This week, Wisconsin Governor Tony Evers (D) vetoed Assembly Bill 4, legislation introduced by House Speaker Robin Vos (R) that would have provided targeted low- and middle-income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. relief through a more generous standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. in the state’s individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. code.
Like many states, Wisconsin offers a standard deduction that reduces the amount of a taxpayer’s income that is subject to the state’s individual income tax. However, unlike most states, Wisconsin’s standard deduction is hardly “standard” at all. Instead of offering a standard deduction at a set value, Wisconsin’s sliding-scale standard deduction is highly progressive in nature; individuals with the lowest incomes can claim the highest amount, and the higher a taxpayer’s income, the less of a deduction he or she is eligible to claim. In fact, the deduction phases out completely for taxpayers with income above a certain level.
Due to inflation indexingInflation indexing refers to automatic cost-of-living adjustments built into tax provisions to keep pace with inflation. Absent these adjustments, income taxes are subject to “bracket creep” and stealth increases on taxpayers, while excise taxes are vulnerable to erosion as taxes expressed in marginal dollars, rather than rates, slowly lose value. , Wisconsin’s standard deduction and income thresholds vary from year to year. In Tax Year 2018, single filers with Wisconsin Adjusted Gross Income below $15,500 can claim a $10,580 standard deduction, and married couples filing jointly with income below $22,000 can claim a standard deduction of $19,580. Taxpayers with incomes above that amount can claim decreasingly lower amounts using a complex sliding-scale formula. The standard deduction then phases out completely such that single filers with $103,500 or more in income and married couples with $121,009 or more in income are not eligible to claim Wisconsin’s standard deduction at all.
Assembly Bill 4 would have made the standard deduction available to more taxpayers while increasing the amount of the deduction eligible to be claimed at every income level. Specifically, under this legislation, single filers with less than $18,790 in income would be eligible to claim a standard deduction of $13,360, and married couples making less than $27,120 would be eligible to claim a standard deduction of $24,740. While this legislation would have increased the standard deduction and made it available to more filers, it stopped short of reducing the standard deduction’s progressivity or simplifying its complex structure.
One option to reduce complexity is to conform to the federal standard deduction or use it as the starting point for Wisconsin’s own calculation. The Tax Cuts and Jobs Act (TCJA)The Tax Cuts and Jobs Act in 2017 overhauled the federal tax code by reforming individual and business taxes. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by .47 trillion over 10 years before accounting for economic growth. increased the federal standard deduction to $12,000 for single filers and $24,000 for married filers, adjusted annually for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. . In addition to making the standard deduction more generous, conformity with the federal provision would allow Wisconsin taxpayers to claim the standard deduction regardless of income.
Another structural improvement worth considering is eliminating the marriage penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples. inherent in Wisconsin’s standard deduction. Under current law, a single filer with $30,000 in income is eligible to claim a standard deduction of $8,780, but two individuals who are married and each make $30,000 in income can claim a standard deduction of only $12,017. If the marriage penalty were remedied, the standard deduction for a married couple making $60,000 in combined income would be double the amount available to single filers, or $17,560 in Tax Year 2018.
Should Wisconsin policymakers reconsider a similar proposal to offer individual income tax relief through the standard deduction, structural reforms should also be considered, such as eliminating the marriage penalty and perhaps conforming to the federal deduction. Policymakers might also consider changes to the standard deduction as part of a broader comprehensive tax reform package. Our Wisconsin Tax Options: A Guide to Fair, Simple, Pro-Growth Reform offers four comprehensive tax reform options for policymakers to consider, each of which makes changes to the standard deduction. Specifically, Options A, B, and C would conform to the new federal standard deduction, while Option D would eliminate the standard deduction’s marriage penalty while maintaining the current sliding-scale structure.
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