Tuesday, March 1, 2011

Who Pays Wisconsin Pensions and Who Is Responsible for the Deficit?

As the pivotal unrest in Wisconsin hits the two week mark, Governor Scott Walker does not show any signs of backing down. He continues to insist that public workers must contribute more for their health benefits and pensions and forgo all of their collective bargaining rights in order to balance the state budget. Two authors find serious folly with Walker's policy and the media coverage on the issue.

David Cay Johnston, a Pulitzer Prize winning columnist and tax expert, argues that journalists have done a poor job of explaining how public pensions are paid for in Wisconsin. According to Johnston, it is misleading to ask public workers to contribute more for their pensions and benefits because they already pay 100% of these costs. Health benefits and pensions are part of the workers' compensation and are a form of deferred payments that workers have negotiated through bargaining. So, Johnston says, it is deceptive to frame the benefits as an unearned "gift" by income taxpayers instead of part of the public workers' income.

Walker and his supporters would presumably argue that this is exactly the point: Collective bargaining has made compensation packages for public workers too generous, regardless of how you frame the payment method, and it ties the hands of local government trying to balance their budgets. However, if balancing the budget is Walker's goal, Lee Sheppard at Forbes.com finds his policy flawed. In order to make Wisconsin "open for business", Walker is cutting corporate income taxes and requiring a supermajority vote in order to raise business taxes. Sheppard says that this policy will deprive the state of hundreds of millions of dollars a year, which will add to the state's deficit.
Walker's arguement against collective bargaining is that it decreases the flexibility for local governments to balance their budgets. Yet, by requiring a supermajority to repeal corporate income tax cuts, Walker is being hypocritical by enacting a policy that limits future options for balancing Wisconsin's budget.


  1. Indeed a complicated issue, but I don't totally agree with Mr. Johnson's point. The reporters' way of description seems fine to me. There is no disagreement about the true effect, which is the reduction of real income.

  2. Well, that's not entirely correct, is it?

    You appear to be trying to tie the union issue to a corporate tax issue. They are and should be separate.

    So first, decrease taxpayer expense by decreasing union benefits.

    The reduction of corporate income tax does, initially, decrease state revenues.

    However, the theory of economics the Governor is following is one that suggests that by lowering corporate taxes, the corporations will have more money available to hire workers. Those workers get taxed on their income.

    In addition, as these workers get jobs, they are now spending money in the economy that they previously were not spending due to unemployment. That's more revenue from sales taxes.

    Now, more goods are being produced to meet the increased demand, necessitating the hiring of yet more workers. Theoretically, the cycle repeats itself.

    The argument that the corporations will just keep the excess profits runs counter to their own interests. They WANT to sell more goods and increase profits.