Policy Documents

Research & Commentary: Wisconsin Income Tax Repeal

January 9, 2014

A new report by the American Legislative Exchange Council’s Center for State Fiscal Reform found 18 states made a total of 25 meaningful tax cuts during the 2013 legislative session. Wisconsin was one of the states that took major steps to improve its economic competitiveness and reduce the tax burden of Wisconsin businesses and households. The state is expected to continue down the path of lowering or even eliminating its income tax. 

In 2013, the state legislature approved a $650 million income tax cut that lowered rates and reduced the number of brackets from five to four. The average tax decrease, according to the Lacrosse Tribune, would be $158. Taxpayers earning around $45,000 a year on average would receive an $87 reduction, and those earning $125,000 will receive a $281 cut. The reform package also simplified the tax code by eliminating several tax credits and inconsistencies with the federal tax code. Eliminating unnecessary tax credits simplifies the tax code and improves tax neutrality by removing business tax credits that benefit targeted groups and industries. 

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, relying heavily upon its income tax. Gov. Scott Walker has said he is considering taking the 2013 income tax reforms even further by eliminating the tax altogether. Wisconsin lags behind many of its neighbors with its less-friendly business climate and loses millions of dollars in potential tax revenue across its borders each year. 

An average middle-income Wisconsin family pays higher income taxes than millionaires in Illinois or Michigan. By eliminating its income tax, Wisconsin would join the nine states that do not levy a broad-based individual income tax. Studies have found states with no income tax or with lower income taxes perform better economically and achieve greater job and population growth than those with higher taxes. 

Writing in Forbes, Ben Wilterdink of the American Legislative Exchange Council points out in the past decade the population in the nine states with no personal income tax grew 150 percent more rapidly than in their high-tax counterparts, and their gross state product grow 40 percent faster than those of higher-tax states. 

Income taxes are among the most disruptive factors affecting economic growth. They discourage capital from flowing into a state and hinder the creation of new jobs. Eliminating Wisconsin’s income tax would be a strong step toward making the state more competitive and attracting new business. 

The following articles examine state income tax reform from multiple perspectives. 
 

Walker Says Administration Will Evaluate Eliminating Income Tax
http://wispolitics.com/index.iml?Article=312385
This article from WisPolitics.com discusses the recent comments from the Walker administration in its ongoing discussion about taxes and the possible inclusion of income tax repeal in future tax reform plans. 

Scott Walker Mulls Striking Income Tax
http://www.politico.com/story/2013/12/scott-walker-wisconsin-income-tax-101286.html?hp=r3
Jose Delreal of Politico speaks with several contacts around Wisconsin about the possibility of state income tax repeal. 

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.”  

Tip Sheet: State Income Tax Reform
http://heartland.org/policy-documents/tip-sheet-state-income-tax-reform
This Policy Tip Sheet from The Heartland Institute examines state income taxes, how they are considered by many economists to be the most destructive tax and a deterrent to economic development, and how states with no income tax have performed better economically and have seen greater job and population growth than those with higher taxes. 

Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The sixth 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.”  

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 inflict significant damage on economic growth. 

Taxes Really Do Matter: Look at the States
http://heartland.org/policy-documents/taxes-really-do-matter-look-states
Economists Arthur Laffer and Stephen Moore examine the claim that tax rates don’t matter and thus raising income taxes, dividend taxes, and capital gains taxes won’t hurt the economy. Analyzing the evidence for more than two decades, with data dating back to 1960, the authors find that in any 10-year period, states without an income tax consistently outperformed those with the highest income taxes. 

New Evidence Shows States with No Income Tax Grow Faster and Create More Jobs
http://danieljmitchell.wordpress.com/2012/12/15/new-evidence-shows-states-with-no-income-tax-grow-faster-and-create-more-jobs/
Daniel J. Mitchell examines recent research and finds evidence demonstrating zero-income-tax states grow faster and create more jobs than high-income-tax states. 

The Potential Effect of Eliminating the State Corporate Income Tax on Economic Activity
http://heartland.org/policy-documents/potential-effect-eliminating-state-corporate-income-tax-economic-activity
Laura Wheeler, senior researcher at the Fiscal Research Center of the Andrew Young School of Policy Studies, summarizes studies of the effect of state corporate income tax changes on economic activity. Wheeler then uses the results of those studies to estimate the economic effect of eliminating a state’s corporate income tax. She concludes low state corporate income taxes spur investment and employment in the state. 

The U.S. Tax System: Who Really Pays?
http://heartland.org/policy-documents/us-tax-system-who-really-pays
Writing for the Manhattan Institute, economist Stephen Moore examines popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness.
 

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 Budget & Tax News Web site at http://news.heartland.org/fiscal, 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.