Fiscal Facts: Assessing two tax proposals and the possibility of compromise

Wisconsin Policy Forum

Gov. Tony Evers and State Senate Majority Leader Devin LeMahieu share one common thread: they would sharply change how the state taxes its highest earners.

The dueling proposals also reflect different philosophies about how to bolster Wisconsin’s competitiveness with other states in measures of economic strength and quality of life.

Wisconsin was the first state to successfully implement an income tax, and it remains a larger part of our state’s revenue mix – and tax burden – than many other states. Lawmakers and Evers already cut income taxes by about $1 billion a year in the current state budget. With Wisconsin facing its largest surplus on record, it’s likely the upcoming 2023-25 state budget will bring more tax changes.

LeMahieu’s proposal would establish a single “flat” income tax rate of 3.25% and would lower income taxes for all filers who owe them. This approach delivers the greatest benefits to the highest earners. According to a Forum analysis based on projections from the state Department of Revenue and nonpartisan Legislative Fiscal Bureau, once phased in by tax year 2026, those with state adjusted gross income (AGI) of more than $1 million would receive an average tax cut of $107,876.

Evers’ proposal would target low and middle-income earners with new tax credits or increases in existing credits while raising taxes on manufacturing profits and capital gains that mostly affect upper-income earners. Those changes would produce an average tax increase of $39,586 per taxpayer for Wisconsinites with AGI of $1 million or more. Meanwhile, it would lower taxes, on average, for those with annual AGI up to $200,000.

The LeMahieu plan would have a more substantial effect on state tax collections. It would decrease individual income tax collections by a projected $2.11 billion in fiscal 2024, growing to $5.06 billion in 2027 and subsequent years.  The Evers plan would increase state tax revenues by $257.3 million over the next two years, but would also increase expenditures through refundable tax credit payments to filers by more than $300 million, resulting in a net cost to the state.

Some advocate for lowering Wisconsin’s top marginal tax rate of 7.65% to enhance its ability to attract and retain high earning residents. Marginal tax rates alone provide only a crude sense of how tax systems affect taxpayers of varying income levels, but more sophisticated analyses also show Wisconsin has higher than average effective rates on the highest earners. 

Others note that other taxes collected by state and local governments, on sales and property, are more regressive and that an income tax makes taxation more fair based on one’s ability to pay. Since Wisconsin relies on the income tax more than other states, large cuts to its revenue could significantly affect funding for K-12 and higher education, health care, public safety, aid to local governments, and property tax relief.

Currently, Wisconsin’s top income tax rate is second highest among its neighbors and its bottom rate is the lowest. The state’s income tax has become less progressive over the past decade, though for now the state’s system remains more progressive than the average state income tax nationally. The two plans would determine whether the state accelerated that trend or reversed course.

This information is a service of the Wisconsin Policy Forum, the state’s leading resource for nonpartisan state and local government research and civic education. Learn more at wispolicyforum.org.