Majority of states now have top rate below 5 percent
States are increasingly choosing sides on income tax policy. The general national trend in recent years has been toward lower, flatter income tax systems, while a smaller number of states have moved in the other direction, toward higher top marginal rates.
Wisconsin is in the middle, pulled in both directions. The choice our leaders make about which path to follow will have important implications for the state’s future competitiveness and prosperity.
A recent Tax Foundation analysis, “The State Income Tax Divergence,” shows the scale of the shift. As of February 2026, 23 states had cut their top marginal individual income tax rates over the past five years, while six states and the District of Columbia have raised them. This month, another, Rhode Island, joined them, raising its top rate three percentage points to 8.99 percent.
The longer-term pattern is also striking. In 2006, 15 states had top income tax rates below 5 per cent. By 2026, that number had climbed to 26 states. At the other end of the spectrum, only one state had a double-digit top rate two decades ago. Today, six do.
In other words, many states are leaving the middle where Wisconsin now resides. The state is not immune to the same pressures causing policy change elsewhere, and there are frequent calls for Wisconsin to choose one side or the other.
On the side of higher taxes, Gov. Tony Evers’ 2025-27 budget proposed creating a new individual income tax bracket with a top marginal rate of 9.8 percent on taxable income above $1 million. Wisconsin’s current top rate of 7.65 percent is already above the national average, which is the main reason the state ranks 31st in income tax competitiveness in a separate Tax Foundation analysis. Raising it still further would move Wisconsin decisively toward the high-tax side of the national divide.
On the other side, Republican lawmakers have repeatedly proposed significant income tax reductions, including flatter rate structures. For example, in 2023 Senate Majority Leader Devin LeMahieu proposed a gradual move to a flat income tax rate of 3.25 percent — one of several options that included lower top rates.
That is the right instinct.
Lowering the top tax rate is important because taxes affect decisions about where people live, work, invest and build businesses. Skilled workers and entrepreneurs are mobile, and states must compete to attract them. A tax system that imposes high marginal rates on additional income makes Wisconsin a less attractive place to earn, invest and expand. An analysis published by the Badger Institute in 2023 shows a lower top tax rate would increase economic growth, investment and employment in Wisconsin. Reducing the top tax rate isn’t just important for high earners: It would improve economic prospects and outcomes broadly.
This is especially important because the top individual income tax rate does not apply only to wealthy wage earners. It also affects many pass-through businesses, whose owners pay business taxes through the individual income tax code. For those firms, a high top marginal rate can reduce the after-tax return to expansion, hiring and investment. As noted, skilled workers are mobile and capital is even more so. One of the biggest harms from a higher top tax is that it reduces the incentives for investment.
The choice facing Wisconsin is larger than any one tax reform proposal. Wisconsin must decide which side of the national income tax divergence it wants to join.
The Badger State is one of the few states that remains in the middle, but it is facing the same political pressures as other states to move in one direction or the other. The right decision is clear. Wisconsin should choose competitiveness and prosperity by reducing the state’s top income tax rate.
Ben Eisen is vice president of research and policy for the Badger Institute.
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