Wisconsin Policy Forum: Wisconsin tax burden reaches historic low

A billion-dollar income tax cut, property tax levy limits, and wage growth have combined to reduce Wisconsin’s overall tax burden on residents to a record low, according to a new study released by the Wisconsin Policy Forum.

For many years, Wisconsin perennially landed in the top 10 states in tax burden, but the new report says the state has fallen below the national average.

Specifically, the report states, citing federal data, state and local taxes in 2022 fell to 9.9 percent of personal income, down from 10.3 percent the year before, while the overall tax burden fell to 35th nationally.

Senate majority leader Devin LeMahieu (R-Oostburg) pointed to GOP-driven tax cuts as a major reason.

“Wisconsin has traditionally been a high tax state,” LeMahieu said. “Not anymore. Between 2000 and 2022 Wisconsinites benefitted from the largest decrease in tax burden in the country. The sky didn’t fall, state revenues continue to climb, and Wisconsin is in historically strong financial position.”

Since 2022, LeMahieu said, the state provided K-12 schools with the largest increase in new resources in history and the state continues to have a $4-billion surplus.

“The 35th lowest tax burden in the country is great, but we can do better,” he said. “Senate Republicans are committed to returning the state’s surplus to Wisconsin families by continuing to cut taxes.”

Report details

Wisconsin’s taxes as a share of income were 1.2 percent below the national average of 11.1 percent in fiscal year 2022, the report stated. 

Because of high inflation, the report pointed out, state and local tax collections grew by 12.6 percent nationally in 2022. But here, the legislature and the governor lowered the tax rate in the state’s third income tax bracket from 6.27 percent to 5.3 percent starting in 2021. That amounted to an approximate $1 billion tax cut that helped limit the growth in state and local tax revenues to 4.6 percent in fiscal 2022, the Policy Forum wrote.

“Without this income tax cut, the tax burden would have still fallen but less sharply,” the report stated. “Meanwhile, personal income (a measure including wages, interest, dividends, and government payments to individuals) rose by 8.8 percent in Wisconsin and 9.2 percent nationally. The income growth sharply lowered the tax burden in Wisconsin but was not enough to keep taxes from growing as a share of income nationwide.”

The numbers reflect a two-decade trend that has provided the state with the largest drop in tax burden in the country and lowered its tax levels from the highest among its four neighboring states in 2000 to the second-lowest in 2022, ranking only behind Michigan, the Policy Forum reported.

“As recently as 2000, Wisconsin was ranked third-highest nationally for taxes as a share of personal income,” the report stated. “In 2022, however, the tax ranking dropped to 35th nationally, which was the lowest since at least the 1990s and a drop from 26th nationally in 2021.”

A drop from 12.5 percent in 2000 to 9.9 percent in 2022 represented a drop in the state tax burden of 2.6 percent, or 20.9 percent. 

“Both of those decreases were the largest of any state in the nation over those years,” the report stated.

Say what: A tax gap, not a tax cut

Wisconsin’s drop also came during a period of widening gaps between higher-taxing and lower-taxing states, the Policy Forum reported. 

“In 2000, there was a 5.25 percentage point gap between the two states with the highest and lowest tax burden but by 2022 the gap had grown to nearly nine percentage points,” the report stated. “Compared to the ranking as a share of personal income, Wisconsin’s ranking for taxes per capita fell by somewhat less, though it also dropped to a record low. In 2021, the state ranked 24th nationally for state and local taxes per capita at $5,689, while in 2022 Wisconsin ranked 29th at $5,966.”

The Policy Forum analysis revealed that not all decreases in the tax burden are created equally.

“This analysis, however, shows only a drop in Wisconsin’s average tax burden — some taxpayers here benefited less and others more,” the report stated. “In the case of the recent $1 billion income tax cut, for example, Legislative Fiscal Bureau estimates prepared at the time showed 98.9 percent of the total decrease was expected to go to tax filers with state Adjusted Gross Income of more than $40,000 and 74 percent of the total to filers with income of more than $100,000.”

As a share of personal income, the Policy Forum reported, Wisconsin’s individual income tax ranked 13th-highest nationally in 2020 but by 2022 its ranking had fallen to 30th. 

“This drop in the ranking may also reflect in part state tax decreases approved in early 2021 for recipients of federal pandemic Paycheck Protection Program (PPP) loans,” the report stated. “This trend may also reflect the fact that for 2022 the state adjusted its income tax withholding tables, which reduced on a one-time basis the tax funds being collected and held by the state for eventual refunds to taxpayers.”

What’s more, the Policy Forum reported, Wisconsin’s standard tax deduction and the cutoff levels for income tax brackets are indexed to inflation. 

“These adjustments protected taxpayers here from being pushed into brackets with higher rates by increases in wages that accompanied the rise in consumer prices,” the report stated. “Research by the Tax Foundation suggests that about half of the U.S. states with an income tax include some sort of inflation adjustment of their standard deduction, brackets, or other features, but the other half of states do not appear to do so. In those states, the recent rise in inflation could lead to higher effective tax rates unless the state either raised the standard deduction or exemptions or lowered the tax rate.”

