Wisconsinites will likely see a tax cut this year. Whose will go down the most?
How much, and what form that takes, are important details yet to be ironed out.
MADISON — Facing a projected surplus of more than $7 billion this year, lawmakers on both sides of the aisle say one thing Wisconsinites can count on in upcoming budget negotiations is a cut in their income taxes.
How much, and what form that takes, are important details yet to be ironed out.
The two options currently on the table are Democratic Gov. Tony Evers' call for tweaking the state's more than 110-year-old progressive income tax to benefit middle class earners and legislative Republicans' proposal to eliminate the current tax structure entirely and collapse it into one flat rate of 3.25% for everyone.
While the dueling proposals appear to set the stage for yet another impasse between the state's Democratic governor and GOP-controlled Legislature, Department of Revenue Secretary Peter Barca said the end result could end up somewhere in the middle.
"I think there's room for compromise, so that's the good news," Barca said at the nonpartisan Wisconsin Policy Forum's annual forum in Milwaukee on Wednesday, Feb. 1. Barca added later that, "I think we could do something on the top rate" while also helping more low- and middle-income wage earners.
Rick Chandler, who served as revenue secretary under former Republican governors Scott McCallum and Scott Walker, said shifting to a flat tax would put Wisconsin on a par with other states and help make the Badger State more attractive to out-of-state business owners and individuals.
While Wisconsin's three lower tax brackets have seen reductions over the years, the top bracket, which applies a rate of 7.65% for individual income above about $280,000 annually, has remained largely unchanged for more than a decade. If the top bracket had been reduced at the same rate as the lower brackets, it would be under 6%, Chandler added.
"I think there's an argument for doing a tax package that does both middle class tax cuts and would address our top rate, which is where we're sticking out like a sore thumb right now," Chandler said.
Evers has called for a 10% tax cut for individuals earning $100,000 or less a year and married filers making $150,000 or less, while Senate Majority Leader Devin LeMahieu, R-Oostburg, has proposed replacing the graduated income tax, which he described as "uncompetitive and mediocre," with the flat tax — something Evers has vowed to veto if it reaches his desk.
First in the nation
In 1911, Wisconsin became the first state in the nation to create an individual tax structure composed of 13 income brackets. Under the state's progressive income tax, the income richer people earn above a certain threshold is taxed at a higher rate.
The number of tax brackets grew to 16 in 1962 before gradually being reduced to four income brackets in 1986. The state added a fifth bracket in 2009, but returned to the current four-bracket structure four years later.
While most residents have seen their tax rates drop over the last 40 years, those with the lowest incomes have seen their rates increase, according to a March 2022 report from the Wisconsin Policy Forum. The report underscores that, while Wisconsin's income tax remains one of the more progressive in the nation, it has become less progressive over time.
Between 1980 and 2020, the report found, the average income tax rate fell by just over 30% — from 7.9% to 5.5% — for the wealthiest 1% of taxpayers. The average income tax rate for the middle 20% of taxpayers fell by 20% — from 3.1% to 2.5% — over that span, while the bottom 20% of taxpayers saw their average tax rate more than double, from 0.2% in 1980 to 0.5% in 2020.
Between 2009 and 2011, Democratic Gov. Jim Doyle and the Democratic-led Legislature raised taxes to cover an expected shortfall in the state budget. Those increases were primarily targeted toward the state's top earners with the creation of a new individual income bracket of 7.75% for income above $300,000.
From 2011 to 2023, the Republican-controlled Legislature took 21 actions to increase total tax collections by a combined $1 billion, according to the Policy Forum. Over that same period, 60 laws passed by the Legislature reduced tax revenues by a combined $8.09 billion, the fiscal bureau found.
Currently, the state's lowest bracket of 3.54% applies to individuals earning less than $12,760 per year or married filers earning less than about $17,000, while Wisconsin's top tax bracket of 7.65% applies to individuals earning more than $280,000 or married filers earning more than $374,600.
About 97% of Wisconsin taxpayers paid 5.3% in income taxes or less in 2021, according to the state Department of Revenue. Just 3% of filers were in the highest tax bracket.
The share of taxes paid by different income groups has also shifted over the years, with the bottom 80% of taxpayers owing 37.2% of all state income taxes in 1980, compared with that same group of taxpayers owing 27% of all income taxes in 2020. In the same span, the top 1% of taxpayers in the state owed 22.2% of all income taxes in 2020, compared with 13.5% owed in 1980.
