– Illinois’ minimum wage increased to $13 at the beginning of the year and businesses are feeling it.
In 2019, after no increases in the minimum wage since 2010, the legislature agreed to a gradual increase that will top off at $15 an hour in 2025.
The passage fulfilled a campaign pledge from Gov. J.B. Pritzker. In step with the ramp-up, the Illinois minimum wage will increase to $14 an hour on Jan. 1, 2024, and on Jan. 1, 2025, the minimum wage will reach $15.
Todd Maisch, president and CEO of the Illinois Chamber of Commerce said the increase is “particularly painful” for retailers, restaurants and employers in the service industry.
“Employers are trying to decide whether they will trim hours or trim jobs. In some instances, if they think they can get away with it, they will have to raise prices,” Maisch told The Center Square.
Maisch said that for businesses that are struggling with inflation, paying a higher minimum wage is more pain for the bottom line.
“Governments cannot create demand; they cannot create revenue,” he said. “So that means that small businesses must decide how to cut costs. Way too few members of the legislature understand that basic fact.”
Lawmakers act as if all businesses have a secret vault of cash that they can tap to pay higher wages, Maisch said.
“We all know that that is not the case,” he said.
Keeping wages artificially high makes it harder for inflation to go down, Maisch said, and raising prices is not an option for many businesses.
“Coming off of very aggressive inflation, that is the last thing that small businesses want to do,” he said. “Over time, inflation impacts consumer behavior more and more. Consumers are spending less and less at restaurants and other places.”
Maisch thinks most employers will opt to trim jobs and cut hiring rather than raise prices.
The service industry, including retail, is on the frontline when it comes to the minimum wage hike, Maisch said. He expects businesses to opt for more automation in response.
“Whether it will be self-serve sodas or having customers tap screens to put in their own food orders, more businesses will decide that they have to go that route,” Maisch said.
Raising the minimum wage will have a ripple effect, he said.
“For a manufacturer, the fact that somebody can come in and on the first day on the shop floor make $13 an hour, that means that everybody that’s been there for six months or a year or two is going to pressure the employer for higher wages,” Maisch said.
High-performing employees will get the wage increase, Maisch said, but employers will become even more hesitant to bring on new employees that they would have to train.
State Rep. Bryan Shupe (R-Milford) is promoting a proposed change to House rules that would scale back House leadership’s ability to leave bills in limbo.
According to data from the 150th General Assembly – covering the 2020 and 2021 legislative sessions – bills sponsored by Democrats were roughly twice as likely to receive a hearing when assigned to the House Administration Committee compared to bills sponsored by Republicans.
The same disparities do not appear in other powerful committees, including the House education committee.
Shupe attributes the disparity in the House administration committee to the powers of the chair, the House Majority Leader – a position currently held by State Rep. Valerie Longhurst. The chair is responsible for setting the committee’s agenda, and while House rules dictate all bills receive a committee hearing within 12 days of their introduction, that isn’t easily enforced. The House Speaker exercises similar control over the floor agenda.
Shupe says he plans to introduce a proposal giving a committee hearing automatically to any bill that hasn’t been heard within 12 days of its introduction. He also proposes amending House rules to put any bill on the House floor if it is released from committee and not added to the agenda within 12 days.
He says the rule changes would limit the control of House leadership enough to give every bill an equal opportunity for consideration.
“If a bipartisan committee – Democrats and Republicans – have voted for a bill to be heard on the House floor, then it deserves a spot on the House floor,” he said. “That should not be up to one person – the Speaker of the House – regardless of who it is.”
Though Shupe has detailed his proposal to constituents, he hasn’t yet introduced it for a vote.
From: Caesar Rodney Institute In 1925, Delaware’s government anointed a state song, “Our Delaware,” by an act of the General Assembly. According to Wikipedia, “Our Delaware” is derived from a 1904 poem by George Beswick Hynson, comprising three verses, each honoring one of Delaware’s three counties.
After listening to Delaware’s state song, it seems to be very dated and lethargic-just like Delaware. You don’t have to take my word for it; CLICK HERE and listen for yourself!
Perhaps it is time for a refresh by adding a “state anthem” to go along with the “state song” and choosing a tune that better reflects Delaware today.
Below are my seven recommendations for consideration for a “state anthem” from a few existing songs created by four Delaware-related artists! I hope you will give them a listen.
Delaware-born artist George Thorogood’s “Delaware Slide“captures precisely what has been happening in Delaware – it is sliding down. Delaware’s economy has been suffering 1970’s era stagflation over the last 18 months. Furthermore, Delaware’s smaller businesses have been strangled by government regulations and seriously harmed by Delaware’s painful Gross Receipts Tax. It is the “Delaware Slide” in real time.
George Thorogood’s “House Rent Blues” presents a realistic description of life faced by many Delawareans. Delaware has a serious affordable housing crisis along with lower employment today than before COVID-19 (See Chart nearby). As an added benefit, the last half of the song describes the protagonist’s efforts at self-medication through drinking. Sadly, Delaware’s problem is not so much alcohol as it is drug overdoses. See below graph: 463,600 Non-farm jobs as of October 2022 versus 469,500 as of March 2020, according to the Delaware Dept of Labor.
