Wisconsin Gov. Scott Walker (R) and state legislators are currently embroiled in a debate over the state’s budget. Walker’s $70 billion budget proposal includes changes to transportation funding, changes in the state’s prevailing wage laws, a controversial subsidy for a new arena for the NBA’s Milwaukee Bucks, and a proposal to eliminate the alternative minimum tax (AMT).
Since 2011, the Wisconsin has cut taxes by nearly $2 billion and has eliminated 17 special-interest tax credits and a tax bracket. These positive reforms have resulted in Wisconsin improving in numerous national rankings of business climates. Despite these improvements, problems with the state’s tax system remain.
Although Wisconsin’s tax rates are competitive with its neighboring states for lower-income taxpayers, it lags behind many of its competing states among 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.
One tax Wisconsin could lower or eliminate to address this competitive disadvantage is its AMT. Over the past few years, Wisconsin has considered proposals to end the AMT, including one introduced by Rep. Dale Kooyenga (R-Brookfield) that would eliminate the AMT as part of a larger tax reform package.
The AMT is designed to add certain tax-preference deductions back into the adjusted gross income of middle and upper income taxpayers. After a special AMT exemption, taxes are recalculated using the AMT tax schedule, and if the new tax is higher than the regular income tax, the taxpayer pays the difference.
The goal of the AMT is to reduce the impact of tax preferences given to special interests in the tax code and simplify the tax system. In reality the AMT does the opposite, because it has its own deductions and preferences, and it introduces more complexity and compliance costs to the tax code because those preparing their taxes must do so twice.
Wisconsin is one of six states with an alternative minimum tax. The others are California, Colorado, Connecticut, Iowa, and Minnesota. Although the AMT initially applied only to a small number of taxpayers, the number of people affected by the AMT has grown because it is not indexed for inflation, and more middle-income taxpayers are required to pay the AMT. According to the Wisconsin Legislative Fiscal Bureau, the state AMT was applied to 27,807 filers in 2013, with three-quarters of the filers making at least $200,000 a year.
Wisconsin’s alternative minimum tax is an ill-conceived imposition that adds unnecessary complexity and cost to the tax code while raising little revenue. Instead of allowing the AMT to continue to grow, Wisconsin lawmakers should consider repealing it and eliminating tax preferences for targeted interest groups.
The following documents provide additional information about the alternative minimum tax.
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
In the 2015 edition of this publication from the American Legislative Exchange Council, authors Arthur B. Laffer, Stephen Moore, and Jonathan Williams offer both individual-state and comparative accounts of the negative effects of income taxes.
Is the Tax Code Driving Taxpayers from Wisconsin? An Analysis of 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 hardworking 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.
The Facts about the Alternative Minimum Tax
Mercatus Center economist Veronique de Rugy discusses several myths about the AMT and notes even many Democrats oppose allowing lower exemption levels to rope in large numbers of additional taxpayers.
The Expanding Reach of the Individual Alternative Minimum Tax
William G. Gale, Leonard E. Burman, and Jeffrey Rohaly explain how the federal alternative minimum tax, which was originally designed to target 155 taxpayers, grew to cover 36 million. The paper also discusses economic problems caused by the alternative minimum tax and examines options for reform.
Why the Alternative Minimum Tax Should Be Repealed
Writing for the Institute for Research on the Economics of Taxation, Michael Schuyler argues the AMT has been a disaster from day one. He says the AMT is based on an inaccurate and unreasonable definition of income and is “a complicated, arbitrary, wholly unjustified tax that should never have been enacted. It should have been repealed years ago.”
The Alternative Minimum Tax: Repeal Not Reform
Cato Institute Director of Tax Policy Studies Chris Edwards argues for repeal of the alternative minimum tax: “Without relief from Congress, 23 million taxpayers will pay the AMT in 2007. The average liability will be more than $3,000, and that added burden will hit most families by surprise. To avert a tax revolt, lawmakers would be wise to take action and repeal this unneeded tax.”
Ten Principles of 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 ranging from “Above all else: Keep taxes low” to “Protect state employees from politics.”
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, Glans argues.
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 subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Nathan Makla, Heartland’s state government relations manager, at [email protected] or 312/377-4000.