Distributive policy

Wisconsin Policy Forum: Income Tax Changes Lower Average Rates, But Not For Everyone

As state officials have cut income taxes by billions of dollars over the past decade, average tax rates have fallen for most Wisconsin residents, but rates for those in incomes have increased, finds a new report from the Wisconsin Policy Forum.

Significant income tax cuts enacted last summer are likely to accentuate the downward trend in rates for middle- and upper-income earners, the report said. These results provide crucial context to a substantial debate that is just beginning to unfold: how to use what is expected to be an unprecedented government surplus for the current two-year budget cycle ending in mid-2023.

Since 2011, a series of significant cuts to the state’s personal income tax – the largest tax at the state level – has reduced tax revenues from what they would otherwise have been, as well than the average tax rates for most Wisconsin residents. Corporation tax was also reduced from what it would have been under the previous law.

The Forum report concludes that these changes have reduced average tax rates for all but those at the bottom of the income scale.

“Data from the State Department of Revenue shows that between 1980 and 2020, average tax rates increased for the lowest 20% of Wisconsin taxpayers (those earning less than about $8,460 in adjusted gross income (AGI) in 2020) while declining for all other income groups, especially those at the higher end,” the report said.

The average tax rate for this bottom group of taxpayers by AGI has fallen from 0.2% in 1980 to 0.5% in 2020, while the average rate for the top 1% of taxpayers has fallen from 7.9% at 5.5%. The Forum also reviewed a more comprehensive set of DOR data for 2008 to 2020 that takes into account refundable tax credits that can be paid to filers without liability for income tax. These data clearly show that while the bottom 20% as a whole receive more government payments than they owe in taxes, these payments have been declining over time. Meanwhile, the share of taxes paid by high-income taxpayers increased in both periods, as their income growth outpaced that of those at the lowest income levels.

Looking at data over a four-decade period, the report finds that Wisconsin’s overall tax burden has declined, but state income tax has become less progressive. (A more progressive income tax is one in which taxpayers with higher incomes are taxed at higher rates.) Yet the tax remains relatively progressive compared to other states and the tax burden on state revenue remains relatively high, in part because Wisconsin is more dependent on this tax. massively to fund public services.

Other key findings of the report include:

Key Changes: Following tax increases for high-income taxpayers approved in 2009, lawmakers and two governors have made dozens of personal and corporate income tax cuts over the past decade. Although most were modest, three produced significant change. The largest on an annual basis – a reduction in the rate of the state’s third income tax bracket – was enacted last summer and will reduce tax revenue by about $1 billion each year from previous law, starting with this spring’s tax filings. Other major changes were the approval in 2011 of the Manufacturing and Agriculture Credit, which reduced corporate and personal income tax on profits from these industries; and changes in the 2013-2015 state budget, lowering personal income tax rates in each of the state’s five brackets, and collapsing the fourth tax bracket in the third.

Impact on collections: In the state’s current fiscal year 2022 ending June 30, tax collections are estimated to be nearly $2.7 billion less than they would have been without the 82 personal and corporate income tax changes passed since 2011, according to Legislative Assembly figures. Tax office. That would be enough to cover the combined budgets of the University of Wisconsin System General Funds and the Departments of Corrections and Agriculture, Commerce, and Consumer Protection for one year. Over the 12-year period from July 2011 to June 2023, these changes are expected to leave state tax revenues nearly $13.1 billion lower than they otherwise would have been.

Greater 1% Share Paid: To understand how income and taxes vary among state filers, the Forum looked at DOR data from tax returns filed by individuals and couples from 1980 through 2020. , the share of all of Wisconsin’s total income tax owed by the top 1% of tax filers increased over this period, from 13.5% of all state income taxes in 1980 to 22.2% in 2020 – a consequence of faster income growth for high earners. However, for these high-income taxpayers, their share of total taxes paid did not increase as much as their share of total adjusted gross income (AGI). Readers should note that AGI is not the same as total income since some sources such as Social Security benefits are excluded.

Now, the huge growth in tax revenue last year means the state is set to end the two-year budget cycle in June 2023 with more than $5.6 billion in combined gross reserves from the General Fund and the Fund for on rainy days. This unprecedented fiscal strength offers state officials a rare opportunity – whether this year or in the next state budget – to consider further tax cuts, debt reduction and greater financial stability, or additional spending on public services and infrastructure.

If significant income tax changes are contemplated, a broader discussion of each of the major state taxes (income, sales, and property) and whether the current system provides the right overall approach would be beneficial. Key factors include whether the system reliably generates revenue, is not overly complicated, is balanced in combining various taxes, and is fair to all taxpayers. .

It is clear that ideology will play a crucial role in these determinations. Yet potential decisions should also be informed by an understanding of the impact of previous changes — and consideration of the overarching principles that Wisconsin leaders would like to see incorporated into our state’s tax system.

Click here to read the full report: “Informing the Tax Debate: A Closer Look at Trends and Changes in state income tax.

The Wisconsin Policy Forum is the state’s premier source of nonpartisan, independent research on state and local public policy. As a non-profit organization, our research is supported by members including hundreds of corporations, non-profit organizations, local governments, school districts, and individuals. To visit www.wispolicyforum.org to learn more.