Time to Reform State Taxes–Pt. 3: Income Tax Reform

In my previous 2 blog posts, I suggested reforms in state sales tax exemptions which could bring in $1.9 billion in revenue to the State of Wisconsin without raising sales tax rates, and a significant reform to property tax structure to blend those taxes with income to recognize the modern reality that property wealth does not equal actual wealth.  Today’s post will describe a common sense rebalancing of Wisconsin’s state income tax structure, which is long overdue.

While on the face of it, the fact that Wisconsin has 5 income tax brackets may seem like it has a progressive system of taxation, a closer look reveals otherwise. As you can see these brackets are very close together, particularly for all but the very lowest income bracket.

Tax Bracket (Single)
Tax Bracket (Couple) Marginal Tax Rate
$0+ $0+ 4.60%
$10,180+ $13,580+ 6.15%
$20,360+ $27,150+ 6.50%
$152,740+ $203,650+ 6.75%
$224,210+ $298,940+ 7.75%

Thus, an individual, such as Wisconsin’s richest individual, Judy Faulkner, founder of Epic Systems, currently ranked #285 on Forbes Magazine’s list of the 400 wealthiest Americans with a net worth of $1.7 billion, would pay just a slightly higher 1.25% more than one of her lower paid employees, who may clean her office, and may only make $21,000/year (roughly $10.50/hr).

Sadly, rather than making this system more progressive, Wisconsin’s legislature exacerbated the problem by granting huge capital gains tax exemptions in the current budget, which predominantly benefit Wisconsin’s wealthiest citizens.

According to [a] Legislative Fiscal Bureau report, taxpayers with incomes over $150,000 represented only 10 percent of 2009 state tax filers but claimed 52 percent of the capital gains exclusions.

The consequences of this exemption for Wisconsin’s budget are dire.

The Legislative Fiscal Bureau estimates the new exemptions will reduce revenues by $16.1 million in 2011-12 and $20.2 million in 2012-13. Once fully phased in by 2016, tax collections would fall by over $100 million annually, the bureau estimates.

An examination of other states’ income tax brackets and rates reveals that Wisconsin is not the only state with a barely progressive rate.  There are 7 states which have no income tax, and 7 other states with a completely flat income tax rate, as well as 2 states which have a flat rate on dividends and interest income only. California, Hawaii, Vermont and New York have the most progressive income tax rates with the widest variation and largest number of brackets.  Other states fall somewhere in between.

While there is no magic formula for calculating fair income taxation brackets and rates, just as the last Presidential election was a referendum which determined that the American people recognized that the wealthiest Americans should pay a higher rate of taxes than the rest of us, so too should this same doctrine apply at the state level.

The time for tax fairness is now.  The question remains whether elected officials in Wisconsin as well as other state politicians whose states have flat or barely progressive income tax systems will do so.

For more information on how I can help you accomplish effective, progressive systems change e-mail Jeff Spitzer-Resnick or visit Systems Change Consulting.

Categories State Income taxes, Tax ReformTags ,

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