Group wants to end tax on overtime pay

Sometimes, when you’re unable to make off with the whole enchilada, you do the best you can and take half the enchilada — or whatever portion you can get.

That might be the motto for the Institute for Reforming Government (IRG), a conservative policy group in Wisconsin. For several years IRG has been pushing for the elimination of the state income tax, to no avail, as leaders in both parties refuse to go there.

So now IRG says it is a pursuing incremental reform measures, and earlier this month it released one of them, a proposal it says will reduce the tax burden on workers and families by eliminating the income tax on overtime wages.

According to IRG, the plan would target middle class workers and their families who are contending with continued economic hardship and inflation, saving the average Wisconsin manufacturing worker $323 a year.

Specifically, the measure would eliminate the income tax on overtime wages and bonuses up to $2,500. In practice, IRG states, workers would not pay income taxes on wages earned for any work in excess of 40 hours during a work week. 

“Families will have more money in their pockets to deal with the rising prices of necessities like gas, energy, and groceries,” IRG states in its proposal. “This will also provide an incentive for workers to help fill Wisconsin’s worker shortage.”

Inflation has taken a real bite out of pocketbooks across Wisconsin, the proposal states, with Wisconsinites spending, on average, $709 more per month than they were just two years ago.

“Families have been forced to make hard choices — whether it’s cutting other parts of their monthly budget or picking up extra hours at work,” the proposal states. “At the same time, Wisconsin is facing a worker shortage in almost all sectors of the economy. Employers cannot find enough workers to fill vacant positions.”

In arguing for the measure, IRG cites Bureau of Labor Statistics (BLS) data showing that the average manufacturing worker works roughly 3.6 hours of overtime per week and earns $21.76 an hour and $32.64 an hour for any work in excess of 40 hours in a given week. 

Thus, eliminating the state income tax on overtime pay would save the average Wisconsin worker over $320 a year.

IRG says the idea is hardly novel.

“Other states have already done this and some are currently considering legislation,” the proposal states. “This year, Alabama passed bipartisan legislation with the backing of the House minority leader and the speaker of the House that eliminated income tax on overtime wages. North Carolina has pending legislation that would provide the same relief in perpetuity.”

In September of 2023 there were 480,900 workers employed in the manufacturing industry in Wisconsin, IRG observes, and so, based on BLS data, the group estimates that the manufacturing industry alone would see more than $155 million in annual savings.

Inflation makes tax reform imperative, IRG says.

“Inflation has hit the middle class hard,” the group states. “All of life’s necessities have risen in price — groceries, gas, energy, and transportation. As of September 2023, inflation was still at 3.7 percent, almost two points higher than the Federal Reserve target rate of 2 percent.”

And that has taken a real toll, the group states, pointing out that Wisconsin’s median household salary of $67,080 has lost 16 percent of its buying power since January of 2020.

IRG also argues that public sector employees as well as private sector workers would gain from the overtime proposal.

“There are many public sector employees that will see a savings, too; public safety employees will keep more of their hard earned wages when they work longer hours keeping our communities safe,” the group states.

The bottom line is, IRG argues, middle class workers and families need tax relief and exempting their overtime pay from state income taxes is a good start. 

‘By allowing workers to keep more of their overtime, wages will help struggling families cope with increased prices,” the group states. “A shift in policy could also help to solve the worker shortage in Wisconsin, by incentivizing workers to take on additional hours. In fact, when polled in April of this year, 64 percent of Wisconsinites thought that eliminating income tax on overtime pay would help solve the worker shortage.”

Countdown

IRG says the clock is ticking on tax reform.

“Earlier this year, the legislature passed a historic $3.5 billion tax cut,” IRG’s proposal states. “Unfortunately, 95 percent of this tax cut was vetoed by the governor. The legislature has since proposed alternative cuts, but they have not sent a new bill to the governor’s desk. The legislature and governor have until spring of next year to agree on meaningful tax reform to help workers before the current legislative session is over.”

Time is also of the essence when it comes to the state’s long-term prosperity, IRG contends, because its analysis of data shows that Wisconsinites are fleeing to low-income tax states, taking income and tax revenue out of Wisconsin.

“Over 92,000 tax filers left Wisconsin in 2021, with almost 60 percent moving to states with a flat income tax or no income tax at all, according to data from the Internal Revenue Service (IRS),” IRG stated in its analysis. “Similarly, over 62,000 Wisconsin driver’s licenses were transferred to other jurisdictions in 2022. Those leaving took over $4 billion of income from Wisconsin’s economy, $2.6 billion to low- or no-income tax states.”

That also means over $400 million in state and local tax and fee revenue left the state, IRG observed.

The IRG analysis was based on IRS data on the number of individuals that move and establish residency in a new state each year.  Specifically, the IRS data revealed that 92,146 income tax filers moved to other states in 2021, while 53,918 moved to states with a flat income tax or no income tax at all.

It was the middle class that was moving, the data revealed.

“With an average adjusted gross income of just over $82,000, those moving to these states are clearly middle-class Wisconsinites,” IRG stated. 

The analysis showed that $75,182.05 average income was lost per return, with $82,370.79 per return going to states with a flat income tax or no income tax at all.

“These facts are not a surprise, as 59 percent of people in recent polling thought Wisconsin’s income tax was too high and 75 percent supported lowering the income tax,” IRG stated.

Richard Moore is the author of “Dark State” and may be reached at richardd3d.substack.com.