Bob Marley’s “Three Little Birds.” Bob Marley’s mother was a long time Delaware resident, although I’m not sure he spent much time here. His music maintains universal and global appeal – something Delaware clearly lacks. In “Three Little Birds,” each bird could be a substitute for one of our three Counties; however, the song is probably rightly considered Jamaican property. Rats!
Bob Marley’s “Exodus“ might be a great secondary option because, between 2010 and 2020, Delaware’s 18 to 24 year old population declined by 9.0%. Quite an exodus!
Cab Calloway’s “Minnie the Moocher.” The great Cab Calloway spent the last years of his life in Delaware. This hit song reflects the growth in government transfer payments in Delaware, which have grown by almost 400% from 2002 to 2020 – 20% faster than the national average. In addition, as shown in the graph below, Delaware’s workforce participation is lower today than at any other time since the federal government began tracking the statistic (with one COVID-19 related exception). Too many Delawareans are forced to mooch off the State rather than participate in the workforce and economy.
Cab Calloway’s “The Hi-De-Ho Man (That’s Me).“ This song is one of the greatest call-and-response songs ever performed. Given that New Castle County’s (NCC) economy is smaller todaythan it was 20 years ago. Maybe the NCC government could respond to the call of success of Sussex County’s economic growth. Comparison of County, State, and National economic growth in constant dollars for Delaware (Source: Bureau of Economic Analysis).
David Bromberg’s “Sharon.” Any potential list of artists would be incomplete without David Bromberg, who performs/tours often and has a luthier shop in Wilmington. The song “Sharon” can be interpreted as an allegory about the seduction of power. The audience members depicted in the song could be seen as Delaware’s elected officials losing themselves in their backroom deals. Delaware needs transparency in public education and needs an update to the antiquated 1970s FOIA process.
Conclusion
No list would be complete without these four artists and the seven specific songs. I hope these selections will generate some thoughts and laughs. However, I am sure I have missed some other obvious choices, and I hope that CRI readers might come up with their own examples and share them on social media.
Delaware’s future “state anthem” should reflect Delaware as it is today while connecting to artists who have a connection to the State.
Three bills that would raise real estate tax credits are on the docket for the Delaware House of Representatives Education Committee.
With the state now projected to have a surplus of nearly $1 billion – the third year in a row for such extraordinary income – a Democrat and a Republic representative are moving to give older residents a bigger tax break.
The committee will meet Wednesday at 3 p.m., its first convening of the 152nd Delaware General Assembly. Livestream it here.
In Delaware, residents who are 65 and older are eligible to receive this tax credit on the amount they pay in school taxes.
The state reimburses local school districts for any loss of income resulting from the credit.
Up until 2017, this tax credit was $500 annually. To fill a significant budget hole that year, the tax credit was reduced by $100, according to Stephanie Becker, communications officer for the Delaware House of Representatives.
Three bills related to the credits have been filed by Rep. Bill Bush, D-Dover, and Rep. Kevin Hensley, R-Odessa.
Sponsored by Hensley, this bill would increase the Senior Real Property Tax credit to $750 from $400.
Becker said Hensley and many of his colleagues believed the 2017 cut would be only a temporary fix.
“Once revenue projections rebounded and the state’s financial situation improved, one of the first things we would make good on was restoring the tax credit to its original amount,” she said.
Because of their life-long contributions, no group of citizens has collectively paid more taxes than Delaware’s seniors, Hensley said in a statement.
A member of the legislature’s Joint Finance Committee, which writes the state budget, Hensley pointed out that Delaware appears to once again be in a position of getting a hefty surplus.
He is among the Republicans who believe that the state’s windfall should mean a break for those who pay taxes instead of all being plowed into state projects.
“With that in mind, we should make the effort to permanently provide modest tax relief to our older population, many of whom are now living on fixed incomes,” he said. “When it comes to my senior tax credit bill, I believe most Delawareans would agree that it is among the most well-intentioned funding expenses our state can make.”
Sponsored by Bush, this bill would increase the Senior Real Property Tax credit from $400 to $500 for seniors who have resided in Delaware for 10 years.
“Rep. Hensely’s bill goes a bit further in raising the credit from $400 to $750,” Becker said. “Both bills will be debated this legislative session and a determination will be made on how much – if any – of a tax credit should be given to Delaware senior citizens.”
For seniors who have held residency in Delaware for more than three years but less than 10 years, the maximum credit authorized, via local school board vote, will be either a 50% of the tax collected or $400, whichever is a lesser amount.
Residents who are 65 and older and have lived in the First State for at least a decade will receive a 50% credit, or $500, again the lesser amount.
Introduced by Bush, this bill would remove the three-year residency requirement to qualify for the Disabled Veteran Tax credit.
