STATE OF WISCONSIN SUMMARY OF TAX EXEMPTION DEVICES SCOTT WALKER, GOVERNOR FEBRUARY 2017 Division of Division of Executive Budget and Finance Research and Policy DEPARTMENT OF ADMINISTRATION DEPARTMENT OF REVENUE Table of Contents TABLE OF CONTENTS Page Introduction ...................................................................................................................................... 1 Tax Law Changes ............................................................................................................................. 5 Individual Income Tax ...................................................................................................................... 7 Corporate Income and Franchise Tax ............................................................................................ 33 Economic Development Surcharge ................................................................................................ 55 Sales and Use Tax ............................................................................................................................ 57 Insurance Premium Taxes ............................................................................................................... 75 Property Tax ..................................................................................................................................... 81 Forest Crop and Managed Forest Laws ......................................................................................... 87 Real Estate Transfer Fee ................................................................................................................. 91 Taxation of Public Utilities .............................................................................................................. 97 Excise Taxes ..................................................................................................................................... 101 This report can also be found on the Internet. http://www.revenue.wi.gov/ Introduction INTRODUCTION Wisconsin’s state and local governments rely on tax revenues to fund valuable services to our citizens. Ensuring that our system of taxation is fair, equitable, and efficient is vital to our economic success and quality of life. In setting tax policies, we must consider taxpayers’ ability to pay, the impact of those policies on economic development, and the interaction of tax policies with other policy goals. Tax exemptions are an important component of Wisconsin tax policies. A tax exemption device is “…any tax provision that exempts, in whole or part, certain persons, income, goods, services or property from the impact of established taxes.”1 Granting a tax exemption can be a powerful tool for providing economic development incentives or for mitigating the regressive qualities of certain tax types. However, exemptions always come with a cost. Exemptions reduce revenues otherwise available for programs or for tax relief for taxpayers who do not benefit from the exemption. Therefore, it is critical that policymakers understand both the costs of exemptions and their effectiveness at achieving their intended goal. Recognizing the need for this information, the legislature mandated that a report be presented biennially to the legislature listing all tax exemption devices and their fiscal effects. First presented in 1975, this is the 22nd report compiled by the Department of Revenue. Highlights of the Report The report is organized by tax type. For each, it describes the various exemptions that are currently authorized and provides estimates of the fiscal effects in fiscal year 2016 (FY16) where data is available. Detailed explanations of each tax type are available on the Department of Revenue web site at http://www.revenue.wi.gov/index.html. On a case by case basis, the estimates provide a valuable benchmark for discussion of whether the policy justifications warrant the loss in revenue or if other tools, such as direct expenditure programs, could be considered as alternatives. As the examples below demonstrate, determining the degree to which exemptions meet their policy objectives is challenging, due to the difficulty of quantifying the outcomes and in some cases the need to make assumptions regarding the underlying goal or goals. Individual Income Tax Exemptions The individual income tax is the largest generator of revenues for state government. In FY16, income tax collections of $7.74 billion represented 51.3% of state General Purpose Revenue (GPR) tax collections. Exemptions from the income tax include deductions or exclusions from taxable income and tax credits. • Tax exclusions are types of income that are not taxable and do not need to be reported on the tax return, such as income from qualifying scholarships. • Deductions are amounts that are subtracted from total taxable income that is reported, such as a deduction for medical care insurance premiums and the standard deduction. • Credits are a direct reduction in the tax liability that is owed. • Non-refundable credits are credits that cannot exceed total tax liability. • Refundable credits can exceed tax liability and can result in a payment due to the taxpayer Many income tax exemptions are based on Wisconsin’s consistency with federal tax policy. For example, Wisconsin conforms to the federal exclusion of payments received for sickness or injury benefits, which had an estimated cost of $1.42 billion for Wisconsin in FY16. While this is clearly a high cost exemption, removing the exemption would reduce the benefit of other policy programs such as worker’s compensation, proceeds from insurance policies, and allowance for injuries incurred in military action. Other income tax exclusions are unique to Wisconsin. For example, Wisconsin allows taxpayers to subtract from income 30% of the capital gains on assets held more than one year. This exclusion cost $176 million in FY16. An example of a refundable tax credit is the homestead credit that provides a credit to low income renters and homeowners to offset a portion of property taxes. The cost of the program in FY16 was $98.4 million. 1 Wisconsin Statutes Section 16.425 (2). Introduction 2 Sales Tax Exemptions Wisconsin generated $5.07 billion in FY16 from the 5% sales and use tax, which represented 33.5% of state GPR taxes. In addition, counties and the professional baseball stadium district may collect additional sales tax from the same tax base. Sales tax exemptions result in lower revenues for both the state and local governments. One of the largest exemptions from the sales tax is the exemption for food purchased for home consumption, which was estimated to reduce state revenues by $601.9 million in FY16. Another significant exemption is for goods sold to other state and local governments and schools, which reduced revenues by an estimated $339.4 million in FY16. Removing this exemption would result in a situation where one taxing authority imposes a tax on another. In contrast to tangible goods that are taxed unless specifically exempt in statute, services are exempt unless they are singled out for taxation. Of those services that are exempt, the largest measurable exemptions are in the areas of professional services and business services. These exempt categories include a variety of services such as those provided by health professionals (accounting for $606.6 million in foregone revenue in FY16), and exemptions for computer and legal services (which reduced FY16 revenues by $151.4 million and $118.4 million, respectively). Property Tax Exemptions The local property tax generates more revenue than either the state sales tax or the income tax. Property taxes collected in 2016 for taxes levied in 2015 totaled $10.62 billion, which represents the combined levy of school districts, municipalities, counties, technical colleges, and special districts. The state establishes policies regarding what real and personal property is subject to the local property tax, guided by the uniformity clause of the state constitution, which prohibits differential treatment of most property including partial exemptions. Real property that is exempt from taxation includes property owned by religious establishments, educational and medical facilities, and low-income housing owned by non-profit benevolent associations. In total, it is estimated that the value of exempt real property is $30.48 billion. There are also a number of exemptions to personal property taxation, including the exemption for machinery and equipment used in manufacturing – the value of which is estimated at $15.74 billion. If the exempt property examined in this report were taxable, property tax rates would be reduced by an estimated 9.1% statewide, ranging from a 12.61% average reduction in cities to a 4.65% average reduction in towns. Property tax exemptions have implications for economic development and the state's health, housing, and education policies. The impact of property tax exemptions should by evaluated with consideration to both the impact on the owners of remaining taxable property and policy goals. Other Exemptions The report also discusses exemptions relating to the corporate income tax, insurance premium taxes, economic development surcharge, real estate transfer fees, public utility taxes, excise taxes, and forest crop and managed forest laws. Limitations of the Report Readers should be aware of several limitations to the report. The fiscal impacts of tax exemption devices are often difficult to measure, and estimates of the effect