MADISON — Wisconsin has the oldest continuously operating state income tax in the nation, and one of the most costly to taxpayers.
A new report by the University of Wisconsin-Madison Center for Research on the Wisconsin Economy (CROWE) lays out a roadmap for killing the state income tax, a plan UW economics Professor Noah Williams says could bring $1,700 per household in tax relief — a total tax cut of $3.5 billion.
To offset the hit to staff coffers, Williams, the author of the study, proposes raising the state sales tax rate from 5 percent to 8 percent. Existing sales tax exemptions on everyday items like groceries, rent, medical expenses, and childcare, would remain in place.
Despite conservative-led tax cuts bringing billions of dollars in relief to Wisconsin taxpayers over the last decade, Wisconsin remains one of the highest tax states in the country.
The report, “Fundamental State Tax Reform: Eliminating the Income Tax in Wisconsin”, asserts the reforms would not only remove the burden of the nation’s 9th-highest income tax rate from the shoulders of workers, it would prove to be a powerful economic development tool. Nearly nine in 10 businesses in the state, employing more than half of all workers, pay taxes under the individual income tax.
“Wisconsin’s state income tax, and the high top rate in particular, reduces the incentive of these businesses to hire and invest in the state,” the report states.
Williams says the reforms would lead to nearly 8 percent higher output and nearly 7 percent higher employment in the long-run, thanks to an eventual net tax cut of 12.6 percent of state tax revenue.
The “bold tax reform” proposal has the support of Wisconsin Manufacturers & Commerce, Americans for Prosperity-Wisconsin, the Institute for Reforming Government, and Americans for Tax Reform.
Tax reform is critical, particularly in an era of rising inflation not seen in nearly 40 years, the organizations say.
“Middle class families, who are already losing money due to runaway inflation, are hit hard by Wisconsin’s income taxes. They pay the highest effective tax rate, meaning they pay a higher percentage of wages in taxes than higher earners,” the coalition states in a press release.
According to Williams, households making between $36,551 and $126,449 pay higher real-world income tax rates than what is called for by law, with a family of four earning $50,000 paying nearly 10 percent to state income taxes. That’s because of the technical aspects of state tax credits and the state standard deduction, and how they impact the amount owed as the credits are phased out with higher earnings.
The report shows take home pay would increase 7.2 percent under the reforms.
Wisconsin would become the second Midwest state to ditch the income tax, joining South Dakota. Proponents assert the reforms would give the Badger State a “massive competitive advantage” and provide a pathway to compete with economic boom states like Florida and Texas, which also have eliminated state income tax.
The study notes that Wisconsin’s sales tax rate is 8th lowest in the country, at about 5.43 percent on average when taking into account local sales taxes. About half of all consumption is exempt from the sales tax, including many essential items like groceries, medicine, and rent. The proposed increase would still put Wisconsin’s state sales tax below rates in neighboring states, the report shows.
Supporters say eliminating state income tax would go a long way in easing Wisconsin’s No. 1 economic stumbling block: a severe worker shortage.
“There’s no doubt that Wisconsin has some of the hardest working people in the country – we know because we employ a lot of them on our team. But if Wisconsin doesn’t take action to make our tax climate more competitive, I fear we will continue to face significant workforce issues,” said Jesse Adams, president of Adams Electric in Elkhorn. “Reducing state income tax will raise take home pay for hard working families and will pull people off the sidelines and back into the workforce.”