GOVERNMENT AFFAIRS

A new academic study by University of WisconsinMadison Professor of Economics, Noah Williams, who is also with the nonpartisan Center for Research On the Wisconsin Economy (CROWE), suggests that eliminating Wisconsin’s state personal income tax would help bolster the economy and state workforce. The study’s findings are garnering support from a variety of statewide and national reform groups including, the Institute for Reforming Government (IRG), Americans for Tax Reform (ATR), Wisconsin Manufacturers and Commerce (WMC), and Americans for Prosperity-Wisconsin (AFP-WI).

The study, “Fundamental State Tax Reform: Eliminating the Income Tax in Wisconsin,” details the positive economic impact that would occur in the state if lawmakers completely eliminated the state’s personal income tax and replaced a substantial portion of the revenue with a 3 percent increase in the state sales tax. Wisconsin’s current state sales tax rate is 5 percent. When you also include any local sales taxes, the average state and local rate is around 5.43 percent which is the 8th lowest rate in the country. The study indicates that increasing the state sales tax by 3 percent would still remain lower or on par with state and local sales taxes levied in neighboring states and communities (Chicago - 10.25 percent, Rockford - 8.75 percent, Duluth- 8.875 percent, Minneapolis - 8.025 percent, Dubuque - 7 percent, IL - 8.82 percent, IA - 6.94 percent). According to the analysis, such a shift would result in a significant middle class and small business tax cut amounting to a $3.5 billion tax savings statewide which translates into an annual average of $1,700 per household. If Wisconsin would eliminate the personal state income tax, it would become the 10th state in the nation without a personal income tax on wages and would be the only such state in the Midwest, potentially giving a significant boost to businesses and making the state a more attractive destination for job seekers.

According to Professor Williams, the founding Director of CROWE, such a fundamental tax reform would have the opportunity to substantially improve economic outcomes in Wisconsin leading to increases in output, employment, consumption, and after-tax income. This increased economic activity is predicted to grow the Wisconsin economy by $28 billion with an additional 175,000 people employed. Wisconsin’s top income tax rate is 7.65 percent which puts Wisconsin in the top 10 states for highest top rate in the country. Many who support the plan argue that this is a small business tax - nearly 9 out of 10 employers accounting for 50.9 percent of all employment in Wisconsin pays individual income taxes, and almost 75 percent of them pay at the highest rate. Add in the federal income tax and many of these small businesses are paying 47.7 percent - nearly half of all their income - to the government coffers. In addition, supporters argue that middle class families, who are already losing money due to runaway inflation, are hit hard by Wisconsin’s income taxes. They pay the highest effective tax rate meaning they pay a higher percentage of wages in taxes than higher earners.

According to the CROWE study, households making between $36,551 and $126,449 pay higher real-world income tax rates than what is called for by law, with a

family of four earning $50,000 paying nearly 10% to state income taxes. That’s because of the technical aspects of state tax credits and the state standard deduction, and how they impact the amount owed as the credits are phased out with higher earnings. According to Professor Williams’ report, take home pay will increase by 9.4 percent (7.2 percent after the modified sales tax is considered). Wisconsin would be the only state in the Midwest to have no income tax, giving the state a significant competitive advantage and providing a pathway to compete with states like Florida and Texas that have no personal income tax. Williams argues that this economic incentive will help fuel more people moving to Wisconsin and help turn the corner on the state’s workforce shortage. According to Professor Wiliams, eliminating the income tax will lead to higher employment, increased private sector investment, and lower cost of capital.

Some have said that eliminating the state income tax is a reform that would be a game changer for the state of Wisconsin. More take home pay, higher employment, higher GDP growth are all things that can make Wisconsin a more competitive and attractive place to live and work. Williams also notes in his report that the vast majority of employers in Wisconsin, almost 90 percent, are pass-through entities which means they actually file taxes as individuals. On average, a pass-through employer in Wisconsin has under 13 workers. Eliminating the income tax would put more money into workers’ paychecks, while also helping employers put capital into the company to grow and expand.

While enactment of this magnitude of tax reform is unlikely under Wisconsin’s current political landscape, the CROWE study sets the stage for further debate and possible action by a Republican governor and legislature, should that happen in next year’s midterm elections.

Learn more on the report to eliminate Wisconsin’s personal state income tax at https://bit.ly/Feb22GovAffairs.

IIAW Lobbyist