But part should be jettisoned, and we need to keep working toward flat tax
The best part about legislative Republicans’ proposed tax measure is that it really does cut taxes in a reasonable way for a lot of Wisconsinites, says an authoritative observer of states’ tax reforms.
The proposal, approved by the Legislature’s budget-writing Joint Finance Committee on June 12, would raise the upper limit of the personal income tax’s second-lowest bracket, meaning the tax rate on a lot of income would fall from 5.3 percent to 4.4 percent.
The move, said the Tax Foundation’s Katherine Loughead, “is a relatively well-structured way to provide relief for lower- and middle-income Wisconsinites.”
Currently, Wisconsin’s marginal tax rate rises from 4.4 to 5.3 percent at $39,150 of taxable income for married couples. That break point would rise to $67,300. For single people, the break point now is $29,370. It would rise to $50,480.
As relief, the cut works well, said Loughead, because Wisconsin hits moderate incomes with relatively harsh rates. Of the 41 states with income taxes, 30 charge a lower rate than Wisconsin does on single taxpayers earning $30,000 in taxable income, said Loughead. That includes Illinois, Iowa and Michigan.
“A large number of lower-income Wisconsinites are currently exposed to Wisconsin’s second-highest rate,” said Loughead, who is research manager at the Tax Foundation’s Center for State Tax Policy.
The bracket change also means lower rates on a portion of the income of everyone earning more than the new upper boundaries: For every taxpayer, the tax on the 40,000th dollar earned would fall from 5.3 percent to 4.4 percent, no matter how much her total income is.
As a result, the change would mean lower taxes for about 70 percent of married couples and about 51 percent of all taxpayers in Wisconsin, the nonpartisan Legislative Fiscal Bureau estimated Wednesday. The average married couple would see a $230 tax cut. Among all other taxpayers, the cut would average $143.
“There are plenty of benefits there for Wisconsinites across the board,” said Loughead.
She has less admiration for the other big provision passed by the JFC: exempting the first $24,000 of retirement income earned by an individual 67 or older.
The measure was touted by Republicans as making Wisconsin less unattractive to retirees, to encourage them “to stay and watch their grandkids grow,” Rep. Mark Born (R-Beaver Dam) said.
It’s well-intended, said Loughead, but “all tax policy decisions come with trade-offs.”
“Exempting a greater portion of retirement income would make it more difficult to reduce income tax rates for all Wisconsinites,” she said.
Indeed, while the exemption is available only to residents, it’s available to new residents who may well have spent their working careers elsewhere.
And it suffers from the flaw of every favor for a favored group: “Every dollar of revenue that is foregone in offering exemptions to a small subset of the population is a dollar of revenue that has to be generated from someone else,” she said.
On this count, Loughead said, Wisconsin did well to skip some ideas circulating earlier in the budget season, such as exempting tips. Such provisions “carve up the tax base,” she said. Exempting tips works well for a waiter earning $30,000, for instance, but isn’t much use for a janitor earning the same amount, none of it as tips.
Far better, she said, to do broad rate reductions or to make Wisconsin’s income-linked standard deduction phase out at a higher income. Wisconsin’s personal exemption of the first $700 of income isn’t adjusted for inflation, “so it’s lost a lot of its real value over time.”
The tax measures aren’t yet locked in. The budget approved by the Joint Finance Committee progresses to a Senate where Republicans hold only an 18-to-15 majority. Sen. Chris Kapenga of Delafield has signaled opposition to the overall budget bill, while Steve Nass of Whitewater expressed dissatisfaction with it. Gov. Tony Evers, whose previous use of line-item vetoes to dramatically change bills, is widely distrusted by lawmakers. It is unclear he’ll sign a budget that can pass the Legislature.
Wisconsin did dodge a bullet when lawmakers early on rejected Evers’ proposal to raise the top income tax rate still further. Wisconsin’s top rate, 7.65 percent, already is the 10th-highest top rate among states and hasn’t been cut in years even as lower brackets have been. Evers proposed adding a new rate of 9.8 percent on incomes over $1 million.
As with the existing top rate, the still higher bracket would disproportionately hit income earned from “pass-through” businesses, such as LLCs or family-owned firms, that form the bulk of businesses in Wisconsin, including the backbone of the state’s manufacturing sector.
Evers’ higher bracket would have been swimming against the tide, said Loughead: Since 2021, 24 states reduced income tax rates, including Wisconsin, but Wisconsin is one of the few not to reduce its top rate. And “reducing the top marginal rate is the most likely to promote growth, compared to reducing lower marginal rates,” she said.
A few states — New York and Massachusetts, for instance — have raised rates, Loughead said, but that’s because plans for higher spending left them short of money. “Wisconsin has an abundance of surplus revenue on hand,” she said, and has no need to hit small or medium-sized businesses with a 9.8 percent rate “that would make the state much more like Minnesota.”
A missed opportunity: Despite hopeful talk last session and this, the Legislature took a pass on adopting a “flat” income tax, in which all taxpayers pay the same rate. Wisconsin’s favorable fiscal picture makes such a reform readily available, and research, including some specific to Wisconsin, shows it would have substantial benefits for Wisconsinites’ prosperity. Fourteen states have a single-rate system, including Illinois and Iowa, with six states enacting a flat-tax system in the past four years.
It’s a competitive environment that raises the stakes for what Wisconsin chooses to do.
“Ultimately, a lot of high-income taxpayers are voting with their feet,” she said. “They are moving away from high income tax states, moving their businesses away from high income tax states toward states that have either no income tax at all or lower and flatter, more reasonable income tax structures.”
Patrick McIlheran is the Director of Policy at the Badger Institute.
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