Policy Documents

Research & Commentary: Wisconsin Income Tax Reform

January 28, 2013

In his 2013 State of the State Address, Wisconsin Gov. Scott Walker proposed cuts in the state’s income tax rates to be phased in over a few years. According to Assembly Speaker Robin Vos (R-Rochester), the tax cut, which could take effect in 2013, would amount to $300 million to $350 million over two years. According to the Milwaukee Journal Sentinel, Walker says the tax cut will mean about $200 in tax savings for the typical middle-income family.

A cut in Wisconsin’s income tax rates would make the state more competitive and attract new business. Income taxes are among the most disruptive factors affecting economic growth; they discourage capital from flowing into a state and hinder job-creation.

According to the nonpartisan Tax Foundation, Wisconsin has consistently ranked among the worst states in the nation over the past 30 years for its total state and local tax burden. Wisconsin lags behind many of its neighbors with its less-friendly business climate and loses millions of dollars in potential tax revenue each year. Wisconsin currently ranks in the bottom ten in the Tax Foundation’s State Business Tax Climate Index.

Wisconsin’s current personal income tax system has five brackets, with a top rate of 7.75 percent that begins at an income of $224,210. Taxpayers in Wisconsin pay more in personal income taxes than most other states, ranking 11th highest nationally. Wisconsin’s corporate income taxes are high as well; companies are charged a flat rate of 7.9 percent on all corporate income, ranking 18th highest nationally.

According to Forbes, “America’s nine ‘no income tax’ states saw their non-farm payrolls expand by 5.5 percent from 2001-10 – well above the average national increase of 0.6 percent. The nine highest-tax states? Their employment actually shrank during the prior decade – by 1.6 percent on average.”

In the past decade, several states have had substantial success in improving their economy and business climate by lowering their income tax rates. As a result, several states this year are expected to consider lowering or eliminating their income tax in order to spur economic growth. As the tax competition heats up, lowering Wisconsin’s income tax would help the state attract more jobs and high-quality workers.

The following articles examine income tax reform, the effectiveness of low income tax rates, and Gov. Walker’s tax reforms, from multiple perspectives.

Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.” 

Research & Commentary: Reforming Wisconsin’s Income Tax
http://heartland.org/policy-documents/research-commentary-reforming-wisconsins-income-tax
In 2012, Wisconsin state Rep. Robin Vos called for a legislative council committee on state income tax reform to look at the state’s current, progressive, income tax structure. Vos called for a tax code that is efficient, fair, and simple, and he says tax reform should not inhibit economic growth. This Research & Commentary examines personal income taxes and their economic effects and outlines four essential principles of sound tax policy. 

Rich States, Poor States
http://heartland.org/policy-documents/rich-states-poor-states-alec-laffer-state-economic-competitive-index
The fifth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes. 

Institute Brief—No Income Tax: The Key to Economic Growth
http://heartland.org/policy-documents/institute-brief-no-income-tax-key-economic-growth
The Public Interest Institute examines how states with no income tax are doing compared to those with income taxes: “Studies show that states without an income tax have greater economic growth rates than states with an income tax, including greater rates of income growth, population growth, and job growth, and are more attractive to businesses looking for locations to build or expand.” 

Long-run Macroeconomic Impact of Increasing Tax Rates on High-Income Taxpayers in 2013
http://heartland.org/policy-documents/long-run-macroeconomic-impact-increasing-tax-rates-high-income-taxpayers-2013
This report from Ernst & Young conducted on behalf of the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association, and the United States Chamber of Commerce examines the log-run impact of increases in the top tax rates. 

State Income Taxes and Economic Growth
http://heartland.org/policy-documents/state-income-taxes-and-economic-growth-0
Barry W. Poulson and Jules Gordon Kaplan explore the impact of tax policy on states’ economic growth within the framework of an endogenous growth model. Regression analysis is used to estimate the impact of taxes on economic growth in the states from 1964 to 2004. The analysis reveals higher marginal tax rates impose significant damage on economic growth. 

The Economic Impact Of Replacing Federal Income Taxes With a Sales Tax
http://www.cato.org/pubs/pas/pa193.html
Laurence J. Kotlikoff examines in this Cato Institute Policy Analysis the crisis in U.S. saving, its implications for the nation’s economic performance, and the responsibility of our tax structure for the crisis. A computer simulation model is used to evaluate a proposal to raise U.S. saving by replacing all federal personal and corporate income taxes with a national retail sales tax. 

The Impact of Tax Policy on Economic Growth, Income Distribution and Allocation of Taxes
http://heartland.org/policy-documents/impact-tax-policy-economic-growth-income-distribution-and-allocation-taxes
There is considerable disagreement about how taxes, especially high marginal tax rates on those with high incomes, influence economic performance and the distribution of income. This essay by James D. Gwartney and Robert A. Lawson uses cross-country data on changes in marginal tax rates since 1980 to examine this topic. Their findings indicate that high marginal tax rates, particularly rates of 50 percent or more, exert an adverse impact on long-term economic growth. 

State Income Migration and Border Tax Burdens
http://heartland.org/policy-documents/state-income-migration-and-border-tax-burdens
Jacob Feldman of the Americans for Tax Reform Foundation estimates approximately $207 million of income would migrate from Wisconsin to Illinois in 2012. “Each positive 1 percentage point tax burden differential between states decreases the ratio of income migration into the high tax state by 6.78 percent in a given year,” he writes.

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the FIRE Policy News Web site at http://news.heartland.org/insurance-and-finance, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.