By Kyle Koenen
The legislature is set to vote on the 2021-23 biennial budget this week. Included in the overall package is a historic set of tax reforms totaling $3.4 billion that will continue to improve the tax climate for Wisconsin families and businesses alike.
The first, and perhaps most impactful of these reforms is the reduction of the third income tax bracket from 6.27% to 5.3%, which equates to a $2.4 billion cut over the two-year budget. This bracket currently covers individuals earning between about $24,000 and $264,000, meaning that the vast majority of Wisconsinites will experience relief under this proposal. Over the past decade, the legislature has continually utilized surplus revenues to reform our tax structure and ultimately return money to taxpayers, including significant cuts in 2013, 2014 and 2019.
WILL examined the impact of income tax cuts since 2011 on a typical family’s tax liability. Our analysis assumes that the income tax cut currently in the state budget passes the legislature and survives the governor’s veto. For the purposes of this analysis, we utilized a family of four making the 2019 median household income of $67,355 who only qualify for the standard deduction. Under this most recent tax cut, a family making the 2019 median income would pay $1,036, or 30% less, compared to what they would have paid in 2011. That is a substantial amount for any middle-class family.
The legislature also dedicates nearly $650 million to general school and technical college aids, which when coupled with no change in school-district revenue limits, reduces property taxes to the tune of $170 over the next two years on the median-valued home. While this may not seem significant in the grand scheme, any efforts to keep a lid on property taxes is both welcome and needed, as Wisconsin consistently ranks among states with the highest property tax burden.
Lastly, through separate legislation that’s expected to pass with the budget, the legislature would also finally eliminate the personal property tax and backfill the lost revenue to local governments in the budget. Personal property tax (PPT) applies to “tangible personal property” for businesses on items that can be moved, such as office furniture, machinery, or office equipment. This tax is levied in addition to the traditional property tax on real estate and property. The accounting and filing of personal property taxes has always been a complex process, with small businesses having to account for and depreciate each qualified item.
Over the years, the legislature has chipped away at this tax by exempting categories of items from taxation. For example, in 1991 computer equipment was exempted. More recently, machinery, tools and patterns were exempted in 2017. While this incremental approach was sensible to avoid large impacts to the local tax base, it also created inequities between different types of businesses. For example, much of the equipment utilized by small Main Street businesses like restaurants and grocers was not exempt from taxation, while manufacturing machinery has been exempted since 1975. By fully repealing this tax, Wisconsin becomes the 7th state to fully eliminate this tax.
Wisconsin has made great strides over the past decade towards improving our tax climate, but we still have significant room for improvement. In 2011, Wisconsin ranked 5th in overall state and local tax burden. In 2019, that dropped to 14th overall. While an improvement, Wisconsin still ranks in the bottom third of states. Even with the proposed income tax cut in the budget, Midwestern peers like Illinois, Indiana and Michigan all have flat taxes with lower rates than our third bracket (4.95%, 3.23% and 4.25% respectively). Wisconsin also still ranks 5th worst in property tax rates as a percentage of home value.
With so much ground to make up, these incremental improvements are important for the economy. Wisconsin has proven that cutting taxes can grow the economy and increase state revenues. After a challenging year, and concerns about the state’s revenue, it is a relief that the state has $4.4 billion more in revenue than initially expected. Governor Evers would be wise to sign these reforms in the state budget proposal and give much needed relief to Wisconsin taxpayers.