By Jason Culotta
WMC Director of Tax & Transportation Policy
The top rate of Wisconsin’s personal income tax is ninth highest among the states. Given the election results last November, the time is now for Wisconsin to finally leave the top ten ranking among states with the highest income tax burden.
Since Governor Walker and Republican legislative majorities took office in 2011, tax policy has focused on four core goals: initiating a strong property tax freeze (with increases allowed by referendum), implementing the Manufacturing & Agriculture Credit (income tax relief for those industries), bringing personal income tax relief for the middle and bottom brackets, and buying down approximately one-half of the property tax levied by technical colleges.
These have been strong steps toward improving our business climate but lack the key economic driver that reducing the top income tax bracket provides (aside from the credit for manufacturers). Most businesses, organized today as passthrough entities like S corporations or LLCs, pay income at the personal rather than corporate level. Economists cite addressing the top bracket as among the key factor states can change to influence economic growth.
In 2013, North Carolina dropped its top bracket of 7.75% to a flat rate of 5.75% and compressed all its brackets into one combined with a more generous standard deduction for those with lower incomes. Interestingly, after reducing rates, income tax collections increased there by 10% year over year. Imagine the possibilities if Wisconsin generated $800 million more than the $8 billion the personal income tax is expected to generate this year!
Under Governor Tommy Thompson, the top rate was reduced to 6.75% in 2000, the lowest since the Great Depression. Governor Jim Doyle raised it to 7.75% in 2009 as part of his package of major tax increases to balance the budget. When Republicans reduced all income tax brackets in 2013, they only lowered the Doyle rate by 0.1% while eliminating another bracket and significantly reducing the three lower ones. Much has been written about Wisconsin’s poor performance in creating start-up businesses.
The fact that our state has such a high personal income tax rate is a major contributing factor to precluding small businesses from forming here. In 2016, Maine became the most recent state to cut its top income bracket from a rate higher than Wisconsin’s to a rate below it. This trend is why our state – by leaving the top rate largely untouched – has moved higher up the list of high top brackets. Our competitor (as the manufacturing leader), Indiana, has even reduced its flat income tax rate to a mere 3.3%!
Eliminating the top personal income tax bracket (the Doyle bracket) altogether is the first step. While critics will bemoan a “tax cut for the wealthy,” the truth – as illustrated by North Carolina’s recent example – is that small business growth and increased tax collections will result.
The next lowest Wisconsin bracket is at 6.27% for income over $22,200. Dropping our current top rate to that level would move us below nine other states and place Wisconsin at the 18th highest position – a significant improvement over the current ranking. Cutting it to 6.0% would be even better. Wisconsin would clearly be an average state for income tax – and far below the top ten ranking.
The path forward for Madison policymakers is clear: cutting the top personal income tax bracket will yield further economic growth and small business creation. The alternative of standing still will see our state remain among the highest tax rates in the country. Let’s move Wisconsin forward.
This column was first published in the January 2017 edition of Wisconsin Business Voice, a quarterly magazine produced by WMC that reaches 18,000 c-suite level business leaders across the state.