The following is a transcript of verbal testimony delivered by Badger Institute President Mike Nichols on proposed reforms to Wisconsin’s personal income tax structure.
The testimony was delivered to members of the Senate Committee on Universities and Revenue regarding Senate Bill 1 on April 25, 2023.
Thank you, chairman Hutton. Thank you, ranking member Larson. Senators, thanks for the opportunity.
I’m Mike Nichols, President of Badger Institute.
We did ask the clerks to hand out two studies that we’ve worked on in recent years, a Tax Foundation study on Tax Reform Options to Improve Wisconsin’s Competitiveness and also, more recently, The Economic Implications of a Flat-rate Income Tax for Wisconsin.
For many years we’ve worked on tax reform issues with the Tax Foundation and more recently with the University of Tennessee.
You’ll be happy to know I’ve jettisoned the whole beginning of my remarks about the need for competitiveness and where the rest of America is. The only thing that I’ll add that hasn’t been said is that in addition to thirteen states, including our neighbors who have already or are moving towards a flat tax, and the seven or nine (depending how you count it) who do not have any income tax at all, there are another fifteen states in this country that have mildly — very mildly — progressive tax structures — very compressed brackets.
So, we really are falling behind — and I’ll leave it at that and move on because I’d be redundant in terms of what I’d telling you. You’ve already heard some of it.
But before I talk about what the research says here — this Wisconsin-specific research about growth and opportunity, I just want to talk a little bit for a moment about progressivity. And I want to broaden the conversation for just a minute, because I think this will be unique.
It’s worth noting that even in a single-rate structure, Wisconsin’s income tax code would remain progressive through deductions and credits like the sliding scale standard deduction at the lower end and refundable earned income tax credits. There’s still progressivity.
It’s also important to remember that when it comes to questions of progressivity, taxes are really only one part of the equation.
So, if you look at the so-called tax-and-transfer system in this country as a whole, it is overwhelmingly progressive. And no matter what happens in this building with a flat tax or movement toward a flat tax, it will remain that way. It will remain progressive in this country.
On average, according to our partners at the Tax Foundation, American households in the top quintile — and this is from 2019, the most recent data — had an estimated total federal, state and local average tax burden — and we’ll get to the state in a minute — $125,700. This is all taxes — 23-times as much as the average five $5,500 paid by households in the lowest quintile.
At the same time, according to the Tax Foundation, our partners, the average household in the bottom quintile received $34,000 in government transfers. After accounting for the cost of these transfer programs — because there are taxes paid at that level as well — the bottom quintile still came out $32,400 ahead. The middle quintile came out $10,200 ahead, and the average top quintile household paid $61,000 to fund transfers to others.
So, you look at the taxes and transfers: a very progressive system. Looked at another way, government transfers account for 59% of the bottom quintile’s comprehensive income in America.
So, the point before I move on to the state data that’s too often overlooked is that progressivity really works in two ways. It works through the tax code at the federal and state level and it works through transfers. And when you’re considering tax policy, you really have to look at both and you have to consider the impact of the federal tax code.
So, as the Tax Foundation notes, states have different roles and challenges than the federal government — namely competition. And I jettisoned the beginning of our remarks about competition, but the states are where we need competition, right? [Competition] with each other, with other states for people, for jobs, for investment — all those things that the folks who preceded me talked about.
But where’s the evidence that a flatter tax structure will make us more competitive? It’s not just general evidence. We have these two studies, and I won’t get too far into them. I hope everybody will have an opportunity to digest them. One is from Don Bruce, he’s a prominent economist at the University of Tennessee.
He just completed a study for us, for the Badger Institute, estimating that moving to a flat individual income tax of 5.1 percent — and we did this last fall already, so this predates some of the bills now that are about to move through the Capitol here — but also using the sliding scale standard deduction, which hasn’t been talked about enough, to make sure that nobody at the lowest rate sees a tax increase.
So, you could have a flat tax higher than the lowest rate and have nobody see a tax increase because of changes to the sliding scale standard deduction — but would generate, according to Don Bruce, $7.2 billion — this is Wisconsin-specific — in additional GDP, $614 million in new investment — this is over five years, and nearly $24,000 additional jobs over the next five years.
So, bottom line, shifting to a flat-rate income tax — this is 5.1 [percent], but the principles hold the same at different levels for a flat rate — could result in annual growth that’s more than 10% faster than historic trends.
Now a key point — and it’s been brought up a couple times — is that this isn’t just about individuals. Ninety-five percent, as I think the folks at CROWE and WMC have indicated, of Wisconsin businesses are pass-throughs. These are entities that pay at the individual rate. So, that’s been noted and that does translate and you can read this in the Bruce report.
And there’s a lot of literature on this with the higher wage growth for the folks at the lowest end; for everybody — more employment, more business formation which creates opportunity.
So, Bruce points out — as has been pointed out elsewhere as well — that there is a relocation of capital. Higher earners do move towards more favorable tax environments. So, there are migration impacts. All that is in the study. And I’ll just leave the study with you so you can digest the literature and the methodologies. But I also wanted to note very briefly — and I hope you have a chance to look at it — we’ve done several studies over the years with the Tax Foundation on specific pro-growth tax options.
This one, this one is very interesting. There are actually five different options in here, four of which are flat tax iterations, one of which is a compression of brackets. And I won’t go too far into it; it would take hours to talk about everything that all of the analysis shows. But there various [options] — flat taxes between where we started 4.1% but up to 5.1%.
Some of the iterations left the corporate — the corporate tax is also very high, the corporate tax is 7.9 [percent] — on some of them. One of the more simplistic iterations left the corporate tax — it’s 7.9 [percent]. Some of them lowered that a little bit, which is also good for growth. Some of them made some slight changes to our sales tax — issue for another day. As you know, we have a third law sales tax in the entire country. And then, elimination of a few other things that I guess we’re not talking about today. But, you know, elimination of the throwback rule — which is bad for business — and repealing the economic development surcharge and funding that in a different way.
So, there are other things that we’ve looked at, but I would just say that in the Tax Foundation analysis, each of the sample reform options returns about $1.2 billion annually to taxpayers. Then that can be ratcheted depending on where you are. There’s flexibility in there, depending on political considerations and need for other revenue, for other things — you know, you want to have a different revenue number.
So all that’s in here. We’re very proud of the work that we’ve done with the Tax Foundation. It’s all data driven.
I would just say that I hope that people will look at the entirety of the tax-and-transfer system. It’s inevitably going to remain very progressive. But Wisconsin can — and we think has to — do a lot more to compete with our neighbors. That’s where competition has to take place and with much of the rest of America. Or, watch our children and our neighbors move to states with more jobs and better wages, more opportunity and more prosperity. And those who are left behind at all levels are going to have fewer jobs, less opportunity, and more of the tax burden. People who are left behind are going to bear more of the tax burden.
So, to us, the choice would seem clear.
I’m happy to answer questions, and I do hope that everybody — if you don’t have it already — will pick up a couple of copies of the studies that we’ve put together.
Thank you for the opportunity to testify, chairman.