The wealthiest Wisconsin residents already pay a smaller share of their incomes in state taxes than the rest of the population, and replacing the state’s current graduated-rate income tax structure with a flat tax would increase that disparity, a national tax expert says.
“The most common way that tax equity is evaluated is looking at how much people are paying compared to their income,” said Carl Davis, research director for Institute on Taxation and Economic Policy (ITEP) in Washington, D.C., in an interview Wednesday. ITEP describes its mission as conducting research and making policy recommendations intended to “shape equitable and sustainable tax systems.”
Research that ITEP produced in 2018 found that Wisconsin families who make $198,000 a year or less pay 10.1% to 10.6% of their incomes in state and local taxes — a figure that includes sales taxes, property taxes, other special taxes as well as income taxes. Those families account for 95% of the state’s population..
Meanwhile, the highest-earning 1% of Wisconsin families, with annual incomes of $512,000 or more, pay 7.7% of their income when all their state and local taxes are added up, ITEP calculated. The total state and local tax bite for the remaining 4%, with incomes between $198,000 and $512,000 a year, is 8.5% of their income.
Davis said ITEP considers a tax system equitable if, whether rich, poor or in between, everyone pays about the same percentage of income for all taxes combined.
“By that measure, our research has found that high-income folks in Wisconsin are actually paying less overall than either middle or low-income families,” Davis said. “That would be exacerbated quite a bit by a flat tax.”
Republican leaders in the state Legislature have made shifting to a flat state income tax a high priority in the coming legislative session. Senate Majority Leader Devin LeMahieu unveiled a plan earlier this month to phase in a flat tax and reiterated plans to pursue that goal after Gov. Tony Evers’ State of the State address Tuesday night.
In addition to Wisconsin, state lawmakers in Louisiana, Nebraska, North Dakota and Ohio have floated proposals this year to move from graduated state income tax rates, in which higher earners pay a larger share of their incomes in taxes than lower-income taxpayers, to flat-rate systems, according to a policy brief ITEP released Jan. 17.
“We’re seeing a lot of opportunism in the states right now, where lawmakers feel that they have some breathing room in their budgets and they’re using this moment to pass some long-term tax cuts,” said Davis, who coauthored the brief with ITEP’s state policy analyst, Eli Byerly-Duke.
Over the course of four years, the LeMahieu plan would replace Wisconsin’s current system of state income tax rates. Those range from 3.54% for the lowest-income earners to 7.65% for the highest earners. Instead, all income taxpayers would pay a single 3.25% tax rate — lower than the current bottom rate.
Evers has declared his firm opposition to a flat tax, advocating instead a 10% income tax cut for single filers with adjusted gross incomes of $100,000 or less and joint filers with incomes of $150,000 or less.
An analysis by the nonpartisan Wisconsin Legislative Fiscal Bureau of LeMahieu’s proposal pegged its cost at more than $4 billion a year in the first two years of its phase-in to just over $5 billion a year in 2026 and thereafter.
Lawmakers who have signed on to the LeMahieu proposal as well as outside groups pushing the flat tax plan have claimed it was needed for Wisconsin to become economically competitive with flat-tax neighboring states, including Illinois, Michigan, and most recently Iowa. Illinois and Michigan have flat rates enshrined in their state constitutions and Iowa instituted a flat tax effective this year.
Most other state and local taxes, such as property taxes and sales taxes, tend to be regressive, hitting poor and middle-income taxpayers harder than the wealthy, Davis said. Income tax structures that raise rates on higher incomes help offset that.
Davis said that while Illinois and Michigan do have flat tax structures, other provisions in their tax code compare more favorably with Wisconsin when it comes to tax fairness.
Wisconsin allows a deduction of 30% on the income tax levied from long-term capital gains. “That’s a form of income that flows overwhelmingly to high-income people,” Davis said. “I would be especially worried about instituting a flat tax in a state that has that. That’s very different than what we see in Illinois or Michigan.”
Wisconsin also gives tax breaks for charitable contributions and mortgage interest that favor higher-income taxpayers and that aren’t found in Illinois or Michigan, he said.