The exemption would mean that the First State’s disabled veterans receive a full tax credit of their non-vocational school district property tax.
The bill defines disabled veterans as someone who receives 100% disability compensation from the United States Department of Veterans Affairs or its successor agency due to a service-connected, permanent and total disability based on unemployability, or a 100% disability rating.
Under the new bill, those who have permanent residence in Delaware would automatically qualify, rather than needing three years of residence.
Those who have seasonal or temporary residence, or who are out of the state for a period of at least a year would not qualify for the tax credit.
A bill filed Friday would raise weekly Delaware unemployment payments from $400 to $450 and, for one year only, save state companies $50 million in 2023 by using state funds to pay unemployment tax increases.
House Bill 49 filed by Rep. Ed Osienski, D-Newark, said Delaware already is paying less in unemployment than neighboring states and that the maximum amount of the payments has not been changed since 2019.
Rep. Mike Ramone, R-Pike Creek, said he hadn’t seen the bill, but he found it interesting that the idea is being floated now.
“At this time, many businesses are significantly understaffed,” said the House Minority leader. “Why would we motivate people more to stay out of a work force? There are plenty of jobs.”
The Delaware State Chamber of Commerce is opposed to the bill and will testify against it at Tuesday’s hearing, said Tyler Micik, director of Public Policy and Government Relations for the chamber.
The bill said it would make sure that employer payments don’t change by using funds from the Unemployment Trust Fund.
That fund was depleted by the surge of pandemic related unemployment claims, but Gov. John Carney used federal pandemic funds to replace them, the bill summary said.
There is enough money in the trust fund to offer unemployment tax relief measures to Delaware employers by reducing new employer tax rates, reducing or holding constant overall employer tax rates, and reducing the maximum earned rate during the calendar year 2023, the bill says.
The bill will also temporarily simplify the tax rate schedules that are used to calculate unemployment assessments paid by employers.
The state Department of Labor has estimated that the tax assessment changes will reduce the tax obligation of employers an estimated $50 million in 2023, the bill summary said.
If the bill passes and is signed into law by Carney, it will be in effect retroactively to Jan. 1, 2023, and expire Dec. 31. 2023, the bill says.
Medicaid enrollment in the United States is expected to top 100 million in the coming months, a new study shows.
The Foundation for Government Accountability says more than 98 million Americans are enrolled in the federal health care program. Delaware accounts for 307,756 of that figure, as of Oct. 31.
Medicaid, according to the release, provides health care coverage to low-income residents, including adults, children, pregnant women, elderly adults, and people with disabilities.
“For years, FGA has been warning about the rising number of people on government welfare programs,” Hayden Dublois, the organization’s Data and Analytics director, said in a release. “Now, we’re nearing a grim milestone – nearly one-third of the country will be on Medicaid.”
The group’s research shows that as welfare enrollment increases workforce participation decreases and is urging the federal government to take action.
“We’re in the midst of a nationwide workforce crisis, yet the Biden administration is pushing policies to entice people into government dependency at record levels while limiting opportunities to achieve the American Dream,” Dublois said in a release.
According to the release, the organization points to rising enrollment in the program primarily due to the federal government extending the public health emergency related to COVID-19.
The group said that while those emergency measures are in place states will receive additional funding for the program with the caveat that those enrolled remain in the program.
Under the emergency, the group said, 21 million Americans are enrolled in the program who would not have qualified under nonpandemic conditions due to earning too much income or are ineligible.
“The pandemic-era policy keeping more than 21 million ineligible enrollees on Medicaid is costing taxpayers more than $16 billion per month,” Dublois said in the release. “Despite the recently enacted legislation allowing states to redetermine eligibility beginning in April, the Biden administration is slow walking the process and hoping states will be sluggish to act.”
Meanwhile, the dashboard shows, Maryland has 1,749,423 residents enrolled in Medicaid as of Oct. 31; Pennsylvania has 3,625,047 enrolled as of Nov. 30; and New Jersey has 2,206,895 enrolled as of Nov. 30.
Over the past decade — during which University of Delaware officials have requested more than a billion dollars in taxpayer funds from the General Assembly to support in-state scholarships, construction projects, and even general operations — the state’s flagship university has quietly shifted hundreds of millions of dollars to investments overseas, according to a review of the university’s tax returns and other financial documents by Delaware Call.
With the university’s offshore investments growing from $14 million in 2010 to a peak of $413 million in 2016, according to UD’s tax records, the university is likely avoided paying millions of dollars in federal taxes using an accounting scheme The New York Times described as “tax wizardry” and which is often out of reach for all but the largest nonprofits. The majority of those investments were and continue to be located in one or more Central American and Caribbean nations.
Since 2016, UD’s offshore investments have slowly declined to $334 million in 2018 and $266 million by June 2020, the most current year for which the university’s tax information is available.
While UD invested hundreds of millions of dollars overseas, it also increased tuition every year between 2009 and 2019, according to reports in the Newark Post, sometimes by 7% or more, resulting in the price of annual in-state undergraduate tuition rising more than 50% — from approximately $9,000 to $14,000 — over the course of a decade.
