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Commissioned last fall, the Badger Institute paper, “The Economic Implications of a Flat-Rate Income Tax for Wisconsin,” was written for the Badger Institute by Don Bruce, the Randy and Jenny Boyd Distinguished Professor at the University of Tennessee’s Haslam College of Business and the director of the university’s Boyd Center for Business and Economic Research. Dr. Bruce has done similar work estimating the effect of tax reform nationally by applying what economists already know of the effect of tax rates on businesses’ decisions about growth and the investments that bring it about.
Dr. Bruce found that a Wisconsin income tax reform that applied a 5.1% rate to all taxpayers, while using Wisconsin’s standard deduction to protect those now paying lower rates from seeing any increase, would have substantial benefits under even a conservative calculation.
Such a reform would over the first five years…
- Increase Wisconsin’s output of goods and services by $7.2 billion,
- Add 24,000 additional jobs,
- Increase business investment by $614 million.
Before tax reform, Wisconsin’s economy is forecast to grow between 2.1% and 3.4% a year. By Dr. Bruce’s estimate, tax reform adds more than a third of a percentage point to that rate.
And while state tax officials project a drop in employment in coming years, Dr. Bruce’s findings show that tax reform would reduce that decline and, by the fifth year, cause job growth to rise by 0.35% rather than by the 0.19% now expected.
Dr. Bruce noted that the economic boost would come to a state economy currently projected to grow only slowly. “The impacts would certainly be even larger in more robust economic times,” he writes.
The parameters of tax reform that Dr. Bruce estimated match one of the recommendations of the Badger Institute and the Tax Foundation in 2022’s Tax Reform Options to Improve Wisconsin’s Competitiveness, which offered several pathways toward a fairer, growth-promoting single-rate income tax.
That option differs in some details from the Macco proposal, which would reduce most taxpayers’ rate to 4.5% in five annual stages, exempt low-income households from income taxes, and condition each reduction on state revenue exceeding the 2019-2020 level adjusted for inflation. But the Badger Institute analysis can inform discussion generally about single-rate reform.
“Don Bruce’s work is a crucial gauge of the benefits that even a moderate tax reform can bring to Wisconsinites,” said Patrick McIlheran, the Badger Institute’s director of policy. “Many observers have argued that Wisconsin’s top tax rates, some of the highest among states, discourage businesses from growing here, and that tax reform will brighten Wisconsinites’ prospects. This paper puts a number on those possibilities.”
Dr. Bruce’s full paper can be read here.
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