Despite cutting taxes by nearly $2 billion since 2011, Wisconsin loses an average of $136 million per year to out-migration, according to a report released Monday by the National Center for Policy Analysis (NCPA).
Using the NCPA’s State Tax Calculator tool, the report compares the tax climate in Wisconsin to the tax climates of both the top five destination states (Florida, Arizona, Texas, Colorado, and North Carolina) and Wisconsin’s neighboring states (Illinois, Iowa, Michigan, and Minnesota).
Among the top five destination states, all offer significant lifetime earnings gains for homeowners making $75,000 or more, while for renters earning $50,000 or less, only North Carolina is a worse bet than Wisconsin. (RELATED: North Carolina’s State Education Boss Wants to Exempt Teachers from Income Tax)
Compared to neighboring states, the tax climate in Wisconsin favors low-income earning renters while penalizing home ownership and higher income. For renters making $50,000 or less, Wisconsin is inferior only to Michigan, but for homeowners making at least $75,000, only Illinois presents a more burdensome tax climate than Wisconsin, leading the authors to conclude that, “the state is penalizing taxpayers for being more successful.” (RELATED: Supply-Side Founding Father Boost E-Commerce Sales Taxes)
To isolate the effects of tax policy from other inducements, such as the warmer climate in southern states, the report focuses primarily on the comparison of Wisconsin to its neighboring Midwestern states.
Michigan, which offers higher lifetime earnings for all levels of income, has comparable sales and property tax rates to Wisconsin. However, its flat 4.25 percent income tax compares favorably to Wisconsin’s progressive income tax, which ranges from 4 percent on income up to $10,910 to 7.65 percent on incomes of $240,191 and above.
Both Iowa and Minnesota have higher marginal income tax rates than Wisconsin, but their respective property tax rates of 1.29 percent and 1.05 percent are significantly below Wisconsin’s rates of 1.76 percent. As a result, those states are more costly for renters, but more attractive for homeowners.
Illinois, alone among Wisconsin’s neighbors, has a worse tax climate for both renters and homeowners at every point along the income spectrum. Although its flat income tax rate of 5 percent is lower than Wisconsin’s for all but the bottom income bracket, and property taxes are comparable in both states, the average local sales tax in Illinois is 8.16 percent, compared to 5.43 percent in Wisconsin.
Since 2011, Wisconsin has taken steps to reduce both its income tax and property tax rates, which together will save taxpayers an estimated $2 billion by 2015.
Prior to the reforms, Wisconsin had five income tax brackets ranging from 4.6 percent to 7.75 percent. Today, there are four brackets, which range from 4 percent to 7.65 percent. According to the Wisconsin Legislative Fiscal Bureau, the changes are expected to reduce the state’s income tax burden by $416 million in FY 2014-2015. (RELATED: Millions Flee California Because of Progressive Tax System)
In addition, the report says, “Wisconsin has taken steps in the last few years to lessen the property tax burden.” In each year since 2011, property tax rates have decreased by an average of 1.18 percent, including a 3.42 percent decrease in 2014. Despite these reductions, Wisconsin still “has the fifth-highest median property tax rate in the nation,” just slightly higher than in Illinois (ranked sixth) and Michigan (eighth), but significantly more than in Iowa (fourteenth) and Minnesota (nineteenth).
One tax that Wisconsin has not changed is the sales tax, which has remained at 5 percent since 1982. Even so, according to the report, “its average state and local sales tax rate is lower than rates in each of its four border states.”
The NCPA report concludes that “although lower- and middle-income residents, particularly non-homeowners, do quite well in Wisconsin compared to its neighbors, higher-income earners and wealthy earners have a tax advantage by moving to another state.” This is potentially problematic for policymakers in Wisconsin, because the residents with the greatest incentive to leave the state are also the one who pay the most taxes.
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