In an attempt to discern the origins of the dollars that UD has invested overseas, Delaware Call filed a Freedom of Information Act request asking university officials for more details regarding the school’s overseas investments. UD denied the FOIA request, claiming that it is not obligated to share any documentation regarding its offshore investments because these investments do not include state-allocated funds.
“Pursuant to Delaware’s FOIA, only university documents that relate to the expenditure of public funds are public records subject to disclosure under the Act,” wrote UD Deputy General Counsel Jennifer Becnel-Guzzo, “Your request does not relate to the expenditure of public funds. The University, therefore, has no public records responsive to your request.”
When asked by Delaware Call if any federal funds in the form of Pell grants or student loans were diverted to offshore investments, UD initially declined to comment. After multiple follow-up emails, UD’s media relations manager, Peter Bothum, replied, “No state or federally funded resources are applied to offshore investments,” but provided no evidence that substantiated the claim.
When shown UD’s tax returns, outgoing state Rep. John Kowalko (Newark) said that he was unaware of the university’s offshore holdings but not surprised, calling it “outrageous behavior” for a public institution and slammed the university’s special exemption from open records requests that shield information about these investments from public scrutiny.
“You can’t call yourself a public institution on Thursday when you want taxpayer money and a private institution on Friday when we want to look at your books,” Kowalko said, adding that even state legislators don’t have special access to UD’s finances. “I don’t think for one minute that UD has been a proper steward of taxpayer money. I think they’ve been manipulative.”
How offshore investments help universities avoid tax liability
UD first reported offshore investments on Schedule F of its 2010 tax returns under former president Patrick T. Harker and chief investment officer Mark Stalnecker. Over the following decade, UD’s offshore investments skyrocketed in an apparent attempt to supercharge capital gains through investments that would otherwise carry a tax penalty if traded by a nonprofit inside the United States.
By 2013, UD’s offshore investments had swelled to $136 million while the university’s total investment income grew to nearly $100 million annually and tuition increased by 4%. The next year, UD’s offshore investments ballooned yet again to $398 million while investment income reported on UD’s federal tax form topped $220 million.
The investment returns were a windfall for the university, which was in the middle of a construction boom that included the purchase and demolition of a former Chrysler assembly plant and its transformation into an entirely new campus with manufacturing facilities, modern glass towers, and a $165 million biopharmaceutical center.
In 2016, UD explained that its asset allocations had shifted “dramatically” since 2000 to reduce “the endowment’s investments in domestic stocks and bonds by reallocating to international and nontraditional asset classes.” At the turn of the millennium, UD invested the majority of its assets in US stocks and bonds and virtually none in hedge funds and private equity. By 2016, domestic investments had fallen to 40% of the university’s asset allocations while hedge funds and private equity swelled to 19% and 21%, respectively, according to archived versions of the university’s website.“These funds have been redeployed into the international equity markets and alternative assets such as hedge funds and private equity funds which should not only provide higher returns in a greater variety of investment environments but also help to control overall risk,” reads the current version of UD’s asset allocation page.
Figure 1: UD Endowment Asset Allocations vs Target Allocations as of 6/30/22 (Source: University of Delaware)
Among the nation’s most prestigious colleges and universities, it is not unusual to keep hundreds of millions, or even billions of dollars invested outside the United States. Just last year, Swarthmore College and Villanova University reported $375 million and $249 million, respectively, in offshore investments, and University of Pennsylvania reported more than $5.3 billion, almost entirely in Central America and the Caribbean. It’s all perfectly legal.
Why have UD and so many other major universities diversified their investments to include significant offshore holdings?
The reason likely lies in a section of the tax code known as the Unrelated Business Income Tax, or UBIT, which is basically a special tax on nonprofit revenue derived from sources unrelated to any tax-exempt purpose. For example, if a nonprofit decided to start a business that generated a profit, then profit from that company would qualify as unrelated business income because it’s not a charitable activity, according to Zac Kester, CEO and managing attorney at Charitable Allies. Nonprofits do this all the time to bolster their impact on a community, like an organization that supports formerly incarcerated people re-entering society and wants to start a landscaping company to help its clients find work.
“The overall concept is that when a nonprofit organization has passive income — things like dividends, interest, rent — it’s not taxed,” says Kester. “But if revenue is not related to the exempt purpose of the organization, then that is taxable under the UBIT rules.”
Unrelated business income also includes many kinds of debt-financed and high-risk investments.
What does this mean? If a university were to profit from certain types of investments traded inside the United States — such as hedge funds, leveraged securities, or many types of private equity — then that university would be obligated to pay the 21% flat federal corporate income tax rate stipulated by UBIT. However, according to The New York Times, by establishing overseas companies known as “blocker corporations,” which often take the form of limited partnerships or limited liability corporations in offshore tax havens, universities can avoid paying federal taxes on leveraged and risky — but also potentially lucrative — investments.
