As Wisconsin lawmakers work to finalize the state budget for the fiscal year (FY) 2022-23, which begins July 1, the Wisconsin Legislative Fiscal Bureau (LFB) reported Tuesday that the state has significantly more revenue than that was expected as what LFB released sales forecasts earlier this year.
Specifically, LFB’s revised three-year sales forecasts are $ 4.4 billion higher than previously reported: $ 1.4 billion higher than expected for FY 2021, $ 1.5 billion higher for FY 2022 and 1 , $ 4 billion higher for FY 2023. This gives an expected total surplus of $ 2.6 billion for FY 2021, $ 3.9 billion for FY 2022, and nearly $ 5.9 billion for FY 2023. These revenue projections are due to a combination of better-than-expected tax collections this spring as the state took a turn in the fight against COVID-19, as well as the sizeable amount of federal aid that the state, its local governments and the Taxpayers received amid the pandemic. While federal aid is one-time money, state tax officials expect robust revenue growth in several years.
Under applicable Wisconsin law, any year that actual tax revenue from the general fund exceeds the budgeted amount for that year, half of the excess revenue is paid into the state’s budget stabilization fund, which helps prepare the state for future economic contraction . As Fiscal Year 2021 closes, actual tax collections are projected to be $ 1.6 billion higher than when the fiscal year 2020-21 was passed in 2019. As a result, approximately $ 808 million will be automatically transferred to fiscal stabilization funds, but the remaining revenue surpluses for FY2021 – as well as the revenue growth of historic proportions expected for the coming biennium – can and should be used for the long-term benefit of current and future Wisconsinians.
As always, there will be many different opinions on how to distribute this excess revenue, but since tax breaks will undoubtedly be part of that discussion, it is important to consider how these tax breaks can be achieved in a meaningful and economically efficient manner that the The state will prepare for further investment and growth in the coming years.
Given the state’s revenue forecast, it makes sense to examine ways to structurally return some of the excess revenue to taxpayers while making Wisconsin more economically competitive. These suggestions – among others – are detailed in our Guide to Tax Reform Options in Wisconsin.
Reduce individual income tax rates. Wisconsin’s highest marginal tax rate of 7.65 percent is higher than all but nine states and the District of Columbia, and the second highest marginal tax rate of 6.27 percent – that of only about $ 24,000 in taxable income for a single person and $ 32,000 -Dollars for married couples – is also extraordinarily high. When considering the effects of the marginal marginal rate, it is important to consider that sole proprietorships, partnerships, LLCs, and other transit companies pay taxes under the state’s individual income tax system, so the state’s high marginal marginal rate of 7.65 percent is for many businesses a strain in Wisconsin, especially for those who have come to the brink of closure during the pandemic (as well as companies that have closed but hope to reopen in the future). The permanent lowering of the country’s high individual income tax rates – especially the rates of 7.65 and 6.27 percent – should be a top priority, as these are a particular drag on the country’s economic growth and have not been reduced in recent years despite the two lower rates were being reduced. One option to ensure that tax rate cuts are sustainable beyond FY 2023 is for lawmakers to introduce tax triggers to make future tax rate cuts dependent on the continued availability of revenue as the state recovers from the pandemic.
Reduce the marriage penalty and ultimately eliminate it. An ideal individual income tax structure doubles the width of the tax brackets for married couples compared to single parents to ensure rates are applied evenly, but under Wisconsin individual income tax, two people who get married have a much higher effective tax rate than married couples who do Submit together as they would like two people submitting separately but earning the same amount of combined income. In particular, the marginal income thresholds in Wisconsin for married couples are only about 33 percent higher than for single parents, while the thresholds for married asylum seekers in most other states are 100 percent higher for married couples. This marriage penalty departs from the neutrality of Wisconsin’s tax law, so policy makers should prioritize the gradual introduction of higher thresholds for married applicants.
Reduce the corporate tax rate. Like the individual income tax rate, the state corporate tax rate is exceptionally high; only 13 states and DC have a higher peak marginal rate than Wisconsin. This has led the state to put heavy emphasis on incentives to attract new employers to the state, but since incentives are only available to certain skilled companies, unskilled employers bear the full brunt of the state’s high quota. Lowering the state’s high corporate rate would encourage employment growth, wage growth, higher returns for shareholders (including annuity and other individual retirement account holders), and more long-term investment and opportunity in the state of Wisconsin. As with lowering the individual income tax rate, future corporate tax rate reductions can be made dependent on the future availability of income.
Remove the fallback rule. Aside from uncompetitive income tax rates, Wisconsin’s economic competitiveness is hampered by the existence of a fallback rule that exposes a greater portion of corporate income to the state’s high corporate income tax rate than in states without such a policy. Several studies have found that the introduction of fallback rules is displacing business to such an extent that revenue gains from the existence of a fallback rule may not be enough to offset the loss of revenue associated with the lower investment in the state that it entails. Thus, while there would be a short-term loss of revenue associated with the repeal, those losses would likely be resolved over time. The repeal of the fallback rule would be a relatively small, short-term investment that would bring positive economic results to the state in the long run.
Protect companies from unemployment insurance tax increases. Wisconsin has weighed heavily on its unemployment insurance trust fund in the face of historic job losses in 2020. The unemployment insurance taxes that fund state unemployment benefits are paid by employers in Wisconsin, and when the trust fund is drawn heavily, interest rate hikes are usually triggered automatically. The Wisconsin Department of Workforce Development announced that unemployment tax rates will remain stable for 2021, but the state should use a portion of its excess revenue to protect employers from increased UI tax rates in the years to come as future UI tax increases move on the time Many companies will have to hire their employees again and return to profitability after the pandemic. The easiest way to do this is to replenish the trust fund, and states are allowed to do so with the help of federal aid provided under the American Rescue Plan Act, up to pre-pandemic funding, not including that Touching government revenue.
Reduce reliance on material wealth taxes. One of the more economically damaging taxes (on a dollar-for-dollar basis) Wisconsin continues to levy is a tax on certain personal property, including office furniture and equipment. For many Wisconsin employers, property taxes are the primary source of heavy state tax charges, but they affect some industries more than others. Wisconsin has made strides in exempting more classes of property from this tax over time, but the state should continue to work to get these taxes off the books entirely, especially given their complexity and the high cost of compliance.
As Wisconsin emerges from the pandemic, state policymakers have the rare opportunity to reinvest excess income in a structurally sound way to make the state more attractive to individuals and businesses, fuel a faster and more resilient economic recovery, and get the state moving on investment and increase the growth of the state for many years. Policy makers should take this opportunity to make a down payment on the future of the state by providing tax breaks that not only ease the burden on Wisconsinites but also prepare the state for economic opportunity and growth well beyond the next fiscal cycle also endure.
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