New GOP income tax cut proposal would cap rate at 4.5% for Wisconsin

The latest tax cut proposal comes as lawmakers approach the busiest weeks of the state’s biennial budget process. Legislators have a roughly $7 billion projected surplus at their disposal, with a good portion of that consisting of one-time funds.

The bill, introduced by Reps. John Macco, R-Ledgeview, and Jerry O’Connor, R-Fond du Lac, would implement a multiyear plan to reduce the rates for the state’s four income tax brackets. Under the proposed new tax code, earners in the lowest bracket — individuals earning less than $13,810 per year or married filers earning less than about $18,400 — would pay no income taxes, while all other earners would pay a 4.5% income tax regardless of income.

Macco, who chairs the Assembly Committee on Ways and Means, said the proposal is designed to make Wisconsin’s income tax code “fair, low and simple.” He said the end result would essentially be a hybrid flat tax that he hopes can secure approval from not only Democratic Gov. Tony Evers, who has pledged to veto a flat tax, but also his Republican colleagues.

“Everybody pays less, nobody pays more,” Macco said Tuesday. “We’re not shifting the burden from one side to the other.”

Assembly Speaker Robin Vos, R-Rochester, told reporters Tuesday that Assembly Republicans have had “almost no caucus discussions” on income tax cuts, though he reiterated that GOP lawmakers remain focused on a broad tax cut, preferably one that moves closer to a flat income tax.

“I’m not so certain that his plan in the end will be the one that we adopt, but the idea of having a flatter tax code is one I think we’re all in favor of,” Vos said of Macco’s proposal.

Reduced collections

Under the bill, all four of Wisconsin’s income tax brackets would be reduced starting with the 2024 tax year. After the first tax cut, four subsequent reductions would only occur if state general fund collections exceed expenditures.

“Essentially what this would do is provide for a tax cut for all filers with a current tax liability,” said Jason Stein, research director with the Wisconsin Policy Forum, a nonpartisan organization that doesn’t endorse specific policies.

“That said, there would still be a significant decrease at the upper end because you’d still be dropping more than 3 percentage points on the rate that applies to the income in the highest bracket,” Stein said.

The bill is estimated to reduce state income tax collections by more than $3.5 billion annually once fully phased in, according to a fiscal estimate from the nonpartisan Legislative Fiscal Bureau.

Lawmakers on both sides of the aisle have said the state’s unprecedented surplus opens the door to some form of tax cut. However, Evers and Republicans who control the Legislature have so far failed to reach an agreement on the matter.

“With the record budget surplus, taxpayers are expecting tax relief from this session,” O’Connor said in a statement. “This longer-term plan is fair, especially considering how Wisconsin stacks up against competing states, including those with no state income tax. This bill brings justified tax relief to all taxpayers.”

Varying rates

The state’s current lowest tax rate is 3.54%, which applies to individuals earning less than $13,810 per year or married filers earning less than about $18,400. Wisconsin’s top tax rate of 7.65% applies to individuals earning more than $304,000 or married filers earning more than about $405,500.

About 97% of Wisconsin taxpayers paid 5.3% or less in 2021, according to the state Department of Revenue. Just 3% of filers were in the highest tax bracket.

Senate Majority Leader Devin LeMahieu, R-Oostburg, has already proposed shifting the state to a 3.25% flat income tax, a change Evers has already promised to veto if sent to his desk. Evers has called for a 10% tax cut for individuals earning $100,000 or less a year and married filers making $150,000 or less.

Evers’ office did not respond to a request for comment, while LeMahieu’s spokesperson Michael Pyritz said Tuesday the Senate majority leader had not yet reviewed the Macco-O’Connor bill.

A recent Wisconsin Policy Forum report found LeMahieu’s proposal would give an average annual tax cut of more than $100,000 to Wisconsinites who earn more than $1 million. Under Evers’ proposal, those same earners would see an average annual tax increase of almost $40,000.

Flat tax

While Evers has sought to direct tax cuts primarily to low- and middle-income earners, Republicans have largely focused on a flat income tax, which supporters say would make Wisconsin more competitive with neighboring states.

A report by University of Tennessee economist Don Bruce for the conservative Badger Institute estimated that, by moving to a 5.1% flat income tax, Wisconsin would see an estimated $7.2 billion increase in economic output and 24,000 new jobs.

The Republican co-chairs of the state’s powerful budget committee have already signaled a 3.25% flat income tax is “unlikely” to be included in the state’s next two-year spending plan.

Michigan and Illinois have flat individual income taxes of 4.25% and 4.95%, respectively. Minnesota’s top rate is 9.85% for individuals making more than $171,000 and married filers earning more than about $285,000, while Iowa’s top tax rate is 8.53% for individuals and married filers making more than $78,435. Iowa’s Republican Gov. Kim Reynolds last year signed into law a 3.9% flat tax, which will go into effect in 2026.

Wisconsin’s current budget, drafted by Republicans and signed by Evers in 2021, included more than $1 billion in income tax cuts.