Neutrality is the best policy for Wisconsin
Two Republican legislators are circulating a bill that would virtually eliminate all income taxes on retirees. It’s an effort to keep older spenders from fleeing Wisconsin — one that would be a bad idea.
Social Security already is exempt from income taxes in Wisconsin. The plan being circulated by Rep. David Steffen of Howard and Sen. Rachael Cabral-Guevara of Appleton would create tax exemptions for other retirement income from things such as IRAs, 401(k) plans and pensions.
The bill would exempt the first $100,000 of such income for single Wisconsinites 67 or older and the first $150,000 for married couples who file jointly.
We wouldn’t be alone. Some of our neighboring states, Illinois and Iowa, are among those that do not tax retirement income from IRAs, 401(k)s or pensions.
“My goal is to return as much of that $4 billion of tax cuts that the governor removed from the budget [and] find a way to get that back to the people’s pockets,” Steffen told the Milwaukee Journal Sentinel. “It’s all an overpayment by taxpayers.” The change would likely save retirees hundreds of millions of dollars.
The proposal is new, and the Legislative Fiscal Bureau has not yet released an analysis, but tax experts generally frown on similarly narrow proposals introduced elsewhere.
Some Kansas legislators, for instance, repeatedly have tried to cut or eliminate income taxes on seniors. Katherine Loughead, a senior tax policy analyst with the Tax Foundation, cited multiple problems with the approach down there.
“If a state levies an individual income tax on wage and salary income, that tax should be consistent in its application to all kinds of income, including Social Security benefits and other forms of retirement income, such as pension income and income from 401(k)s and Individual Retirement Accounts,” said Loughead in testimony to Kansas legislators.
Generally, in the interest of fairness, the Tax Foundation believes income should either be taxed on the way into a retirement vehicle, as with a Roth IRA, or the way out, as with a 401(k).
“That is why up to 85 percent of a taxpayer’s Social Security benefits are taxed by the federal government and why they should likewise be subject to taxation in states that have an income tax. Taxing some forms of income but not others departs from the principle of neutrality, and neutrality is a principle of sound tax policy that many economists agree state governments should try to adhere to when making tax policy decisions,” said Loughead.
Neutrality is essential for both fairness and prosperity.
Large income tax base carveouts, Loughead has pointed out, put “upward pressure” on the overall rate that applies to all income, including that earned by workers and job creators who drive productivity and economic growth.
Far better, in other words, to reengage in the push in Wisconsin for lower rates for everyone — not just seniors.
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.