Insight: Taxpayers Can — and Will — Vote with their Feet
Jeff Schoepke, WMC Director, Tax and Corporate Policy

It’s fun for politicians to say they are socking it to the rich, or big business. Defining wealthy is certainly arbitrary, and relative — most people don’t think of themselves as such regardless of their income. That’s why politicians like to target those folks — there are fewer self identified rich, and, therefore, fewer votes to contend with.

Another reason they want to go after “high earners?” There is money to be had. The budget recently signed by Governor Doyle creates a new top income tax bracket, increasing taxes by more than $285 million on those making over $300,000. Without question, the Governor chose this tax because it raised the maximum amount of revenue for a minimum amount of political backlash.

But is it good for Wisconsin? This new top rate will give Wisconsin the 11th highest in the nation. And, the Tax Foundation’s State Business Tax Climate Index ranks Wisconsin’s individual income tax 7th worst in the nation as it relates to business climate.

A 2005 study from the Wisconsin Taxpayers Alliance (WTA) entitled "Moving In, Moving On: Migration in Wisconsin," analyzed unpublished migration data from the U.S. Census. WTA found that during the last five years of the 1990’s, Wisconsin saw 9,100 more households with income less than $75,000 move into Wisconsin than move out. During the same time, the state lost 4,700 households with higher income. Although 4,400 more households moved here than left during that time, WTA concluded that net losses during 1995-2000 were $4.72 billion in net worth and $454.8 million in income. Since that time, Wisconsin’s personal income and household income have lagged behind our neighbors and the national average, strongly suggesting that this trend has continued.

Why? Weather? Maybe. Lack of high paying jobs? Certainly. High taxes? Because of the impact the income tax has on recruiting and retaining top executive talent, Wisconsin CEOs repeatedly identify the income tax as Wisconsin’s most significant — and problematic — business tax in WMC surveys. Taxes are a factor.

You can look to another state’s recent experimentation with punitive tax policy for some insight. Just last year, Maryland passed a new “millionaire’s tax,” a surcharge on incomes of $1 million. How much revenue has Maryland seen as a result of this new tax? Nada. Nothing. Zip. While part of the explanation is certainly the impact that the economy has had on those with higher incomes, the other part is undoubtedly migration. Maryland borders two states with much better tax climates. When the wealthy move, they take their money with them. Less capital means less capitalism.

Beyond wealthy individuals, this tax is also a significant tax increase for many small businesses. Businesses organized as pass-through entities — Sub. S-Corps, LLCs, sole proprietorships, etc. — pay the individual income tax, not the corporate income tax. Nationally, Sub. S-Corps now outnumber C-Corporations by more than 3 to 2, meaning many small and medium sized businesses will see tax increases. Again, less capital to be reinvested in Wisconsin companies.

There are some states that get it — Maine and North Dakota have recently cut their income tax rates. Expecting more money in the short and long term due the positive economic impacts, the cuts are expected to improve the State of Maine’s long term fiscal state. When explaining how he would justify tax cuts for the wealthy, Maine’s Democrat Governor John Baldacci told The Wall Street Journal: “You can’t have employees without employers.”

The Insight Column is a weekly column that provides commentary and background information
from WMC lobbyists on issues affecting your business. For more information on this topic, contact Jeff Schoepke, WMC Director of Tax and Corporate Policy, (608) 258-3400 or jschoepke@wmc.org .