Governor Walker recently floated the idea of eliminating the income tax in the State of Wisconsin. It would be a bold move and one that comes as a bit of a surprise given that the last budget still leaves Wisconsin’s highest income tax rate higher than it was during most of the Doyle administration.
It has been said that Wisconsin is a 3-legged stool when it comes to taxes. We collect sales tax, income tax and property taxes. Compared to most States our income and property taxes are high while our sales tax is low. Given this tax situation, can you eliminate one of the legs of this stool and still collect enough revenue to fund State operations? I don’t think you can.
The income tax generates about $7,500,000,000 in taxes each year. So in order to eliminate the tax you would have to replace this revenue somehow.
The easiest way to replace some of this would be to increase the Sales Tax and possibly expand the base to include things like professional services. The trouble is that you would have to nearly triple the sales tax to make up this amount. I don’t think there’s an appetite for a 15% sales tax anywhere. The other political problem is that the sales tax is regressive in nature. Specifically it hurts people at the lower end of the spectrum more than people at the upper end. I think passing even a modest increase in the sales tax would come with a big fight.
So then you can look at raising property taxes, but I can’t see that going anywhere. Property taxes are already the most hated tax amongst my clients.
If I’m the Governor I would look to first get our top marginal rate in line. It shouldn’t be that hard to get it back to 6.75% and then you can go from there. Keep in mind about 33% of Wisconsin’s taxpayers do not pay income tax, so simply eliminating it won’t make a difference for a large chunk of people.
Most clients I have make decisions based on their marginal tax rate. So if we can start by lowering the top end it should make us more competitive with our neighboring states.
As for further reductions to the Income Tax the best route might be to broaden the sales tax base to include exempted services. That would allow for more of an across the board cut to the income taxes.
This should be doable. Of course this will be framed as a tax cut for the rich, but the Governor should have the votes to get this done.