Former WI Governor Scott Walker does not want to reduce the state income tax

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“I love the idea of not just lowering it, but wiping it out entirely,” Walker told the Washington Examiner. “It’s going to be a huge game-changer.”

Walker is using ammunition from a new study released today by the Center for Research on the Wisconsin Economy, UW-Madison, as a campaign begins to eliminate Wisconsin’s 6.27% personal income tax.

CHEW ON THIS AS YOU RECEIVE YOUR TAX BILLS IN THE MAIL: According to Kiplinger’s financial analysts Rocky Mengle and David Muhlbaum, Wisconsin ranks eighth in its list of “The 10 Least Tax-Friendly States for Middle-Class Families,” behind first-place Michigan and second-place Nebraska. The November 2021 report puts the blame for Wisconsin’s ranking on the state’s property tax, which the analysts claim is the eighth-highest in the nation. 

Walker and others see a report by UW Economic Professor Noah Williams as a means to accelerate the state’s economy. Here’s the executive summary from the report:

Executive Summary

Wisconsin has the oldest state income tax in the United States, and the state government currently relies heavily on income tax revenue. However, the state income tax is:

• Inefficient: The progressive state income tax compounds the distortions from the federal income tax, leading to total marginal tax rates of nearly 48% for some households. Further, phase-outs of deductions and credits mean that middle income households in Wisconsin pay effective marginal state income tax rates as high as 9.8%, two percentage points above the top statutory rate for the highest incomes.

• Not competitive: Although Wisconsin has reduced its tax burden in recent years, the state remains one of the highest-taxed and has the 9th highest top tax rate in the country. Income taxes have strong impact on migration and business location decisions, while Wisconsin has seen net outmigration in recent years.

• A distortionary tax on most small businesses: Nearly 9 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.

By contrast, sales taxes in Wisconsin are relatively low, with a combined state and local rate which is the 3rd lowest among the states with a sales tax. Unlike the income tax, empirical evidence shows modest economic impact of increases in state sales taxes.

Thus, I consider a reform to eliminate the Wisconsin state income tax, while increasing the state general sales tax to cover some of the reduction in tax revenue. For simplicity, I do not change the base of the sales tax, which covers roughly half of household expenditures. While I consider a variety of policies, I focus on a plan which increases the state sales tax rate from 5% to 8%. To analyze the impact of the reform, I construct a dynamic model of the state economy. The model includes many of the key channels which capture the responses of households and businesses to changes in tax policy:

• Higher after-tax wages encourage work by households and migration into the state.

• Lower taxes on business reduce the cost of capital and encourage hiring and investment.

• Higher sales taxes favor saving over spending out of current income.

These incentive effects lead to important dynamic impacts:

• With greater employment and a larger capital stock, economic output, wages, and
household incomes will grow.

• As people have more income, the level of consumption will increase, even as the share of income consumed falls.

I show that these behavioral and dynamic effects are important for evaluating the impact of the tax reform, not only on tax revenue but also on economic outcomes like output, employment, and incomes. By contrast, official state revenue estimates include no behavioral responses to taxes.

I quantitatively evaluate the impact of the proposed tax reform, both in the long-run and in the immediate years following the reform. I consider two reform implementations: an “all-in plan” which in the first budget year eliminates the income tax and increases the sales tax to 8% and a “phase-in plan” which over the course of four two-year budget cycles gradually eliminates the income tax while gradually increasing the sales tax. The long-run impact of both plans is the same. Phasing in the reform reduces some of the near-term revenue losses, at the cost of delaying the positive economic growth impact.

Focusing on the all-in plan, I estimate that eliminating the state income tax and increasing the sales tax to 8% would:

• Lead to an average net tax cut of roughly $1,700 per household, including both the income tax reduction and the sales tax increase.

• Increase state output by roughly 1 percentage point per year for each of the first five years, and a total long-run output gain of 7.9%. The Wisconsin economy would be about $28 billion larger after the reform than otherwise.

• Increase employment by 6.9%, or about 175,000 jobs, in the long run, with most of the gains coming in the first five years. The employment gains would be driven by labor supply, with increased hours and participation of residents, as well as in-migration.

• Increase after-tax income by about 9.4%, which would fuel an increase in consumer spending of about 7.2%, even after facing a higher sales tax.

• Lead to a long-run reduction of 12.6% of state tax revenue. This is roughly half the revenue loss that would be estimated without considering behavioral or dynamic impacts.

The first state budget would see a revenue reduction of about $3.5 billion relative to current policy. For several years after that point, tax revenue would grow faster under the reform than under current policy.

In summary, fundamental tax reform has the promise of transforming the economy in the state of Wisconsin, substantially improving economic outcomes, and living standards.

A bold report that deserves serious consideration. Will anyone in public office take this ball and run with it?

2 thoughts on “Former WI Governor Scott Walker does not want to reduce the state income tax

  1. Pingback: Week-ends (12/18/21) | This Just In… From Franklin, WI

  2. Pingback: My Most Popular Blogs (12/20/21) | This Just In… From Franklin, WI

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