By Tom Still
MADISON, Wis. – How do disparate tax rates from state-to-state affect business and worker attraction and retention? The debate over that question has been reignited by Gov. Tony Evers’ veto of a personal income tax cut led by the Republican majority in the Wisconsin Legislature.
The answer depends on who is asked – but one thing is certain, economic decisions made by businesses and workers alike don’t often hinge on a single tax category. Total tax burden is often a better indicator.
As expected, Gov. Tony Evers used his veto pen Wednesday to thwart a Republican-led plan to collapse Wisconsin’s four personal income tax brackets from four to three, focusing mainly on eliminating a tax cut for the top two brackets. Many Democrats contended the GOP plan offered too much of a break for Wisconsin’s wealthiest earners.
Also as expected, majority Republicans condemned the veto – mainly because they believe Evers’ veto reached deep into what most people would consider the “middle class.”
There is truth in the GOP position. The third personal income bracket in Wisconsin has a curiously wide range, starting with $36,841 at the low end for joint filers and ranging up to $405,550 on the high side for joint returns. They all will pay the same 5.3% rate now instead of the 4.4% proposed by Republicans. The fourth bracket is where the “wealthy” earners are more congregated, at $405,550 and above.
Republicans could have constructed a tax cut plan that ensured more people above $36,841 on a joint return would get a tax cut, perhaps leaving the top end at a dollar threshold where it would have been politically difficult for Evers to veto it. They did not do so because of a longstanding GOP belief that Wisconsin should move toward being a “flat tax” state.
As a net result, the truly middle class won’t get much of an income tax break at all. Total income tax cuts proposed by the Republicans were about $3.5 billion over the two-year state budget. With Evers’ line-item veto, it will be about $175 million.
“Evers passed up a golden opportunity to give anyone at all making over $36,840 any sort of break on the next dollar they earn, even though Wisconsin has accumulated an enormous multibillion-dollar surplus,” commented two leaders of the Badger Institute. The Wall Street Journal editorialized that “Tony Evers’s tax veto is a gift to Illinois,” suggesting it will make it harder for Wisconsin to compete for people and companies to move from Illinois.
Perhaps the Wall Street Journal is correct, but some perspective on the overall tax burden is necessary.
Wisconsin’s composite personal income tax rate is 17th highest in the nation, according to one source I checked, still lower than Illinois (8th highest) and also lower than Minnesota and Michigan.
Indiana, Iowa, Missouri and Ohio all have lower personal income rates than Wisconsin. (It’s worth noting than 10 states have no income tax at all or nearly so.)
Wisconsin’s total state and local tax burden (10.9%) is ranked 20th highest among the 50 states and the District of Columbia. That usually combines categories such as property tax, corporate taxes and sales taxes, among others. Illinois stands at 12.9% and 7th highest in the nation for total tax burden.
Here’s where Illinois has an edge over Wisconsin: Capital gains are taxed at 4.95%, among the nation’s lowest. Wisconsin taxes capital gains at 7.65%, or 8th highest in the United States. On the flip side, the two-year budget just passed by the Wisconsin Legislature included a larger research and development tax credit for allowable expenses, raising it from 15% to 25%. That’s a competitive plus.
Companies and people make location decisions based on many factors, from taxes to quality of life; from education and training programs to traffic jams; and from housing costs to health care quality. Taxes of all types can be a big deal, but they’re not the only determinant.
Still is president of the Wisconsin Technology Council. He can be reached at email@example.com.