In other words, rather than a university buying and selling investments and paying a flat tax, a company located outside the United States executes those trades in the supposed best interest of the university and pays out a dividend over time, which is untaxed when transferred back inside the country because the school did not, legally speaking, trade any securities, and dividends are treated as passive income, a tax-exempt form of revenue for nonprofits.
How risky are UD’s offshore investments? Because of UD’s exemption from FOIA, there’s almost no way to know for sure. Even state legislators do not have access to that information.
“I’ve made requests that have been declined,” Kowalko said. “We can’t verify anything they say, and I think UD has acted unethically in its refusals to allow a more open accounting of its finances.”
What little we do know can be found in UD’s annual financial audits. UD’s eye-popping returns came crashing down during the first three months of the coronavirus pandemic, with hedge funds being one of the worst-performing asset types, losing tens of millions of dollars in value between June 2019 and June 2020. The following year, UD appears to have almost entirely divested from certain types of hedge funds.
Where are these offshore investments located? That too is unclear. UD’s tax returns only report investment activity by region along with the corresponding amount of investments held in that region. However, according to the Offshore Leaks database managed by the International Consortium of Investigative Journalists, as of 2016 the University of Delaware was apparently connected to at least one apparent blocker corporation, Bermuda-based Dover Street Blocker LP, which itself was connected to Dover Street V Limited Partnership, which was connected to other higher ed institutions, including the University of Vermont and Texas Christian University, both of which report extensive offshore investments in “Central America and the Caribbean,” just like UD.
Another offshore corporation, University of Delaware Dover Inc., was incorporated in the British Virgin Islands in January 2007 by Portcullis TrustNet in the town of Tortola. Both Bermuda and the British Virgin Islands are among the world’s most popular and secretive tax havens, according to the Corporate Tax Haven Index developed by the Tax Justice Network.
During his time in the General Assembly, outgoing Rep. John Kowalko filed numerous bills designed to increase transparency at the University of Delaware. Back in 2014, he sponsored House Bill 331, the first of three consecutive bills to amend the Delaware Code relating to the Freedom of Information Act. That bill added language expanding the university’s FOIA obligations to competitive bids and passed unanimously in both the state House and Senate and signed into law by Gov. John Carney.
“When you’re putting an enormous amount of money into a public institution — and it is a public institution — as Delaware taxpayers are, then there is no right to a FOIA exemption,” Kowalko said in an interview with Delaware Call.
UD’s exemption from the state’s sunshine laws is unusual. Delaware and Pennsylvania are the only states that shield their public universities from most freedom of information requests. Delaware State University also enjoys a FOIA exemption, although Delaware Technical & Community College, which also receives state funds, is not exempt.
Kowalko’s two transparency bills, however, did not draw as much support. In 2015, Kowalko introduced House Bill 42, which removed the state’s FOIA exemption for UD and DSU; however, the bill languished in the House Administration Committee over concerns there should be exemptions for the intellectual property and proprietary information of faculty and students. Kowalko attempted to address those concerns in 2017 with House Bill 72, but that too died in committee.
Blaming the “Delaware Way,” Kowalko said, “Leadership never allowed my bills out of committee.”
Now, on his way out of office, Kowalko says repealing UD’s “rigged FOIA exemption,” as he put it, would be “good public policy,” and he hopes that his efforts to increase transparency and oversight at UD will be carried on by the rising generation of progressive lawmakers in the General Assembly.
Eleven states will reduce their individual income tax rates on Jan. 1.
Arizona, Idaho, Indiana, Iowa, Kentucky, Mississippi, Missouri, Nebraska, New Hampshire, New York, and North Carolina will cut the individual income tax rate on New Year’s Day, according to the Tax Foundation. Over the past two years, more than 20 states have cut individual income tax rates.
Three of these states – Arizona, Idaho, and Mississippi –will also move away from a graduated-rate income tax to a flat tax where all income is taxed at the same rate regardless of income level, the Tax Foundation reported.
Only one state, Massachusetts, is increasing its individual income tax, according to the Tax Foundation. The state will change from a flat to a graduated-rate tax of 9% on any household income over $1 million.
Two states, Hawaii and Illinois, expanded their tax credit programs, which reduce the final dollar amount on the tax bill rather than reducing taxable income, according to the Tax Foundation.
States with low or no personal income tax rates are among the fastest-growing populations in the country, according to data from the U.S. Census. Among those states are Florida, Idaho, and North Carolina.
Florida has no income tax, while both Idaho and North Carolina have a flat tax on income, according to data from the Tax Foundation.
Alabama, Delaware, Iowa, Rhode Island, and Nebraska enacted exemptions for a portion to all of retirement income or military pension, according to the Tax Foundation.
Hillsdale College Professor of Economics Gary Wolfram told The Center Square that states with lower income taxes often attract more businesses and economic activity to their economies.
“States with lower income taxes attract economic activity,” Wolfram said. “The latest census data on state population growth is evidence of the fact. This results in job opportunities and increases in property values that particularly benefit the median income earners.”
