Income tax reform promises to be at the top of the legislative agenda for Wisconsin legislators in 2018, and one of the proposals that’s gaining attention would move the state away from a progressive income tax system to a flat tax model. In May, the General Assembly considered a flat tax as part of a series of tax proposals intended to increase funding for transportation projects. The proposal, which was not passed by the legislature, would have gradually moved the state to a 4 percent flat tax over 12 years.
The Wisconsin-based MacIver Institute has long advocated for a flat tax in Wisconsin. In early 2017, MacIver released a report outlining a potential reform path from the current progressive income tax to a flat 3 percent tax rate for all taxpayers. MacIver’s plan would be instituted over an eight-year period. MacIver analysts believe a flat tax would give Wisconsin the most competitive income tax system among the Midwestern states.
Flat taxes are beneficial for several reasons. They avoid penalizing the citizens who produce the majority of jobs and economic activity with higher tax rates. Flat taxes simplify the tax code by eliminating credits, exemptions, and deductions, taxpayers will no longer need to hire expensive tax accountants or use expensive computer programs to file their state taxes. While main critics of flat taxes argue they represent a tax cut for the rich, even under a flat tax, those who earn higher incomes pay more in taxes, achieving the “social justice” progressive tax proponents claim to seek.
Personal and corporate income taxes are generally considered to be the most destructive taxes because they disincentivize production, innovation, and risk-taking. Recent studies have shown states with no income tax or with lower income taxes perform better economically and achieve greater job and population growth than those with higher income taxes. High income taxes deter economic development by discouraging higher-income-earners and new capital from moving into a state, remaining there, or investing their money. A 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.
Tax revenues are much less predictable under progressive tax systems compared to flat taxe models, making budgeting more difficult. Relying on a small percentage of higher-income taxpayers for a larger percentage of revenues generates revenue windfalls and spending free-for-alls during economic booms, followed by massive budget gaps during economic recessions.
Providing a tax environment that encourages relocation, investment, and economic growth is essential to keep Wisconsin competitive with its neighboring states. Wisconsin ranked 38th in the Tax Foundation’s 2018 State Business Tax Climate Index, a study that compares states across multiple areas of taxation that impact businesses. Wisconsin’s ranking is lower than many of its neighboring states, including Indiana, which was ranked ninth, Michigan (12th), and Missouri (16th). Wisconsin’s individual income tax rate is ranked 43rd, one of the highest in nation.
The proposed flat tax is a clear step toward simplifying the state’s tax code and keeping the state competitive with its neighbors.
The following documents examine the flat tax and income taxes in greater detail.
A Brief Guide to the Flat Tax
Everything you wanted to know about the flat tax is provided in this PolicyFaxby Dan Mitchell of The Heritage Foundation. Mitchell says the flat tax eliminates special-interest favoritism and prevents taxpayers from finding tax loopholes by hiring an army of lawyers, accountants, and lobbyists.
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. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
What Are Flat Taxes?
Kyle Pomerleau of the Tax Foundation examines flat taxes and explains how different flat tax proposals work.
State Individual Income Tax Rates and Brackets for 2016
Nicole Kaeding of the Tax Foundation analyzes the most up-to-date data available on state individual income tax rates, brackets, standard deductions, and personal exemptions for both single and joint filers.
Rich States, Poor States
The ninth 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
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 Effect of Progressive Tax Codes
Bill Ahern of the Tax Foundation discusses the effects of different kinds of progressive taxes on taxpayers and the economy.
State Budget Reform Toolkit
The American Legislative Exchange Council outlines a set of budget and procurement best practices to guide state policymakers as they work to solve the budget shortfalls. The toolkit will assist legislators in prioritizing and more efficiently delivering core government services by advancing free markets, limiting government, and promoting federalism and individual liberty.
The Historical Lessons of Lower Tax Rates
Examining the historical results of income tax cuts, Daniel Mitchell of the Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase.
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, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
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