Chance to Enact Flat Tax Just Got a Whole Lot Bigger

By Mike Nichols

July 28, 2022 — Much to his credit, WTMJ’s Charles Benson broke a big – if potentially fleeting – story at the start of the Republican gubernatorial debate earlier this week.

Wisconsin, according to the Department of Revenue, could have an enormous $5.4 billion surplus at the beginning of the next budget cycle in July, 2023.

Benson was right to frame his questions to the candidates with the new info. A surplus that size, after all, makes a low, transformative flat tax – something the Badger Institute and the Tax Foundation propose in the paper we jointly released earlier this month – more than feasible.

There are, however, some very large caveats.

The estimate, for instance, assumes no increase in expenditures.

Benson’s source was Department of Revenue Secretary Peter Barca.

“Yes, Secretary Barca did speak last week with WTMJ,” DOR Communications Director Patty Mayers wrote in an email to me. “At that time, he shared preliminary numbers. We won't release final (fiscal year) numbers until early fall, another month or so.”

The real gold standard for predictions about surpluses and deficits always comes from the Legislative Fiscal Bureau, includes estimates of such things as appropriations and debt service and factors in economic forecasts. Director Bob Lang tells me the LFB also won’t have a new surplus number until late August or early September. But, Lang confirmed, tax revenues are “strong.”

And even when the rate of revenue growth slows down, Wisconsin will have a much higher revenue baseline than it had before. The state’s current growth trajectory is sizable enough that even if Barca’s estimate turns out to be too high, revenues will still be high enough to pay for substantial tax rate relief.

Wisconsin’s current progressive income tax has four brackets taxed at rates that are as low as 3.54% for single filers making under $12,760 per year and as high as 7.65% for single filers making over $280,950 per year. The Tax Foundation and Badger Institute’s recent paper, Tax Reform Options to Improve Wisconsin’s Competitiveness, offered four options that included a flat tax for all filers of between 4.15% and 5.1%.

Various options offer different adjustments to the corporate income tax (currently 7.9%) and the sales tax (currently 5% statewide) and in some cases alteration of what’s known as the throwback rule and the current economic development surcharge. Option “A” for example – the one with the 4.15% flat tax option – includes a 7% corporate income tax, a 6% sales tax that would also eliminate some current exemptions and some alteration of the state’s sliding scale standard deduction that would help taxpayers at the lower end.

All options, though, would result in a net tax cut of approximately $1.2 billion per year. (Annual individual income tax collections, for comparison’s sake, are approximately $8.7 billion per year – the reason eliminating the tax altogether is fun to talk about but much less realistic.)

Bringing the Option A flat tax down to 3.8% – which is just slightly lower than the 3.9% flat tax Iowa is phasing in by 2026 – would result in a $2 billion annual tax cut, according to the Tax Foundation. Bringing it down to Wisconsin’s lowest current rate, 3.54% – a possibility brought up by former Lt. Gov. Rebecca Kleefisch – would result in a net tax cut of approximately $2.5 billion assuming, again, a 6% sales tax with a broader base (elimination of some exemptions.)

Without any changes to other taxes (other than a substantial increase to the sliding scale standard deduction), the Tax Foundation estimates that dropping the individual income tax rate down to 3.54% for everyone would result in a tax cut – or loss of revenue, in other words – of $4.3 billion. (Without increasing the standard deduction, a flat rate of 3.54 percent would cost much less than that.)

There are many questions.

Would a new flat rate be sustainable in the years ahead? Will the politicians want to spend some of the money instead of giving it all back to taxpayers?  

And, of course, will the surplus actually be as large as projected a year from now?

Wisconsin needs a flat tax to compete with other states, including Illinois and Indiana and Michigan. No one knows what the surplus will actually be in a year but the possibility of an unusually large one combined with the options for altering other parts of the tax code mean the fundamental question is already changing.

The query is no longer whether a flat tax is feasible. It’s “How low can we go?”

Mike Nichols is the president of the Badger Institute. Permission to reprint is granted as long as the author and Badger Institute are properly cited.