While low in some areas, others need immediate reform
A new poll found a surprising gap in voters’ understanding of how Wisconsin taxes compare to neighboring states, even as an unprecedented state revenue surplus makes tax reform a key issue in Madison.
The poll, of 480 registered voters in December, asked, “How do the taxes people pay in Wisconsin compare to the taxes people pay in neighboring states?”
One-third said we pay more than people in neighboring states. Sixteen percent said we pay less; 22% said “about the same” — and a whopping 29% said they did not know or would not venture an opinion. The numbers didn’t vary much by partisanship, either.
Where figures differ is in the no-answer share: While 23% of Republicans did not know or would not say how we compare, it was 32% of independents and Democrats.
The poll, conducted by Morning Consult and commissioned by State Policy Network, a group of free market think tanks (the Badger Institute is a member), asked other questions more centered on voters’ opinions. This question, however, gets at a matter of fact — tax rates are public information.
The Badger Institute published detailed comparisons last summer as part of the options for tax reform it offered jointly with the Tax Foundation, the respected national nonprofit. The full study can be seen here.
The short answer is that Wisconsinites pay more where it matters most. The longer answer is that it varies, depending on which tax and which neighbor.
Wisconsinites pay a lower rate of sales tax than most states — our average combined state and local rate of about 5.4% is third lowest among states that charge a sales tax, behind only Wyoming and Alaska. Average sales tax rates are higher in Michigan, at 6%, Iowa and Indiana at 7%, Minnesota at 7.5% and Illinois at 8.7%.
Sales tax revenue make up about 29% of Wisconsin’s combined state and local revenue in 2018-19, the most recent figures.
In contrast, Wisconsinites pay comparatively high property taxes, though rates are set locally and vary widely. Overall, property tax bills average 1.63% of the value of an owner-occupied home, the seventh-highest state average. Illinois is higher, second-worst in the country at 2.05%, while other neighbors are more moderate, down to Indiana, with a statewide average bill that’s 0.84% of property value.
And, as the Tax Foundation’s Katherine Loughead noted in the 2022 tax options study, Wisconsin’s property taxes, while high, are well structured, applied neutrally across kinds of property. Wisconsin property tax collections amounted to $1,685 per person in 2019, the latest figures from the Tax Foundation, while Minnesotans paid $1,727 a person and Illinoisians $2,338.
Where Wisconsin’s taxes stand out in a harmful way, however, is the personal income tax. Income taxes made up 44% of state revenue, the largest slice by far, and Wisconsin’s rates make us an outlier.
As of Jan. 1, every state between New York and California, with the sole exception of Minnesota, has a more moderate top rate of income tax than Wisconsin’s 7.65%.
In Illinois, everyone pays 4.95%. In Michigan, everyone pays the flat rate of 4.25%. Indiana’s rate for everyone on Jan. 1 dropped to 3.15%, while Iowa, whose top rate was worse than Wisconsin’s, fell to 6%. By law, Iowa shifts to a flat rate of 3.9% for everyone in 2026.
Only Minnesota, where the top rate is 9.85%, is worse than Wisconsin.
Wisconsin’s top rate has stayed the same for a decade, even as 25 other states cut their top rate. Fourteen states now have flat-rate income taxes, with Arizona, Idaho and Mississippi adopting one as of Jan. 1. Nine states have no income tax at all.
Wisconsin’s top rate has remained at 7.65% even as its lower three rates have been cut in recent years. The lowest two brackets were cut in 2019 and 2020, while the second-highest rate was cut by nearly a full percentage point in 2021.
It is worth noting, however, that this second-highest marginal rate – paid by about two-thirds of all Wisconsin households with a tax liability in 2020 – was a higher rate than anyone of any income faced in Illinois, Indiana or Michigan.
Even more troublesome is Wisconsin’s top rate. Economists long have pointed out that “progressive” tax systems, which charge not just higher taxes but a higher rate of taxes as incomes rise, are a disincentive to earning more money and reduce economic output.
The top rate affects more than the individual Wisconsinites paying it. About 95% of Wisconsin businesses are structured as “pass-throughs,” with their business income taxed on the owners’ individual tax returns. About two-thirds of pass-through business income in Wisconsin is exposed to the top 7.65% rate, so the rate has an outsize effect on business owners’ decisions about expansion or even remaining in Wisconsin.
“Reductions to Wisconsin’s top marginal individual income tax rate would be a game changer for many of the state’s small businesses,” wrote Loughead in the report — and, presumably, for the Wisconsinites who rely on them for a livelihood.
Taxes are likely to remain a hot topic as the Legislature and governor work out the state’s next biennial budget.
The poll found that there is broad support for cutting income taxes. The poll asked Wisconsinites “how you feel about the amount of state income taxes you pay.” Only 3% said they were “too low,” and 29% were satisfied. In all, 59% said their income taxes are either “somewhat” or “much too high,” including 52% of Democrats.
Republican legislative leaders say tax cuts — including possibly reforming to a flat rate — are high on their agenda. Democrat Gov. Tony Evers has recently spoken in favor of further cuts in lower-rate brackets while insisting that Wisconsin “should continue to have a progressive tax system.”
What is clear, however, is that retaining the income tax’s “progressive” structure that has, from its beginning, been meant to redistribute income away from those who earn high incomes, is making Wisconsin an outlier among states. In short, Wisconsin costs more than our competition.
Patrick McIlheran is the Director of Policy at the Badger Institute. Permission to reprint is granted as long as the author and Badger Institute are properly cited.
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