Wisconsin State Rep. Robin Vos recently called for a legislative council committee on state income tax reform to look at the state’s current, progressive, income tax structure. Vos is calling for a tax code that is efficient, fair, and simple, and he says tax reform should not inhibit economic growth.
The reforms most likely to fit those qualifications would eliminate the state’s progressive income tax structure and move toward a flat or at least flatter income tax structure. Opponents argue such changes would be unfair to the state’s low-income families and reduce government revenues.
Supporters cite evidence that flattening income tax rates or completely eliminating the income tax stimulates economic growth and reduces the revenue volatility associated with progressive income taxes.
Recognizing the success of no- or low-income tax states, Kansas and Michigan recently passed pro-growth tax reforms. In states without an income tax, the “average population growth over the past decade was about 13.7 percent, or 148.6 percent higher than the average of those high tax states, and 58.2 percent higher than the U.S. average,” according to Rich States, Poor States by the American Legislative Exchange Council. The population increases in those states have resulted in dramatic increases in tax revenue due to a stronger economy and larger tax base.
Flattening the state’s income tax would attract taxpayers subjected to high taxes in other states and improve Wisconsin’s business climate. With neighboring Illinois continuing to increase taxes and dive deeper into debt, Wisconsin is well-positioned to capitalize on Illinois’ mistakes by lowering its income tax. Currently, Illinois has a flat income tax rate of 5 percent, while Wisconsin has a five-bracket progressive income tax with a top rate of 7.75 percent.
A recent study by the Americans for Tax Reform Foundation found, “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.”
Each tax reform should adhere to four essential principles of sound tax policy:
* Taxes should be applied to a broad base.
* They should be kept at or trimmed to a low, competitive rate.
* They should not distort economic choices.
* They should be transparent to taxpayers.
The following documents provide additional information on personal income taxes and their economic effects.
Rich States, Poor States
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.
Ten Principles of State Fiscal Policy
The Heartland Institute gives 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.”
State Income Migration and Border Tax Burdens
Jacob Feldman of the Americans for Tax Reform Foundation estimates approximately $207 million of income will migrate from Wisconsin to Illinois in 2012. The paper finds, “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.”
Institute Brief—No Income Tax: The Key to Economic Growth
This brief from 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.”
The Heartland Tax Rebellion
More states, especially Midwestern states, are lowering and even eliminating their income taxes: “The American Legislative Exchange Council tracks growth in the economy and employment of states and finds that those without an income tax do better on average than do high-tax states.”
Taxpayers Flee Illinois, State Loses $26 Billion of Taxable Income
The Illinois Policy Institute notes “one taxpayer moved out of Illinois every 10 minutes between 1995 and 2009.” Researchers attribute the emigration to Illinois’ rising taxes and constant increases in borrowing and spending.
Options for Tax Reform
Chris Edwards of the Cato Institute analyzes tax reform options and calls for simplicity, efficiency, and limited government. “The number of pages of federal tax rules has increased 48 percent in the past decade,” he notes.
Illinois Shouldn’t Adopt Progressive Tax
California economist Lawrence J. McQuillan argues Illinois should not emulate California’s taxing and spending habits, noting the Golden State’s progressive income tax hurts the state economy. Illinois should avoid taking that route to “solve” its budget problems, he cautions
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 tax topics, visit The Heartland Institute’s Web site at http://heartland.org, Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, and PolicyBot™, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, please contact Government Relations Director John Nothdurft at [email protected] or 312/377-4000.