitive for the jobs of the future. These are the jobs that will allow future generations to raise their families here in Wisconsin rather than in China, India, or Mexico.

This also means that our businesses that are already here in Wisconsin will be more likely to stay and expand here at home. This brings job security to our present workforce.

All in all, these are very compelling reasons to get Wisconsin's tax structure in line to make Wisconsin globally competitive for the jobs of today and the jobs of the future.