Wisconsin Legislature Considering Several Pro-Growth Tax Reforms

June 29, 2021

Note: On July 8, 2021, Gov. Evers approved the biennial budget (AB 68) with partial vetoes. The individual income tax rate reduction from 6.27 to 5.3 percent was enacted as written by the legislature, with the tax relief effective retroactive to January 1, 2021. However, the governor vetoed a technical provision in the budget that would have directed the Wisconsin Department of Revenue to update the state’s individual income tax withholding tables to reflect the change, to be used by employers beginning January 1, 2022. The governor’s veto message states his reasoning as follows: “I am vetoing this section because I object to requiring the Department of Revenue to make these withholding table adjustments at a cost of approximately $700 million while other critical priorities have not been sufficiently funded by the Legislature.”

Until the Department updates the state’s income tax withholding tables, taxes will continue to be withheld from taxpayers’ paychecks at the 6.27 percent rate, a highly unusual move that will result in taxpayers providing an interest-free loan to the government to the tune of approximately $700 million each year of the biennium. While taxpayers will see the tax relief in the form of a lump sum refund when they file their tax returns each spring, they will pay more than they legally owe throughout the year until the withholding tables are updated to reflect the change.

Separately, AB 406, to freeze the state’s unemployment insurance tax rates through 2023, was signed by the governor, but AB 191, to repeal the state’s tangible personal property tax, was vetoed by the governor.

The Wisconsin Assembly and Senate this week are considering several tax reforms as part of the budget for the fiscal year (FY) 2022-23 biennium, which begins Thursday (July 1). Several were precipitated by the Wisconsin Legislative Fiscal Bureau’s (LFB) announcement earlier this month that the state is projected to end the current fiscal year, as well as the upcoming biennium, with billions of dollars in surplus revenue.

The most notable tax changes being considered, in terms of their positive economic impacts, include a reduction in the second-highest marginal individual income tax rate, the elimination of the tax on tangible personal property (TPP), and a freeze in the unemployment insurance (UI) tax rate schedule through 2023. We previously identified each of these three tax policy areas as priorities for reform, as these changes would promote recovery and long-term economic growth while making the state’s tax structure more competitive.

The individual income tax rate reduction is included in the Joint Committee on Finance’s amendments to Gov. Tony Evers’ (D) executive budget bill (Assembly Substitute Amendment 2 to Assembly Bill 68 and Senate Substitute Amendment 2 to Senate Bill 111). While the elimination of Wisconsin’s TPP tax will be considered separately (Assembly Bill 191/Senate Bill 189), as will the unemployment insurance (UI) tax rate freeze (Assembly Bill 406/Senate Bill 426), the budget bill would reimburse localities for the lost TPP tax revenue and transfer money from the general fund into the unemployment reserve fund.

In Wisconsin, when it comes to the budget, the governor has exceptionally strong partial veto authority. Should Gov. Evers neither wish to approve the budget in full nor veto it altogether, he has the option of using a partial veto to strike individual words or lines, and he can make downward adjustments to appropriations figures. This partial veto authority does not extend, however, to non-budgetary bills, such as the TPP tax repeal bill and the UI tax freeze.

Under the budget bill as amended by the Joint Committee on Finance, the state’s second-highest individual income tax rate would be permanently reduced from 6.27 to 5.3 percent, effective retroactive to January 1, 2021. This tax reduction would provide nearly $2.4 billion in income tax relief over the FY 2022-23 biennium.

At 6.27 percent, Wisconsin’s second-highest individual income tax rate is higher than the top marginal rates in 23 states that levy an individual income tax (not including the eight additional states that forgo an individual income tax altogether). This rate kicks in at just over $24,000 in taxable income for single filers and $32,000 for married couples, affecting a vast majority of the state’s taxpayers, with most paying more in income taxes to Wisconsin than they would with the same amount of income in most other states.

Studies show that high marginal income tax rates reduce gross state product growth, while reductions in top marginal rates are beneficial to long-term growth. Reducing the 6.27 percent rate to 5.3 percent is a pro-growth change that would benefit individuals, families, and pass-through businesses. This reduction builds upon recent reductions to the two lower rates. (The lowest rate was reduced from 4 percent to 3.54 percent, and the second-lowest rate from 5.84 to 4.65 percent, between 2018 and 2020.)

Wisconsin Budget Reduces Second-Highest Individual Income Tax Rate
Wisconsin’s Individual Income Tax Rates, Current and Proposed (Tax Year 2021)
Single
Current       Proposed    
3.54% > $0   3.54% > $0
4.65% > $12,120   4.65% > $12,120
6.27% > $24,250   5.30% > $24,250
7.65% > $266,930   7.65% > $266,930
Married Filing Jointly
Current       Proposed    
3.54% > $0   3.54% > $0
4.65% > $16,160   4.65% > $16,160
6.27% > $32,330   5.30% > $32,330
7.65% > $355,910   7.65% > $355,910

Note: Income tax brackets adjusted annually for inflation. Inflation-adjusted amounts for tax year 2021 are shown.

Sources: Assembly Substitute Amendment 2 to Assembly Bill 68; Wisconsin Department of Revenue, “Worksheet for Employee Witholding Agreement.”

A separate bill being considered by the legislature, AB 191/SB 189, would repeal Wisconsin’s TPP tax in its entirety, beginning with property tax assessments as of January 1, 2021. The TPP tax is one of the oldest taxes Wisconsin levies, predating even the individual income tax.

TPP taxes are an antiquated, economically distortive form of taxation, and Wisconsin is among the states that has reduced reliance on them over time. However, certain types of tangible property— including business furniture, office equipment, and other supplies—are still subject to taxes on their value each year. This creates not only additional tax liability but also substantial compliance burdens for businesses, as taxpayers are required to calculate the depreciable value of their taxable property each year and remit the correct amount, a complex process.

Eliminating TPP taxes from the books altogether would reduce compliance burdens for businesses and remove the tax code’s bias against certain investments in Wisconsin. The budget bill sets aside approximately $202 million annually to distribute to localities to shield them from revenue losses attributable to the elimination of the TPP tax, which, like the real property tax, is exclusively a local revenue source in Wisconsin.

Finally, AB 406/SB 426 would prevent UI tax increases that would otherwise take effect automatically. Under current law, Wisconsin has four UI tax rate schedules, with higher tax rates automatically taking effect when the reserve fund balance dips below a certain level. The lowest tax rate schedule is currently in effect, but unless the legislature acts, a higher rate schedule would be triggered for 2022, since the unemployment reserve fund balance is currently below $1.2 billion.

This legislation would freeze the current UI tax rates through the end of calendar year 2023, contingent upon the enactment of a budget that transfers specified amounts of surplus revenue to the trust fund. UI tax rate hikes would be highly detrimental to businesses’ efforts to rehire their employees and return to profitability following the pandemic, so this tax policy decision will help support a smoother economic recovery.

Reducing the second-highest individual income tax rate, repealing the TPP tax, and freezing UI tax rates are three valuable reforms that would help promote a smooth economic recovery in Wisconsin while setting the state up for robust economic growth for years to come.

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A pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates.

A tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.

Withholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests.

A property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services.

An 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.

Taxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.