Tax cuts: beyond political to strategic

There are almost an infinite number of ways to use the remaining $4 billion state surplus. Gridlock between Democratic Gov. Tony Evers and Republican legislative leaders, Assembly Speaker Robin Vos and Senate Majority leader Kevin LeMahieu, has stymied constructive uses of the majority of the windfall.

The Wisconsin surplus was $7 billion before our political leaders turned the surplus into a political football. First, the Republican-controlled Joint Finance Committee threw out the governor’s budget and his proposed income tax cuts. Then the governor vetoed the tax cuts in the GOP budget. Only small cuts for the lowest level of taxpayers went unscathed.

Most of the $3 billion taken out of the surplus went to K-12 education, either to public schools or expanded funding for choice schools. There has been little blowback on that compromise. It is good to see more investment in education, although the University of Wisconsin was left out in the cold.

Eventually, the partisan players on both sides of the aisle will have to arrive at some kind of compromise on where the tax cuts should end up from the remaining $4 billion.

Let’s inject some strategic economic thinking on the $4 billion, on what has so far been a purely high stakes political game:

  • Let’s agree that tax cuts are good for the economy. To make a point, back in 2021, Noah Williams, the then head of The Center for Research on the Wisconsin Economy (CROWE) at the University of Wisconsin – Madison, proposed eliminating the state income tax altogether and replacing it with an 8% sales tax, up from the current 5%. He projected that reform would lead to a long-run increase in the state’s economy of about 8% and higher employment of about 7%. That didn’t come close to happening, but it demonstrates that across-the-board cuts of the income tax can juice the economy. As we all know, a more robust economy is good for all the citizens of the state.
  • Let’s acknowledge that Wisconsin has one of the most progressive income tax structures in the country. The bottom 26% of earners pay no state taxes. The bottom two of four brackets, up to $17,000 and $34,000 for a couple, pay only 3.54 % and 4.65%. Obviously, there’s limited room to cut there.

The widest bracket, up to $374,600 for a couple pays 5.3%. The top bracket over that is where the problem for the economy lies; it’s 7.65% – more than enough to drive people to states like Florida and Texas, which have no income taxes.

  • Out-migration of our high-earners is a real issue. They are the ones who invest in new companies, and the new ventures are where the net new jobs come from. According to CROWE, Wisconsin lost about 83,000 in population between 2010 and 2022. Most of the country gained population. That partly explains why we are a badly lagging state for job growth and pay levels.
  • Most businesses in Wisconsin are by far small businesses, and the owners pay their business taxes at the high personal rate of 7.65%. That level inhibits small business growth. Said CROWE in a recent report: “The high and progressive income tax has a negative effect on firm investment and business formation.”
  • Dropping the top rate sharply is a non-starter in a blue state with a progressive governor. Progressives, maybe rightly, care more about economic equities than about economic growth.

So what is politically possible?

How about, for a compromise, the same percentage cut for all four existing brackets?

But also, how about special treatment for entrepreneurs who create companies and their technology-based jobs? We could do two things to make our state a start-up haven:

  • Raise the investment tax credit from 25% to 40%. Those credits really work to get companies up and running.
  • Lower the capital gains rate to zero for them if they stay here. They are then likely to stay here and invest their winnings in other new ventures.

Lastly, for equity’s sake, although I’m not a progressive, raise the top income tax rate to 10% for fat-cat earners, like professional athletes, actors and CEOs on their annual incomes of more than $2 million. Let them work for society. Maybe use the extra tax revenues for outright bonuses of $500 at Christmas for our really poor people.

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