But, the Policy Forum continued, individual income taxes were not the only difference. 

“The growth in both corporate income and general sales tax revenues in Wisconsin significantly trailed the growth in those categories nationally, even though no major cuts were made to the Wisconsin sales tax,” the report stated. “The overall economy as well as the mix of industries in Wisconsin may have slowed the growth in corporate tax collections, and the types of purchases covered by the state sales tax (which exempts motor fuel and medicines, for example) may have also affected sales tax collections here.”

Property tax is the other major tax in the state, the Forum observed, and those taxes grew by 2.9 percent, similar to the national average.

“Property taxes as a share of income ranked 17th highest nationally, which was similar to recent years,” the report stated. “Local property taxes in Wisconsin were tightly controlled in 2022 by the state budget, which froze the per pupil caps that limit school revenues from general state aid and the local tax levy. Those limits reduced the share of income in Wisconsin devoted to property taxes from 3.2 percent in 2021 to 3 percent in 2022, contributing a significant share of the overall decrease in the state’s tax burden.”

Still, the Forum observed, the state’s higher than average property taxes, on homes especially, remain the most salient tax for most state residents and it could mask the overall decrease in taxes in the state.

“It is also worth noting that Wisconsin also receives much less than average from sales taxes, federal aid, and charges for public services such as sewer fees and tuition at public colleges and universities,” the report stated. “Revenues from these sources as a share of personal income in Wisconsin in 2022 ranked 36th, 42nd, and 33rd respectively.”

Spending

As for government spending, state and local spending in the state was “robust.” Even so, the Forum stated, government spending as a share of personal income fell.

“Direct general expenditures totaled $65.06 billion in Wisconsin in 2022, up 7.0 percent from the previous year,” the report stated. “Spending as a share of income fell from 18.6 percent in 2021 to 18.3 percent in 2022 and the state’s rank fell slightly from 29th-highest to 30th.”

In a highlight, the Policy Forum observed that the decrease in the state’s tax burden over the past quarter century translated into a decrease in overall state and local spending levels and those for education in particular. 

“Overall K-12 spending in Wisconsin rose 4.4 percent in 2022, but that was less than half of the 9.8 percent increase nationally,” the report stated. “The state’s ranking for spending on K-12 schools totaled 3.8 percent of personal income in 2022, which was down from 3.9 percent in 2021 and 5.2 percent in 2000. “

The state’s ranking in that category in 2022 was 31st, down from 24th-highest in 2021 and eighth-highest in 2000, the Policy Forum researchers reported. 

“This represents a major shift in the single largest area of state and local spending,” the report stated. “Higher education spending in the state rose to 1.9 percent in 2022 from 1.8 percent the year before. The state’s ranking rose from 23rd highest to 20th in 2022.”

In other areas, the Policy Forum reported that state and local corrections spending grew by 11.3 percent in 2022. 

“The state’s ranking for corrections spending as a share of personal income rose from 12th-highest in 2021 to ninth-highest nationally in 2022,” the report stated. “That is notable since nearly all corrections spending is paid for with state and local tax revenues—the federal government provides little funding in this area.”

Meanwhile, the Policy Forum reported, police spending rose 5.8 percent in 2022 compared to 3.8 percent nationally. 

“As a result, the state’s rankings for police spending rose somewhat, from 29th-highest in 2021 to 27th-highest in 2022,” the report stated. “That ranking, however, was still down significantly from two decades ago. Meanwhile, spending on firefighters and fire protection fell both in terms of nominal spending and in the state’s ranking, dropping as a share of income from 29th-highest in 2021 to 39th in 2022.”

That was tied for the lowest ranking on record, the Policy Forum reported.

In other areas, the report showed that public welfare spending, such as Medicaid health coverage for low-income residents, grew by 6.5 percent in 2022, but the state’s spending ranking remained unchanged at 21st nationally.

The report also looked ahead.

“From the Forum’s own separate reports on state and local tax collections, we know that there was little change to the state and local tax burden in fiscal 2023 and that may flow into 2024 and 2025,” the report stated. “Personal income growth has been relatively strong, but taxes have also grown in at least some areas.”

For one thing, the Forum reports, Evers and lawmakers did not agree on large income tax cuts in the 2023-25 state budget. 

“Next, a wave of successful local property tax referenda this year will result in substantial increases on December 2024 tax bills,” the report stated. “These increases should also help to counteract at least somewhat the drop in K-12 spending levels as local school leaders try to rebuild their budgets after the two recent years of frozen revenue limits.”

Meanwhile, legislators may want to keep lowering taxes in Wisconsin while Evers and many referendum voters have sought to boost K-12 spending, the Forum speculated.

Also sizable local property tax referenda and increases in Milwaukee sales taxes may slow or halt the decline in overall tax burden, the Forum opined.

“Yet there is little doubt of the deep impact that this trend has made over the past generation for both bills to taxpayers and spending levels on a variety of public services in the state,” the report stated.

In making the analysis, the policy forum says it uses annual data from the U.S. Census Bureau plus population and personal income figures from the U.S. Bureau of Economic Analysis. The latest Census data is for fiscal year 2022.

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