Foreseeing the Future of Wisconsin’s Flat Tax
March 2, 2023
CROWE reports long-term gains in output and income

I don’t know if they need binoculars, a magical telescope, one of those Deloreans that Christopher Lloyd drove around in Back to the Future or just a spine but politicians starting to negotiate tax reform in the Capitol would do us all a favor by looking a little beyond where they are presently sitting in the here and now.

If none of the above are available, they could just secure a copy of a report issued by the newly invigorated Center for Reform of the Wisconsin Economy (CROWE) at UW-Madison. Among the takeaways, moving to a 3.25% flat individual income tax rate:

Would raise output by about 4.5% in the long term, meaning a state GDP about $13.7 billion higher. Much of the benefit would accrue early after the tax cut and most of the change will have taken place within ten years.

Would increase after-tax income by more than 5% in the long run — again, mostly within ten years.

Let’s face it. Tax reform would not be on the table without the enormous projected $7 billion-or-so surplus right now. But that doesn’t mean the surprisingly good financial situation we find ourselves in is the only reason to move toward a flat tax. Or even the best one.

This is about what needs to happen next year and the year after that, and down the road even further when our kids are grown and tempted to take that job in Austin because all that’s left here is vacant office space and minimum wage gigs at the local vape shop. It’s about growing the pie the way CROWE assures us can happen.

Senate Majority Leader Devin LeMahieu knows this. He recently proposed a four-year transition to the 3.25% flat rate. (Right now the top bracket sits at 7.65% and the lowest is 3.56%, so it would be a dramatic improvement — and even lower than any of the four flat-tax options we proposed in the paper we released with the Tax Foundation, Tax Reform Options to Improve Wisconsin’s Competitiveness.)

Likely worried about short-term revenue repercussions, the Republican leaders of the Joint Finance Committee this week reportedly said it is “unlikely” they will include LeMahieu’s proposal in the budget.

It’s true that in the beginning there will be less tax revenue. The reduction in revenue would be $3.94 billion in the first year of a 3.25% flat tax, according to CROWE. The Legislative Fiscal Bureau (LFB) has estimated a much larger reduction. 

“Our numbers are smaller because people earn more and consume more after a tax cut,” Kim Ruhl, the Curt and Sue Culver Professor of Economics at UW-Madison and one of the authors of the paper, told me in an email. “This increases sales tax revenue. Firms invest more and earn higher profits. This generates higher corporate tax revenues. These increases offset some of the decrease in individual income tax revenues.”

In other words, LFB does not consider the behavioral effects of the tax cut. CROWE does, and I hope the politicians will too.

We don’t have to get to 3.25%. The Badger Institute’s recommendations are for flat taxes between 4.15% and 5.1% and would result in much less loss of revenue to the state.  

Sen. Howard Marklein (R-Spring Green) said this week that a flat income tax is still a “long-term goal,” and Rep. Mark Born (R-Beaver Dam) said they will proffer a budget that moves toward a flat tax over time. 

Capitol insiders were surprised that Marklein and Born publicly backed away from the possibility of a low flat tax so quickly in the session, but most still believe there will be movement in the right direction. 

It’s true the progressives will never let Gov. Evers agree to a flat tax. Perhaps Republican leaders, by saying they won’t push for a 3.25% flat tax in this session, are just recognizing his predicament. The rest of us, the thing is, have a predicament as well. 

Wisconsin is a laggard. Absent Minnesota, we have the highest top individual income tax between the coasts. Excluding the people we draw in from Minnesota and Illinois, we are losing about 10,000 Wisconsinites per year to the rest of America.

Fourteen other states already have or are moving toward a flat tax, including Illinois, Michigan, Indiana and Iowa. Three others basically have a flat tax as well because there are so few brackets and the top rate kicks in at such low income levels. Nine other states have no income tax at all. 

We can’t compete at the current rates. Fortunately, as CROWE’s work makes clear, there is a way to change that. Moving toward a flat tax will not only give us a chance to compete, it will help us grow. Everybody will have more money in their pocket. 

The future with a flat tax looks bright — if only the politicians will lift their heads up and peer in that direction.  

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.

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