Why Wisconsin remains a tax hell

New findings trumpeted by the Milwaukee Journal Sentinel fail to break down Wisconsin’s tax burden by income categories or on a regional basis.

By JAY MILLER | Dec. 15, 2015

Wisconsin is not as much of a tax hell as it is reputed to be, so reported the Milwaukee Journal Sentinel on Nov. 18. The Wisconsin Department of Revenue and the Wisconsin Taxpayers Alliance discovered that the U.S. Census Bureau for years had been double-counting some Wisconsin taxes and that if the error is corrected, Wisconsin’s taxes as a share of citizens’ income would rank 15th in the nation, instead of 11th.

Not to worry; Wisconsin is still a tax hell. Here’s why.

To begin with, even accepting the findings above — and I have great respect for the Wisconsin Taxpayers Alliance — ranking 15th out of 50 states in tax burden gives us no reason to brag. It still means that 35 states are more competitive than Wisconsin. (The secondary finding from the article that based on taxes paid per capita, Wisconsin ranks 19th instead of 15th means little. People only want to know what percentage of their income is being taken in taxes, not what the per capita taxes or spending is.)

Importantly, these new findings trumpeted by the Journal Sentinel fail to break down Wisconsin’s tax burden by income categories or on a regional basis. In other words, while I have no reason to dispute them, the findings warrant a more precise analysis.

Relying on a report by the Institute on Taxation and Economic Policy, a nonpartisan research organization that works on tax policy issues, the website WalletHub shows the effective state and local tax rates in each state, based on three income levels. Those income levels are low ($25,000), middle ($50,000) and high ($150,000).

According to that report, although Wisconsin’s tax rate ranks 27th among states for citizens at the low income level, the rate spikes to 43rd and 46th for those at the middle and high income levels, respectively. (Note: That report ranks tax rates from lowest to highest.)

Some might say a ranking of 27th is good because it shows that Wisconsin has a relatively progressive tax structure, placing more of the burden on those who can better afford to pay. This, however, overlooks two serious problems.

First, Wisconsin’s overall taxes remain high. Second, those at the middle- and upper-income levels, or those who aspire to be there, are the ones who create jobs and they don’t want to be punished for their efforts. Based on this statistic, they could be more inclined to look elsewhere for starting up or expanding their companies.

One could reasonably infer that the tax burden in Wisconsin is among the reasons the state ranks 38th in job creation or dead last in start-up activity.

Aside from the above state-by-state comparisons, there is one more factor to consider: the tax impact on those living in Milwaukee city and county, a region that needs to be a key economic driver for the state to thrive.

Unlike income and, to a large extent, sales tax rates (most Wisconsin counties charge 5.5% or 5.6%), residential property tax rates can vary dramatically among locales within a state.

The Minnesota Center for Fiscal Excellence and Lincoln Institute of Land Policy report that in 2013, the city of Milwaukee ranked third among the country’s 50 largest cities in property taxes for homes valued at $150,000 and $300,000. Milwaukee County property taxes follow suit, as evidenced by the exodus of higher-income earners moving to Ozaukee and Waukesha counties to escape them (along with crime).

Therefore, not only do middle- and upper-income taxpayers pay disproportionately higher taxes by living in Wisconsin, those who live in the Milwaukee area pay an even steeper price due to the property taxes levied there. None of this bodes well for turning our region into an economic powerhouse — without a change to our tax structure.

Some people point to another high tax state, Minnesota, which is enjoying economic success right now, to demonstrate that a heavy tax burden does not matter. Minnesota’s success, however, is attributable to Minneapolis-St. Paul, and those two cities are thriving for several non-tax reasons.

They include being the home of several Fortune 500 companies, as well as having the state capital and the University of Minnesota’s flagship campus located there. If the same were true for Milwaukee, perhaps the importance of tax rates would diminish. But the fact is they are not and we can’t ignore that difference.

All told, the state of Wisconsin in general and Milwaukee in particular discourage young professionals and entrepreneurs from setting up shop here at least partly because of the punishing effect that taxes would have on them. A closer look than the one the Journal Sentinel provided shows that this state and region remain a tax hell, and we must do much more to get rid of that label.

Jay Miller of Whitefish Bay is a tax attorney and an adjunct professor at the University of Wisconsin-Milwaukee’s Lubar School of Business. He writes “The Right Balance” blog at JSOnline.com. This column represents his personal opinion.