States like New York, Hawaii, California, and Oregon with high income taxes have shrinking populations, data from the U.S. Census shows. These states are also among the top ten states with the highest income tax with California having the highest tax rate in the country at 13.3%.
The unexpectedly bright revenue prospects of Wisconsin’s state government represent both an opportunity and a danger. A year from now, how will we know which one it is? By whether the state’s $6.6 billion in surplus revenue was used for epoch-marking reform.
Such reform is the opportunity — the chance to turn Wisconsin away from stagnant mediocrity and toward opportunity and justice.
The danger comes from the use of such money to fund the status quo.
As the Badger Institute illustrates in its new “Mandate for Madison,” the status quo means settling for Wisconsin’s economic output per person, which was once growing apace with our neighbors but has lagged during the recovery and now is second-worst among our Midwestern peers. Likewise, our population is growing at a pace that’s middling even when measured against our slow-growth Midwest neighbors. Projections of our working-age population show much slower growth than that of the United States overall. Nationally recognized measures of Wisconsin’s economic freedom, once growing, have flatlined.
This is why it is dismaying to learn that state agencies’ budget requests would snap up at least half the surplus, all so that Madison can go on doing the same as it is now, only at a price that’s 10.6% higher over the biennium. “More of the same but costlier” will not improve Wisconsin’s trajectory, which now involves seeing the receding taillights of more prosperous neighbors.
Instead, that surplus can fund change that will put Wisconsin at the front of the pack. The Badger Institute this fall published “Mandate for Madison,” a collection of ready-to-deploy policy recommendations for a more prosperous Wisconsin from some of the best thinkers in and about our state. Consult the book at our website for details, but these are reforms that we think will make the greatest change for Wisconsin:
Reform our income tax from being punitive to being fair and competitive:
While Wisconsin has lowered income taxes for some in recent years, the top rate remains high, at 7.65%. That’s a higher top rate than all but eight states, and one of those, Iowa, is moving to a flat rate of 3.9% in 2026. Twenty-five states have lower top rates than they did in a decade ago. Standing still, we’re falling behind.
People can choose where they live, and even as Wisconsin employers find it hard to attract workers, Wisconsin’s tax system not only charges high rates, it increases those rates on people as they earn higher pay.
High rates also are taxes on employers. About 95% of Wisconsin businesses are structured as “pass-throughs,” such as partnerships or LLCs, where the tax on business income is levied on the owner’s individual tax return. About two-thirds of pass-through business income in Wisconsin is exposed to the 7.65% top rate — meaning less earnings to be reinvested in the business, less hiring, less groundwork for growth. The more successful a growing business is, the less affordable Wisconsin remains as a place to do business.
The way to change that is to adopt a fairer structure, one that charges the same rate of all taxpayers. This immediately removes the sharp jump in tax rate that now wallops a successful business or a high-talent employee rising in her career when these taxpayers move from the second-highest bracket to the highest.
In “Mandate for Madison,” the Tax Foundation’s Katherine Loughead lays out options for such a flat-rate tax, with a single rate ranging from 4.15% to 5.1%, depending on what other tax changes are included and how much Wisconsin gives back to taxpayers of what it took unnecessarily. Every taxpayer now in the top two of Wisconsin’s four tax brackets would see a tax cut. That’s about half of all households. Then, by using Wisconsin’s income-linked sliding-scale standard deduction — increasing the deduction and raising phase-out points — our proposal protects taxpayers in the lower two brackets, ensuring that they, who saw tax cuts in recent years, now would see no increase.
It is literally a no-downside proposition. The upside is not just that at least half the state’s taxpayers keep more of their money. It’s that our tax system stops being something that employers flee and, instead, contributes to our competitiveness. Even the option that goes to a 5.1% flat income tax and makes no change to the corporate tax rate moves Wisconsin from being 27th-best among state business climates to ninth-best.
For every Wisconsinite needing a job or hoping her children someday can make a livelihood here without having to move away, that’s a win.
Bring justice to the funding of Wisconsin families’ educational options:
A core American value from our country’s earliest days is that parents can choose the education they think best suits their children. Wisconsin has long respected families’ power to choose the right school by offering open enrollment, public charter schools and, for three decades, the right to take a child’s state educational aid to an independent private school via our parental choice programs.
Families have embraced these choices. Wisconsin’s four parental school choice programs now serve about 52,000 students, a number 6.7% higher than in 2021 and 43% higher than five years ago, even as the number of school-age children in Wisconsin remains flat.
Yet families’ ability to access these choices is stymied by systemic inequality on two fronts.
First, children whose parents choose an independent private school are valued much less in state-aid terms than children whose parents choose district schools. The average per-pupil funding in Wisconsin’s incumbent district schools is just over $15,000 a year per child, all in, with individual districts spending from $11,000 to $22,000 per pupil. Children whose parents opt to take state aid to a private school via parental choice get only $8,399 for K-8 students and $9,045 for high schoolers. Since schools must accept this voucher as full payment in nearly all cases, this radically limits the ability of independent schools to serve Wisconsin children.
