Why the Wisconsin Jobs Initiative is Flawed

Democrats in the Wisconsin Legislature (Sen. Larson and Rep. Mason) are proposing a 1% tax rate increase for Wisconsin residents earning one million dollars or more a year – Senate Bill 236 also known as the Wisconsin Jobs Initiative.  The Legislative Fiscal Bureau has estimated that this will result in an additional $70 million in tax revenue within its first year.  Larson and Mason argue that the increased tax rate on Wisconsin’s wealthiest is necessary to restore the approximately $70 million cut from Wisconsin’s technical schools by the 2011-2013 state budget. 

In Maryland in 2007, state legislators had an eerily similar idea to that of Larson & Mason.  They increased the tax rate by 1.5% on residents earning one million dollars or more a year.  The legislators who backed the bill did so on the premise that the increased tax rate would generate an additional $106 million in revenue.  Instead, these revenues fell by $257 million because the number of millionaire tax returns in the state dropped from 7,898 in 2007 to 5,529 in 2008 – a 30% dip.

Many suggest that these high-income earners either found a way to reduce their taxable income through strategic accounting, or they filed their tax returns in a state with a lower burden – warm weather comes to mind.  Either way, a similar outcome is certainly conceivable in Wisconsin.

The Larson/Mason bill is the latest example of expansionary fiscal policy hinged on misleading revenue projections.   That is, increasing tax rates does not necessarily translate into increased tax revenue, and in many cases the opposite is true.  The reason for the discrepancy is that the Legislative Fiscal Bureau and other state and federal agencies do not fully take into account how behavior is affected by alterations in fiscal policy.  

The larger issue, however, is that Larson and Mason are proposing that the state funnel uncollected and unreliable money into these programs.  This type of behavior by our politicians demonstrates why Wisconsin is fighting an enormous deficit and out of control entitlements.  Politicians have a knack for spending other people’s money – even money that hasn’t been collected.  Worse yet is that political leaders are rarely held responsible for supporting an initiative that generates a net loss, as voters seem to forget or ignore outcomes as long as the politicians’ intentions were noble.