Why Wisconsin’s Talking About Flatter, Fairer Taxes
October 8, 2022

Patrick McIlheran

Director of Policy, Badger Institute

The news that Republican gubernatorial candidate Tim Michels is open to a single-rate income tax of “around 5%,” as he told a crowd in Baraboo, is refreshing news for anyone earning a living in Wisconsin.

And not unexpected: The possibility of epochal tax reform has been getting a lot of attention in Wisconsin and elsewhere.

Gov. Tony Evers, a Democrat, even proposed his own tax cut in August, albeit limited. Still, to repurpose an old catchphrase: When politicians compete, taxpayers win.

Wisconsin’s tax revenue is running far ahead of projections and is expected to remain high for years. Meanwhile, about a dozen states this year alone have cut their income tax rates, six of them within 200 miles of Wisconsin. Last year, 13 states cut their rates, and while Wisconsin was one of those, by next year, our top tax rate will be higher than every state except Minnesota and seven others on the east and west coasts.

The Badger Institute and the Tax Foundation laid all this out in a report last July in which author Katherine Loughead ran the numbers and detailed the options. Short version: Wisconsin has a chance not just to cut taxes but to reform them in a way that’s beneficial for everyone.

In particular, we showed how to get rid of the growth-inhibiting relic that is the progressive income tax and to catch up with the wave of states adopting fairer flat-rate structures.

Michels told reporters he’s working out his details, saying only that he’d avoid raising anyone’s taxes. The Badger-Tax Foundation report laid out some pathways that do just that.

Depending on how much of the surplus lawmakers want to return to taxpayers, a flat-rate income tax could be set around 5%, and the current sales tax rate, one of the nation’s lowest, left alone at 5%. Other options include still lower income tax rates with a bump up in sales tax revenue by raising the rate to 6% or by applying it to some now-exempted services.

You may have noticed that an income tax of “around 5%” is above Wisconsin’s lower two tax brackets. The Badger-Tax Foundation options, however, put Wisconsin’s sliding-scale standard deduction to use: By increasing the deduction and raising the income level at which it starts to phase out, they prevent income tax increases on lower-income individuals.

That’s the no-downside half. The upside is broader.

For one thing, every household now in the upper two brackets would see a lower tax rate. That’s every single-filer taxpayer with more than $25,500 in taxable income or married couple at more than $34,000 —about half of all households, according to the Department of Revenue’s latest figures.

And everyone wins when the company that employs you, or the guy who will start the company that someday will employ your kid, stays in Wisconsin. The fact is that states compete on many things, not least the temperance of their tax climates. Wisconsin is about 27th best, according to the Tax Foundation. The options laid out with the Badger Institute can get us to about eighth or ninth place.

Wisconsin lawmakers adopted the nation’s first workable income tax in 1911 in part to shift the burden from a property tax that lay heavy on farmers over to manufacturers and other businesses, who had enraged Gov. Robert La Follette and other progressives by earning a lot of money. The tax took not just more dollars but a higher cut of each dollar from people who earned more, and it did so because progressives wanted to redistribute income.

Now, the rate tops out at 7.65% for the 95% of Wisconsin businesses that “pass-through” their earnings to be taxed on the owners’ individual tax returns. That top bracket, which applies to about two-thirds of passthrough business income, is the only one unreduced, even as all lower brackets were cut in the past three years.

What is obvious to anyone owning a business is that while Wisconsin’s top rate is stuck at 7.65%, the rate in Florida, Tennessee, and Texas is zero. Even Iowa, which in 2021 had a top rate higher than ours, phases down to a 3.9% flat rate by 2026. Illinois, Michigan, and Indiana all have flat rates below 5%. At some point, the question isn’t whether your employer likes being in Appleton but whether she can afford to stay there.

So it’s heartening to see candidates recognizing that the price of government matters. Still, the governor’s offer is a tax credit averaging $375 for a family of four, with no easing at all in Wisconsin’s top rate. By contrast, a flat-rate reform would be structural, not only ending Wisconsin’s disadvantage compared to nearly every state that isn’t on a coast but also ending our politicians’ ability to easily raise taxes by telling voters that only some other chump will get walloped.

That fairer structure has demonstrably driven growth in other states for years. We’re pleased to have helped make it part of the conversation in the Badger State, too.

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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