On taxes, it’s the bottom line that really counts

Gov. Scott Walker accompanied Vice President Mike Pence when he visited Wisconsin a couple of weeks ago to tout the Republicans’ tax overhaul proposal. Yet, Walker himself has said little if anything about it. At first blush, that seems odd. The plan (more of an outline or basic framework at this point) would reduce tax rates, which Walker normally cheers.

But there’s a catch: As originally designed, it would eliminate the state income and real property tax deductions for those who itemize on their tax returns.

That is a big item, especially in this part of the state. Notwithstanding the recent Journal Sentinel article that all Wisconsin’s taxes in the aggregate (including a whole slew of non-deductible taxes) fall around the national average, a look at Milwaukee County’s property taxes tells a different story. It ranks 42 out of 3,143 counties nationwide for property taxes imposed as a percentage of median income.

Likewise, U.S.-census data cited by the Journal Sentinel still shows that Wisconsin’s taxes measured against income are 22nd highest in the country (albeit an improvement over past rankings).

You take the two together and, at least in Milwaukee County, the state and local tax burden remains extremely high. Not being able to deduct those taxes seemingly would exact a significant extra cost on itemizers here — itemizers who vote. Hence, Walker’s reticence.

Of course, forces (read: lobbyists) who represent high-tax states are already hard at work trying to resurrect those deductions in the Republican plan. Although it might seem counterintuitive, we should resist the temptation to join in. Here’s why.

The Republican proposal is an attempt partially to reform and simplify our tax laws — the first such effort since 1986. In order to reduce rates sharply, tax preferences that clutter and frustrate good tax policy need to go. Why should the federal government subsidize those states, including ours, that choose to tax their own citizens so heavily? Yet, that is exactly what occurs when tax law allows state income and local property taxes to be deducted.

Those preferences tend to benefit disproportionately affluent taxpayers in higher-taxed states, because lower income folks don’t itemize and are less likely to own real estate subject to property taxes. When the tax laws confer preferences on some taxpayers, politics dictates that others get their own preferences. The end result is a muddled mess, which is what we have today.

There is no good reason for this to happen. If someone ends up paying roughly the same amount or even less in taxes overall when rates are cut and deductions eliminated, that person shouldn’t care about the deductions themselves. It’s the bottom line that ought to count.

A more streamlined tax structure would make it easier to enforce the laws and perhaps even garner some respect for tax rules. We should all be for that, especially when (as of 2010) $458 billion in taxes per year were lost due to unreported income. The rate of non-compliance is probably worse now.

Equally important, taking away state and local tax deductions might compel our own legislators to tackle tax reform in Wisconsin. Virtually everyone agrees, for instance, that Wisconsin communities — especially Milwaukee County — rely too heavily on property taxes to supply revenue. We need to take another look at how this mousetrap was configured and redesign it in a more rational way. Not having a tax deduction for property taxes as a crutch should provide an incentive for that process to take place.

Sure, some people will gnash their teeth if their special perks are tampered with. But from a broader tax policy standpoint, this is the right thing to do, and if presented correctly, the smart thing to do from a political standpoint. Walker should end his silence and speak out.