Since 2011, Gov. Scott Walker (R) and the General Assembly have cut taxes by nearly $2 billion. Prior to Wisconsin’s tax reforms, the state had five income tax brackets, with rates ranging from 4.6 percent to 7.75 percent. The reforms simplified the tax code by eliminating 17 special-interest tax credits and a tax bracket and lowering the rates, which now range from 4 percent to a top rate of 7.65 percent.
In a paper examining Wisconsin’s economic recovery, the Wisconsin Policy Research Institute (WPRI) notes the Bureau of Labor Statistics (BLS) found Wisconsin has improved in every national ranking of business climates. Although the various tax reforms placed Wisconsin on the road to greater economic competitiveness, WPRI concluded they did not address all the problems with the state’s tax system.
The National Center for Policy Analysis (NCPA) and MacIver Institute compared Wisconsin’s tax climate with both the top five destination states for those leaving Wisconsin (Arizona, Colorado, Florida, North Carolina, and Texas) and the states neighboring Wisconsin (Illinois, Iowa, Michigan, and Minnesota). Despite cutting taxes significantly, the state loses an average of $136 million per year in adjusted gross income to out-migration, the NCPA found.
The states benefitting from Wisconsin’s out-migration all share one policy in common: They place a lower tax burden on higher-income taxpayers, NCPA notes. Although Wisconsin’s tax rates are competitive with its neighboring states for lower-income taxpayers, it lags behind many of its competing states for households with annual incomes of $75,000 or more. An average middle-income Wisconsin family pays a higher income tax rate than millionaires in Illinois and Michigan.
Study author Pamela Villarreal argues, “Essentially, the state is penalizing taxpayers for being more successful. With Wisconsin discouraging home ownership and higher income, it is no wonder that $136 million leaves the state every year. If Wisconsin wants to be a national competitor for new businesses, investment, and job creation, it must keep reforming its tax code and reduce the overall tax burden.”
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.
Wisconsin has made several steps in the right direction with its recent tax reforms, but more work is needed. The progressivity of the state’s income tax system must be reduced. Eliminating the income tax altogether would help taxpayers and the economy the most, but at the very least, the state should implement a lower, flat tax. That would help stem the out-migration of Wisconsin residents.
The following articles examine state income tax reform from multiple perspectives.
Is the Tax Code Driving Taxpayers from Wisconsin? An Analysis of Wisconsin Taxes
http://heartland.org/policy-documents/tax-code-driving-taxpayers-wisconsin-analysis-wisconsin-taxes
The news for Wisconsin taxpayers has been quite positive lately. Gov. Scott Walker (R) and lawmakers have cut taxes three times in the past year, and since 2011, taxes have been cut by nearly $2 billion. In addition, the tax code has been simplified, eliminating 17 special interest tax credits and reducing the number of income tax brackets from five to four. These recent events are great news for the hard-working taxpayers of the Badger State, but this report from the John K. MacIver Institute for Public Policy and the National Center for Policy Analysis (NCPA) shows there is more work to be done.
Wisconsin’s Tax Climate is Improving, But Still Lags Behind Most Neighbors
http://dailycaller.com/2014/08/11/wisconsins-tax-climate-is-improving-but-still-lags-behind-most-neighbors/#ixzz3BciylMFB
Peter Fricke of The Daily Caller examines the NCPA report, which concludes, “although lower- and middle-income residents, particularly non-homeowners, do quite well in Wisconsin compared to its neighbors, higher-income earners and wealthy earners have a tax advantage by moving to another state.” Fricke argues this poses a potential revenue problem for Wisconsin, because the residents with the greatest incentive to leave the state are the ones who pay the most taxes.
Passing Grade: Wisconsin has Turned the Corner Economically, but Much Work Remains to Achieve Prosperity
http://heartland.org/policy-documents/passing-grade-wisconsin-has-turned-corner-economically-much-work-remains-achieve-pr
Tom Hefty and John Torinus of the Wisconsin Policy Research Institute examine how Wisconsin has emerged from the recent recession, what it has done to improve its economy, and the steps it can take to improve it further.
Rep. Dale Kooyenga on Tax Reform: More Work to Be Done
http://www.maciverinstitute.com/2014/07/tax-reform-tax-cuts-more-work-to-be-done/
State Rep. Dale Kooyenga (R) writes Wisconsin has made great strides in tax reform but has yet to implement a pro-growth tax code: “We should celebrate the victories, no matter how small, but we shouldn’t be satisfied with small.”
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: Wisconsin Income Tax Repeal
http://heartland.org/policy-documents/research-commentary-wisconsin-income-tax-repeal
Examining multiple studies of tax policy, Matthew Glans of The Heartland Institute notes 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 make the state much more competitive and attract new business.
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, notes many economists consider them the most destructive tax and a deterrent to economic development, and observes states with no income tax have performed better economically and have enjoyed 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 compares the economic performance of states with no income tax 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 used regression analysis to estimate the impact of taxes on economic growth in the states from 1964 to 2004 and found 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 slow economic growth, and thus raising income taxes, dividend taxes, and capital gains taxes won’t hurt the economy. Analyzing evidence from more than two decades, with data dating back to 1960, the authors found states without an income tax consistently outperformed those with the highest income taxes, in any 10-year period.
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/
Examining recent research, Daniel J. Mitchell finds 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, a 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 website at http://news.heartland.org/fiscal, The Heartland Institute’s website at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
Whether sending an expert to your state to testify or brief your caucus, hosting an event in your state, or simply sending you further information on the topic, Heartland can assist you. If you have any questions or comments, contact Heartland Institute State Government Relations Manager Logan Pike at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