It also treats families unequally. As the head of a network of nonprofit schools in Green Bay put it, “A child is a child is a child,” yet the state is saying some children are worth about 40% less. “I’m not really sure what goes into the state deciding how much a child is worth in private education versus public education,” she said. “I just know that it’s unjust.”
Second, while the state offers aid to cover the cost of schooling to families of all income levels so long as parents use a traditional district school or independent charter schools, it excludes families from the parental choice programs if their income is as little as 220% of the poverty line — $58,300 for a family of four in Green Bay, for instance. This blocks working- and middle-class families from choosing an independent school if they cannot swing the cost of tuition or find philanthropic help — even as the state’s highest income families, who can afford to move to a better school district, are fully subsidized, so long as they choose traditional district schools or an independent charter.
Wisconsin’s revenue situation gives us a chance to permanently repair this injustice — first, by parity in funding for Wisconsin children, based on the principle that students all have an equal value in the eyes of the law and that where a child receives a publicly funded education should not determine the amount of that funding.
Second, as justice in funding permits independent schools to serve more Wisconsin families, a uniform eligibility for publicly funded education options can be extended to all families. Every Wisconsin family now lives under Wisconsin’s mandatory attendance laws and is obliged to pay taxes. All should be eligible for the choice that has for decades been a principle of Wisconsin education.
Many needed reforms don’t require a lot of money:
Our “Mandate for Madison” includes many other reform ideas. Few of them require much additional state spending. For example:
On health care, enabling market innovation is first a matter of not impeding the emergence of direct primary care, improving transparency and getting out of the way of professionals practicing their skills.
On our safety net, we should consolidate existing ample funding streams and restructure them, re-establishing work and education requirements, so we no longer discourage work and marriage.
Reforming Wisconsin’s onerous occupational licensing doesn’t require more spending, just an honest look at what barriers unfairly impede work.
We could go on, but the point is clear: Most of Wisconsin’s problems can be addressed by government performing better rather than growing larger.
Justly funding Wisconsin’s commitment to empowering families’ educational choice will take some money — spending that will enable more access to the superior results already seen in independent schools.
But this means there is an ample surplus that’s been taken from taxpayers available to return to them through tax reform, reform that will put Wisconsin on a path of greater prosperity for all. We should take that path.
Using billions of emergency pandemic bill dollars to plug gaping holes in their budgets, local governments across Wisconsin and the country are setting themselves up to ask for tax increases or slash services as basic as police and fire protection when the federal funding runs out.
Just how steep this fiscal cliff will be is only beginning to be realized. Early research indicates that at least half of the more than $350 billion in State and Local Fiscal Recovery Funds (SLFRF) allocated in the American Rescue Plan Act is eligible to be used to provide government services, award salary increases or even pay down employee pension debt.
A review of the few progress reports available through the U.S. Department of the Treasury shows that six of the seven Wisconsin cities and counties reporting, including Milwaukee, made SLFRF money available for use in propping up their budgets, more than $700 million of it.
Milwaukee expects to use $245 million of its $394 million SLFRF grant to close gaps in the 2022-24 budgets. After that, without help from the state, city Budget and Management Director Nik Kovac told the Badger Institute, the city will have little choice but to lay off perhaps hundreds of employees “across all departments.”
“This fiscal cliff, precipice, whatever you want to call it, we want to put it front and center,” Kovac said in an interview. “Using ARPA funds for this purpose is not a best practice, but the alternative is worse.”
In an issue paper released in April, Beverly Bunch, a public management and policy professor at the University of Illinois-Springfield, said poor documentation of the ground-level spending was obscuring what could be a significant problem for local governments.
“The fiscal cliff is real,” Bunch told the Badger Institute. “State officials need to be concerned about it.”
Local governments are coming to this pass, as is often the case with big government programs, because of the good intentions of the benefactors. As the Badger Institute reported more than a year ago, communities that had never seen sums like those from the $1.9 trillion Rescue Plan Act were having a difficult time trying to spend the money within the federal guidelines. Many were forced to spend valuable ARPA funding just to administer their ARPA funding.
Since Congress passed ARPA on March 11, 2021, Wisconsin governments of all sizes have managed to spend just $813 million, or 32%, of the $2.53 billion allocated to them, according to a document provided to the Badger Institute by the state Department of Administration. The state is due to receive another $2.5 billion, which must be spent by the end of 2026.
Just months into the allocation of this federal windfall, the U.S. Treasury Department quietly changed the spending rules for states, counties and cities. Governments could appeal to ARPA officials for revenue replacement, or an estimate of revenue lost because of the pandemic.
The wrinkle in revenue replacement was that counties and cities did not have to document their revenue loss. The Treasury Department’s new and relaxed formula for claiming lost revenue allowed governments large and small to divert huge portions of their SLFRF allocations away from the programs prescribed in ARPA guidelines and into the day-to-day operation of their governments.
