Wisconsin Has a Spending Problem

By TOM HEFTY | Nov. 24, 2014

The headline in late October was a shocker: “Wisconsin business taxes rank 43rd”  — seventh worst in the country. That shouldn’t have been a surprise. Wisconsin has consistently had among the highest taxes.

In 2012, The U.S. Tax Foundation ranked Wisconsin’s personal taxes fifth highest in the country as a percentage of income. In 2013, the Wisconsin Taxpayers Alliance ranked Wisconsin 11th, using somewhat different calculations. Both are the most current reports available from these groups.

The next surprise: Didn’t Wisconsin cut taxes? Aren’t the schools, the road builders and the university all complaining about spending cuts? How can Wisconsin simultaneously have high taxes and draconian spending cuts? Where do the dollars go?

The answer lies in the mix of Wisconsin spending. Among the 50 states, Wisconsin’s highest rankings for major public spending are for welfare and higher education. Surprised? Didn’t Tommy Thompson fix welfare with the state’s pioneering welfare reform two decades ago? Isn’t the University of Wisconsin leadership seeking major funding increases?

The statistics don’t support the political rhetoric. In the most recent numbers, Wisconsin ranks 12th in the country in per capita state and local spending on higher education ($5.8 billion) and 13th for welfare ($10 billion). Corrections spending also ranked 12th, but with fewer dollars ($1.5 billion).

Wisconsin spends $1,758 per capita on welfare compared with a national median of $1,532. Neighboring Illinois spends only $1,438 — 22% less than Wisconsin.

In a 2014 report, the Federal Reserve Bank of Chicago looked at welfare spending in a different way. The Chicago Fed divided total state safety net spending on all types of welfare by the number of individuals in the bottom income quartile, whether or not those individuals received services. Wisconsin was 16% above the national average and 24% above the Illinois level. Wisconsin spent $16,241 per person compared with a national average of $13,929 and $13,103 in Illinois.

Twenty years ago, welfare reform moved Wisconsin in the right direction. It tied welfare to work and placed time limits on benefits, while maintaining our state’s history of generous welfare benefits.

The original Wisconsin law had two tiers of benefits — one for existing Wisconsin residents and a lower benefit level for new residents. After the federal courts struck down that two-tier system, Wisconsin raised everyone to the higher level. Gov. Jim Doyle took an additional step to weaken welfare reform — reversing the Thompson administration’s integration of welfare and work force training. By 2007 welfare again had its own agency — the newly created Wisconsin Department of Children and Families.

The cost impact of Wisconsin’s generous funding is substantial. If Wisconsin’s welfare benefits were at the same per capita level as the national average, the annual state and local savings would be an estimated $1.3 billion.

The same dynamic is true in higher education. Wisconsin spends generously.

Wisconsin’s sprawling higher education establishment includes 74 campuses — 13 four-year UW campuses; 13 two-year UW campuses; and 16 technical college districts with 48 two-year campuses. To put that number is perspective, Wisconsin has 33 state senators, with an average of two campuses per senate district. That helps explain the political difficulty of reforming higher education.

State and local higher education spending in Wisconsin is almost 10% above the national average as a percentage of state income. According to the 2014 State Higher Education Finance report, Wisconsin allocates 7% of state and local tax revenue to higher education, the highest percentage in the Midwest.

Viewed from another angle, Wisconsin’s state and local spending per capita on higher education is $1,028 compared with a national level of $864. That ranks 12th highest in the country. Higher education spending by local government ranks seventh in the country. These local taxes fund technical colleges and a portion of the UW two-year college budgets.

Higher education and welfare are tough political choices — guns or butter. Do we invest in human capital or provide a stronger safety net for the less fortunate? What can Wisconsin afford? Can higher education be made more efficient? Is welfare structured to encourage work? There are no easy answers.

Some in Madison want both guns and butter. In a scholarly article, Rebecca Blank, the Obama commerce department official who became UW-Madison chancellor, was openly critical of welfare reform. In addition, she argues for greater spending on UW-Madison.

Historically, Wisconsin addressed these complex issues with bi-partisan “blue ribbon” citizen commissions chaired by respected state leaders. The head of the UW system and the retired head of Kimberly-Clark are past examples. Because these panels were deliberately set apart from the partisan fray of the Capitol, they could float policy ideas that the politicians might fear to discuss. But the appointment of these task forces stopped with the Doyle administration. The last blue ribbon commission taking a comprehensive look at higher education convened more than 40 years ago. The last on welfare reform occurred more than 20 years ago.

While Katharine Lyall was president of the UW System, she commented that a state with below-average incomes and below-average wealth cannot long sustain a world-class university. That describes Wisconsin. Long-term economic growth has been slow, ranking 33rd. Average wages in Wisconsin declined to the level of Alabama’s in the last decade.

No one should be surprised. Wisconsin state and local taxes are high because Wisconsin spending is high — particularly for welfare and higher education. Our public leaders need to find the right balance between taxes and programs. This could include the appointment of a reform commission to make recommendations. Failing that, perhaps it is time to look again at TABOR — a taxpayer’s bill of rights. TABOR sets the limit on what taxpayers can afford. Public officials decide the spending priorities within those limits.

The surprise is over. The hard work begins.

Tom Hefty is retired head of Blue Cross-Blue Shield United of Wisconsin. Twenty years ago, he served on the state’s SAVE Commission, which was formally known as the Study of Administrative Value and Efficiency in government.

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