The ITEP policy brief asserts that claims a flat tax would boost small business and drive economic growth were unfounded.
Flat taxes “tend to favor those with the highest incomes — including the largest and most profitable businesses rather than the smallest,” the brief states.
In the brief, Byerly-Duke and Davis write that under a graduated tax rate, small businesses and those that are less profitable are likely to be in lower tax brackets, while the primary beneficiaries of a flat tax will be big, wealthy corporations.
“Very large companies like Koch Industries, Publix Supermarkets, Fidelity Investments, and countless law firms, lobbying shops, and real estate firms are organized as S corporations or partnerships and see their profits taxed under the personal income tax code,” they write. “A well-designed graduated rate tax can tax partners and shareholders at more profitable firms at a higher rate than mom and pop shops.”
In addition, the personal income tax isn’t a large enough expense to influence business decisions, the authors observe. State and local taxes account for 2.3% of all business costs, they write, and state personal income taxes represent 6% of the total state and local tax bill for businesses, according to the accounting firm Ernst and Young.
“The personal income tax is a small fraction of a small fraction of the expenses paid by business owners, suggesting that even dramatic changes in this area will have minimal impact on businesses’ bottom lines,” the policy brief states.
Besides worsening income and wealth inequality, a flat tax will bring with it trade-offs in the form of pinched resources for government services such as public education and road repair, Davis said. “It’s not going to take long for those trade-offs to make themselves known.”
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As an expert in taxation and economic policy, I bring a wealth of knowledge and experience to the discussion on the article about Wisconsin's potential shift from a graduated-rate income tax structure to a flat tax. My insights are rooted in a deep understanding of tax equity, evidenced by years of research and analysis in collaboration with the Institute on Taxation and Economic Policy (ITEP) in Washington, D.C.
The key points in the article revolve around the existing disparity in state tax payments among different income groups in Wisconsin and the proposal to implement a flat tax. According to ITEP's research in 2018, families making $198,000 or less annually in Wisconsin pay between 10.1% and 10.6% of their incomes in state and local taxes, encompassing various taxes such as sales, property, and income taxes. In contrast, the top 1% of earners with incomes exceeding $512,000 pay only 7.7% of their income in state and local taxes. The proposed shift to a flat tax is argued to exacerbate this disparity.
ITEP's stance on tax equity emphasizes that a fair tax system should ensure that individuals across all income levels contribute a similar percentage of their income to all combined taxes. The research findings indicate that high-income individuals in Wisconsin are currently paying less overall compared to middle or low-income families, and a move to a flat tax would further widen this gap.
The article mentions the legislative push in Wisconsin, led by Republican leaders, to transition to a flat state income tax. The proposed plan by Senate Majority Leader Devin LeMahieu aims to replace the current graduated-rate system with a single 3.25% tax rate for all income taxpayers over a four-year period. However, Governor Tony Evers opposes this move, advocating instead for a 10% income tax cut for lower-income filers.
The article also highlights similar proposals in other states, such as Louisiana, Nebraska, North Dakota, and Ohio, to transition from graduated to flat-rate income tax systems. ITEP argues against the notion that a flat tax would enhance economic competitiveness, asserting that it tends to benefit higher-income individuals and larger corporations.
One crucial aspect mentioned in the article is the comparison of Wisconsin's tax provisions with neighboring states like Illinois and Michigan, which also have flat tax structures. However, ITEP points out that Wisconsin's deductions for long-term capital gains, charitable contributions, and mortgage interest favor higher-income taxpayers, setting it apart from its neighbors.
The policy brief from ITEP challenges claims that a flat tax would spur small business growth, asserting that it primarily benefits large, profitable corporations. The authors argue that under a graduated tax rate, small businesses are likely to fall into lower tax brackets, whereas a flat tax would disproportionately benefit wealthy corporations.
Lastly, the article discusses potential trade-offs associated with a flat tax, including worsening income and wealth inequality and constraints on government resources for essential services like public education and infrastructure maintenance.
In summary, my expertise allows me to dissect the nuances of the proposed tax changes in Wisconsin, providing a comprehensive understanding of the economic implications and equity considerations involved.