The SLFRF guidelines already allowed for spending that was tied tenuously at best to emergency COVID relief. Gov. Tony Evers’ administration, for example, committed $100 million to a statewide broadband expansion program that will end up costing $3,225 for each of the roughly 31,000 residential and business locations to be served.
Revenue replacement now allows huge sums of SLFRF money to be tucked into local budgets, an accountability and transparency problem that concerns Bunch.
“Allowing ARPA money to be added to general funds concerns me because it’s harder to find and it loses its character as a federal emergency measure,” she said.
Of the more than 1,900 government entities in Wisconsin that received at least some ARPA money, the Treasury Department has just seven progress reports on its website.
They include a state performance report dated July 31 and reports for the first part of 2022 for the cities of Milwaukee and Madison and for Milwaukee, Dane, Brown and Waukesha counties.
A review of those reports offers a glimpse into how local governments are now relying on revenue replacement to augment their budgets.
The City of Milwaukee, for example, added $20.8 million to the Fire Department’s Emergency Response program and another $6.7 million for emergency medical services training in 2022. The city hired 20 new sanitation workers as part of a $2.3 million Clean City program.
In its report, Milwaukee County says it committed $115.7 million in revenue replacement funds in 2022 to provide government services. There is no outline of what those services are or will be in the report.
Dane County committed $21.2 million to maintain government services. Its seven-page report does not mention what the county intends to do in 2023 and beyond. The phrase “revenue replacement” does not appear in the report.
Of the $47.2 million in SLFRF funding allocated to Madison, the city chose to use $24.4 million “on wages for emergency workers, as well as to balance the general fund budget and avoid the use of fund balance in 2022,” according to its report.
The reports, however, also show cities like Madison and Milwaukee using SLFRF funds outside of revenue replacement for the creation of new programs and the hiring of employees to staff them — positions that will either have to be supported with local tax money or ended when the federal funding is exhausted.
Far from one-time expenses, Madison in the past year committed $3.5 million in SLFRF funds for unsheltered homeless support, $2 million in seed money for a homeless services project and $2 million for a youth housing project.
David Schmiedicke, Madison’s finance director, acknowledged that the city council will have decisions to make in 2025 and 2026. “All of the ARPA funding was recognized as one-time,” Schmiedicke told the Badger Institute. “Continuation of any ARPA-funded programs will be considered on a case-by-case basis in future budgets.”
As welcome as the ARPA funding has been, the depth of the coming fiscal cliff will bring into sharp relief longstanding fiscal troubles, particularly for the more populous cities and counties in the state, Schmiedicke said.
“Since 2012, the city has faced structural deficits in funding for current service levels compared with anticipated revenues under strict state limits on allowable growth in property taxes, declining state aid, and state limits on general revenue options for Wisconsin cities,” he said.
ARPA has temporarily changed the arc of local government debt, which already reached a record $11 billion at the end of 2020, when Wisconsin was fully engaged in combating COVID-19.
Local government debt in that year nearly doubled over the previous year, according to a report released at the end of November by the Wisconsin Policy Forum. Of that debt, $1.13 billion is Milwaukee’s alone, and more than a quarter of the debt is shared by the state’s five biggest cities, the report says.
But the fastest growth in debt, according to the report, occurred in the state’s smaller communities, in whose budgets SLFRF funding has had an outsized impact. As the Badger Institute reported over the summer, despite being flush with ARPA money, some cities are asking their voters to approve property tax increases.
Kovac isn’t waiting for Milwaukee to reach the cliff. In a memo to the city’s Finance and Personnel Committee in late October, he warned that SLFRF funding would be gone by the end of 2024, leaving shortfalls of at least $100 million in the 2025 and 2026 budget projections.
The city poured $68 million in revenue replacement money into its general fund freeing up $40 million to add to its pension reserve fund in 2022, Kovac said.
“Unless new revenue at that scale is acquired, significant budget cuts — forcing hundreds of layoffs across all departments — will be inevitable,” Kovac said in the memo.
Kovac’s warning was directed at state officials. No local government in the state has been as buffeted over the last decade by state aid cuts and curbs on property tax increases as Milwaukee, he says.
While the State of Wisconsin took advantage of Treasury’s revenue replacement plan to the tune of nearly $1.5 billion, the fiscal outlook for the state has never been better.
A Wisconsin Policy Forum report released this week called a projected revenue surplus of $6.8 billion over the July 2023 to June 2025 budget cycle “astounding.”
Kovac said he’s optimistic the Legislature will see fit to channel some of that surplus to Milwaukee for three reasons: Mayor Cavalier Johnson has established better relationships with Republican state legislators than his predecessor, Tom Barrett; the Republican majority in the Assembly and Senate would not want to see government services cut in 2024 when the city is hosting the Republican National Convention; and no state government body would countenance deep cuts in police and fire protection for the state’s biggest city.
“We’ve been very honest about it from Day One,” Kovac said. “We don’t want to do it, but what other choice will we have?”
