Shopping season reopens questions about sales tax

‘Tis the season for holiday shopping – and significant state sales-tax collections.

Wisconsin’s five percent sales tax rate is the lowest among neighboring states, according to a report early this year by the Legislative Fiscal Bureau. Iowa and Michigan are at 6 percent; Illinois is 6.25 percent and Minnesota is at 6.875, according to the report.

Remember this is only the state rate. A majority of Wisconsin counties have enacted additional half-percent sales tax for special projects or local spending. The same is true elsewhere. States allow local officials to piggyback their own sales taxes.

Wisconsin’s sales tax started at 3 percent in 1962. It was raised to 4 percent in 1969 and then to 5 percent in the early 1980s. In each case it was enacted in the context of lowering property taxes.

Wisconsin hasn’t increased the state rate in 30 years. That may delight anti-tax folks, but the delight perhaps should be tempered by the level of property taxes in Wisconsin. The exemption of manufacturing machinery and equipment from the property tax has shifted the burden toward residential property.

It’s difficult to compare states because what is subject to the sales tax varies. Illinois sales tax includes food and prescription drugs.Indianahasa7percent sales tax and it includes gasoline purchases. Minnesota exempts clothing. Thirty-eight states, including Wisconsin, exempt motor fuel from the general sales tax.

Minnesota and Iowa exempt residential energy, while it is taxed by Illinois, Indiana and Michigan, according to the Fiscal Bureau paper. Wisconsin takes the middle of the road exempting natural gas and electricity from November through April and collecting it in the other months.

There can be two basic types of a sales tax – either a broadlydefined tax base with specificallyidentified exemptions or a selective tax imposed on the products listed in state law.

Wisconsin combines the two approaches – imposing a general sales tax on goods and a selective tax on services, the Fiscal Bureau paper notes.

In the last dozen years the sales tax has provided about onethird of the revenues going to the state’s general fund. It was 36.9 percent in 2001-1002 but a decade later is was 31.7 percent of the general fund revenues.

Only five states – Alaska, Delaware, Montana, New Hampshire and Oregon – don’t have a sales tax, but local sales taxes are collected in many places. Nearly 98 percent of the U.S. population lives in states which collect a sales tax.

Wisconsinenteredthesales-taxcollectionbusinesswitha3percent selective tax on designed categories of services and goods. The initial legislation was signed into law by Democrat Gov. Gaylord Nelson and was sold as a way to ease property taxes.

The rate was increased to 4 percent in 1969 under legislation signed by Republican Gov. Warren Knowles. It went “temporarily” to 5 percent under Republican Gov. Lee Dreyfus as recession cut into state revenues. Again there was talk about property tax relief. The 5 percent rate became permanent in 1983 under Democrat Gov. Tony Earl.

The sales tax also is used politically when good economic times arrive in Wisconsin. Rather than save surpluses for a rainy day fund or earmark them for property tax relief, the state provided a one-time sales tax rebate to 2.5 million households in calendar year 2000. A total of $688 million was distributed.

Politically the question remains whether a sales tax is regressive. In 1979 the Department of Revenue made a comprehensive study of the issue, reporting the sales tax was regressive for those with less than $6,000 of annual income but closer to proportional for those with incomes between $6,000 and $40,000. But a 2004 study said it was regressive for all income groups.

Yet the issue seems to linger over whether a higher sales tax should be used to reduce tax burdens on residential property.

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