New Report Touts Benefits Of State Income Tax Repeal As Governors & Lawmakers Jockey To Become Nation’s 10th No-Income-Tax State
By Patrick Gleason, December 16, 2021
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Tennessee became the nation’s eighth no-income-tax state on the first day of 2021, when the phaseout of the Volunteer State’s investment income tax was completed. Less than seven months later, New Hampshire legislators and Governor Chris Sununu (R) enacted a new budget that will make New Hampshire the country’s ninth no-income-tax state. As the ranks of states without an income tax have grown by 28% in just the past year, lawmakers in a number of other states are taking action or preparing legislation to become the 10th no-income-tax state.
This is the context in which a new study was released today by University of Wisconsin-Madison Professor Noah Williams, founder of the Center for Research on the Wisconsin Economy (CROWE), finding that Wisconsin taxpayers and the state economy as a whole would benefit if the Badger State were to become the nation’s 10th no-income-tax state, making it the only state in the Midwest without an income tax.
According to the CROWE study, repeal of Wisconsin’s income tax would cause GDP to grow an additional $25 billion in the first eight years. Dr. Williams notes that such growth would have a “transformative impact on the state economy.” During those eight years, the report estimates that 170,000 additional jobs would be created. The proposal to make Wisconsin the Midwest’s only no-income-tax state has been met with praise from the state’s business community and other stakeholder groups.
“In order to draw more people into our state, Wisconsin must be willing to do something bold,” said Kurt Bauer, President and CEO of Wisconsin Manufacturers & Commerce. “The latest Census data shows people are migrating to low-tax states, while they are fleeing high-tax states. Becoming the only state in the Midwest without an income tax would serve as a beacon to workers and families looking for low costs, a high quality of life and ample career opportunities.”
Eliminating Wisconsin’s personal income tax would directly increase the take home pay for Wisconsin residents. Such a move, as the report notes, would also benefit small businesses, since the vast majority of them file under the individual income tax system. In fact, according to the CROWE report, nearly 90% of employers in Wisconsin are small businesses structured as pass-through entities that file under the individual income tax system. As such, most Wisconsin employers would realize a large boost in job-creating and sustaining capacity if the state income tax were repealed.
Former Wisconsin Governor Scott Walker, who enacted approximately $13 billion in state tax relief during his two terms as governor, much of which came in the form of income tax relief, issued praise for the new report and the goal of making Wisconsin the nation’s 10th no-income-tax state. While Governor Walker was successful in providing income tax relief during his time in office, even then he made it clear that the ultimate goal should be to fully eliminate the state income tax. In a December 16 appearance on the Jay Weber radio show, Walker noted that the income tax repeal plan put forth by CROWE “would put an emphasis on things that drive the economy” and would have “a ripple effect that will be unbelievably positive.”
After former Governor Walker appeared on his radio program, Jay Weber took to Twitter to endorse the proposal to eliminate Wisconsin’s income tax. “Imagine us,” Weber posited to his fellow Wisconsin residents, “surrounded by high tax states, as the only ‘no income tax’ state in the Upper Midwest.”
The tax relief enacted and the spending restraint exercised during the Walker years have generated billions in savings for taxpayers and put Wisconsin in a place where lawmakers can now consider legislation that will begin phasing out the state’s income tax entirely. Thanks to the more than $13 billion in spending restraint facilitated by Act 10, Governor Walker was able to enact reforms that have allowed Wisconsin residents to keep billions more of their paychecks while the state realizes budget surpluses. A Wisconsin Policy Forum (WFP) report released in November underscored the progress that’s already been made in reducing the state tax burden, noting that “the drop in Wisconsin’s state and local taxes as a share of personal income was the largest or nearly the largest nationally since 1999.”
“In 1999, state and local governments took in $17.4 billion from taxpayers – about 12.2% of total personal income in the state (the fourth–highest percentage in the country) and $3,288 per capita (sixth-highest),” the WPF report notes. “By 2019, the $30.6 billion in total taxes accounted for just 10.3% of personal income (23rd in the nation) and $5,275 per capita (24th)”
The progress made in recent years in reducing Wisconsin’s tax burden stands out, but the state’s top income tax rate of 7.65% is still relatively uncompetitive. At a time of heightened policy innovation and competition, recent months and years have made it clear that state lawmakers cannot rest on their laurels. Lawmakers in Tennessee, Texas, Florida, and other states with lower tax burdens and more hospitable tax climates than Wisconsin, for example, are continuing to pursue tax reforms than make their tax codes even less burdensome and more conducive to economic growth and job creation.
In many of the 14 states where income taxes were cut this year, such as in Arizona and North Carolina, lawmakers have also expressed a desire to eventually get the state income tax rate down to zero percent. The new budget enacted in North Carolina with bipartisan support builds on the significant progress that lawmakers in Raleigh have made bringing the state income tax rate closer to zero. Only eight years ago North Carolina’s top income tax rate was 7.75%, the highest in the Southeast. The new budget signed into law by a Democratic governor will bring North Carolina’s now flat income tax rate down to 3.99% by 2027 and will completely eliminate the state’s corporate income tax over the next decade.
Support for state income tax elimination is not limited to Republicans. Louisiana Governor John Bel Edwards (D) approved an income tax cut coupled with a revenue trigger mechanism that will help phase down Louisiana’s income tax over time. One month after Governor Edwards signed that tax reform into law, which was contingent upon voter approval that was ultimately granted in November, his counterpart in Colorado, Governor Jared Polis (D), announced that Colorado’s state income tax rate, cuts to which he has supported in recent years, “should be zero.”
If Wisconsin legislators proceed with a plan to phase out the state income tax, they’ll be joining a list of states where legislators and governors are already working to become the nation’s 10th no-income-tax state. Legislation to phase out state income taxes is expected to be introduced in 2022 in at least two states, West Virginia and Mississippi. Even more states are expected to introduce legislation in 2022 to chip away at the state income tax, making progress on the path to income tax elimination.
As the past year has demonstrated, not taking action to improve one’s state tax code is to fall behind. The report released by CROWE today provides one path that Wisconsin legislators can take in order to not fall behind. Arizona, North Carolina, Tennessee, New Hampshire, Florida, and other states also provide real world examples of other paths that can be taken to achieve the same goal. 2021 was a banner year for state tax relief, but 2022 could surpass it.
Patrick Gleason: I am Vice President of State Affairs at Americans for Tax Reform, a Washington-based advocacy and policy research organization founded in 1985 at the request of President Ronald Reagan. My writing and commentary have been published in The Economist, Reuters, Politico, and the Wall Street Journal, among others. I cover the intersection of state & federal policy and politics.