Policy Documents

Research & Commentary: Wisconsin Tax Reform Update

June 4, 2013

Wisconsin has consistently ranked among the worst states in the nation over the past 30 years for its total state and local tax burden, according to the nonpartisan Tax Foundation. Wisconsin’s current personal income tax has five brackets and a top rate of 7.75 percent. 

Over the past year, the Wisconsin Legislature has considered several major tax reform proposals designed to improve the state’s economic competitiveness and reduce the tax burden on businesses and households. 

Gov. Scott Walker proposed in his 2013 budget to cut income tax rates for thousands of Wisconsin taxpayers, saving about $200 a year for the typical middle-income family. A new proposal introduced by state Rep. Dale Kooyenga would go further by lowering overall rates, simplifying the state’s tax code, and broadening the tax base by ending business tax preferences. 

According to the MacIver Institute, Kooyenga’s legislation would lower income tax rates for an average Wisconsin family from the current 6.5 percent to 6.27 percent next year and 5.94 percent in 2015 and into the future. The bill also proposes reducing the number of brackets from the current five to three by 2015. 

Kooyenga’s bill also would simplify the tax code and improve tax neutrality by eliminating several business tax credits that benefit targeted groups and industries. Wisconsin currently has 52 credits, most of which are used by less than 1 percent of filers. The reforms would eliminate about 20 of these credits, including the jobs and film tax credits. 

Wisconsin lags behind many of its neighbors with its less-friendly business climate and loses millions of dollars in tax revenue each year as a result. An average middle-income Wisconsin family pays higher income tax rates than millionaires in Illinois or Michigan. Many states have no income taxes at all, and they enjoy greater economic growth than those with high income taxes. 

Kooyenga’s proposal also avoids the mistake many state tax reform plans have made in recent years, by not increasing spending. The decrease in Wisconsin’s income tax rates would be a strong step toward making the state more competitive and attracting new business. Income taxes are among the most disruptive factors affecting economic growth because they discourage capital from flowing into a state and hinder the creation of new jobs. 

The following articles examine state tax reform 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. These range from “Above all else: Keep taxes low” to “Protect state employees from politics.” 

Research & Commentary: The Best and Worst Ways to Eliminate a Budget Deficit
http://heartland.org/policy-documents/research-commentary-best-and-worst-ways-eliminate-budget-deficit
Heartland Institute Government Relations Director John Nothdurft identifies some of the most and least effective and economically advisable ways states use to trim their budget deficits. 

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. 

Dale Kooyenga Adds to Scott Walker’s Income Tax Cut for a Total of $752 Million in Taxpayer Savings
http://www.maciverinstitute.com/2013/05/Dale-Kooyenga-Adds-to-Scott-Walkers-Income-Tax-Cut/
Nick Novak of the MacIver Institute examines Wisconsin state Rep. Dale Kooyenga’s plan to reform Wisconsin’s tax code, which includes a $752 million income tax cut and would reduce the state’s tax brackets from five to four in tax year 2014 and three in tax year 2015. Novak says the new plan would reduce rates at every level and combine the middle three brackets over the next two years. 

Wisconsin Plan Cuts Rates, Broadens Bases, Improves State Business Tax Climate
http://taxfoundation.org/article/wisconsin-plan-cuts-rates-broadens-bases-improves-state-business-tax-climate
Scott Drenkard of the Tax Foundation examines Representative Dale Kooyenga’s tax reform bill and how it reforms numerous elements of Wisconsin’s tax code. Drenkard outlines how the reforms will improve Wisconsin tax system and increase its ranking in the Tax Foundation’s State Business Tax Climate Index. “Representative Kooyenga’s proposal expands on Governor Walker’s income tax cut which is currently written into the budget being considered, simplifies the code, makes it more neutral to different types of business activity, and trims several odds and ends that have persisted for decades.”

WI GOP Lawmaker’s Nearly $790 Million Tax Cut Plan Aims to End ‘Compost Pile’ of Credits
http://watchdog.org/87091/wis-743-million-tax-cut-plan-aims-to-end-compost-pile-of-credits/
Ryan Ekvall of Wisconsin Reporter speaks with several people on both sides of the aisle about Kooyenga’s tax reform plan. 

Wisconsin Plan Cuts Rates, Broadens Bases, Improves State Business Tax Climate Ranking
http://taxfoundation.org/blog/wisconsin-plan-cuts-rates-broadens-bases-improves-state-business-tax-climate-ranking
Scott Drenkard of the Tax Foundation examines Kooyenga’s proposed Wisconsin tax reforms and finds they would improve the state’s ranking in the State Business Tax Climate Index, moving Wisconsin out of the bottom ten. “The plan expands on Governor Walker’s income tax cut which [is] currently written into the budget, and also includes additional reform that simplifies the code, makes it more neutral to different types of business activity, and trims several odds and ends that have persisted for decades. The result is an Index ranking of 40, up from the current ranking of 43,” Drenkard writes. 

State Income Migration and Border Tax Burdens
http://heartland.org/policy-documents/state-income-migration-and-border-tax-burdens
In this report, Jacob Feldman of the Americans for Tax Reform Foundation estimated approximately $207 million of income would migrate from Wisconsin to Illinois in 2012 as a result of Wisconsin’s higher income taxes. “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. 

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 going 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.

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.