Wisconsin's income tax rates apply only to income that falls within each individual bracket, meaning a person earning $300,000 would be taxed at the top bracket's rate of 7.65% only on the $20,000 earned above the $280,000 threshold. All income below that threshold would be taxed at the rates for those lower brackets.
A flat tax
Under LeMahieu's proposal, all four of Wisconsin's income tax brackets would begin phasing down this year until the state reaches a flat 3.25% income tax for all earners in 2026.
Individuals earning up to $100,000 represent almost 70% of state taxpayers but would see about 18% of the overall tax decrease under a 3.25% flat tax in 2026, according to the fiscal bureau. Those earning $500,000 or more, who represent about 1.4% of taxpayers, would receive more than 32% of the tax decrease.
And while those in the lowest bracket would see their tax rate drop by about a quarter of a percentage point, the tax rate for the state's wealthiest residents would be cut roughly in half, with a 3.25% flat tax.
In dollar terms, that means that a person earning between $40,000 and $50,000 annually would see an average tax cut of $290 in 2026, under the flat tax proposal, while those earning $1 million or more would see more than $112,000 in average tax cuts.
"We have to find better ways to market our tax system. A flat tax would do that," Chandler said. "On the other hand, it would direct a large share of the cuts to the people at the upper end of the tax bracket, not as much to the middle class, so that's where the debate is."
A nonpartisan review by the fiscal bureau of a 3.25% flat income tax found such a measure would reduce state general fund tax revenues by about $2.1 billion in the first year. That reduction would increase over the three-year period to about $5 billion in 2026, a reduction that would apply to all following years, according to an estimate by the fiscal bureau.
"The challenge with a flat tax, as it's been presented, is it would break the bank," Barca said. "We could afford it with the phase-in for this biennium, but when you get to the next biennium that's when we're going to go back to a structural deficit."
Speaking with the conservative Badger Institute's Free Exchange podcast on Jan. 19, LeMahieu said fiscal bureau projections are considered static, meaning they do not take into account any potential economic growth or revenue that results from a flat tax.
"As you're ratcheting down (the tax rate) there's more and more money going back into the economy that's going to be spent on goods," he said.
Chris Reader, executive vice president of the conservative Institute for Reforming Government and a proponent of either eliminating or flattening the state's income tax, said such a "transformational tax change" would make Wisconsin "a magnet in the Midwest" and predicted tax revenue lost under the shift would likely be made up through increased economic development.
"It would be easier for a family or for a small-business owner or entrepreneur to decide to move here from Illinois or one of our other neighbors," Reader said. "That would also help address the workforce issue that we are hearing from every sector."
Speaking with WKOW over the weekend, Evers said he'd consider vetoing the entire 2023-25 biennial budget if it comes with a 3.25% flat income tax attached.
"(A flat tax is) kind of a death knell for me," Evers said. "I think our progressive tax system is a good one. And we don't need to be spending our time and effort to provide the wealthiest Wisconsinites with some extraordinary, large tax cut."
Evers' $600 million proposal also includes a repeal of the state's minimum markup law, which requires gas station owners to set fuel prices at a certain level above what they pay for it wholesale. Under that proposal, the price of gas would drop by about 30 cents per gallon. The governor also has proposed capping insulin copays at $35 and spending $100 million to create a caregiver tax credit for those caring for a family member.
Speaking with WISN's "Upfront" last weekend, Assembly Speaker Robin Vos said he supports the proposal for a 3.25% flat income tax, but added he won't force the matter with Evers, given the veto threat.
"That would be my preference, but I understand Gov. Evers has concerns with that," Vos said. "But the most important thing for us to do, we have to make big efforts toward reducing our tax burden. Flat tax would be ideal. If we can't get to ideal, there are other ways to get there."
Vos has said he'd like to see tax cuts for everybody, though he also has expressed interest in lowering taxes for those in the state's highest bracket.
Evers will unveil his 2023-25 biennial budget proposal later this month. From there, Republicans, who control the powerful budget committee, will rewrite the document before sending it to the governor.
The current budget, drafted by Republicans and signed by Evers in 2021, included more than $1 billion in income tax cuts, focused primarily on middle-income residents.
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