The Badger Institute supports a flat-rate individual income tax, a structure increasingly adopted by competing states. We have spent years researching options for reform that includes a single, low rate. But if that is out of the question as budget negotiations proceed, the priority should be Wisconsin’s top rate. Here’s why:

Wisconsin’s top rate is uncompetitive

By standing still, we’ve fallen farther behind.

• Wisconsin’s top rate has remained stuck at 7.65% since 2013, even as the three lower rates have been cut three times.

• Since 2013, 24 other states have cut their top rates. Wisconsin’s top rate is now the 9th highest in the country.

• No other state between New York and California, except for Minnesota, has a higher top rate.

Economic benefits depend heavily on reducing the top rate

A single-rate “flat” income tax structure would produce immediate and ongoing economic benefits, largely driven by reductions for high-income taxpayers. Dr. Don Bruce, a nationally known economist, estimated that moving to a 5.1% flat tax would over the next five years produce:

• $7.2 billion in additional gross domestic product

• $614 million in additional investment

• About 24,000 additional jobs

The top rate disproportionately affects most businesses

About 95% of Wisconsin businesses are “pass-throughs” — LLCs, partnerships and sole proprietorships that do not pay the corporate income tax. Instead, their earnings are “passed through” to the owners’ personal tax returns and taxed at the owners’ marginal rate.

About 67% of the earnings of Wisconsin pass-through businesses are exposed to Wisconsin’s top rate.

“The top marginal rate is the most important rate to reduce because it has a far greater negative effect on economic growth than lower rates. That is because business decisions are made at the margin, based on how taxes will affect the next dollar of income earned or invested, not previous dollars of income,” Tax Foundation expert Katherine Loughead testified to the Assembly Ways and Means Committee in May.

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Our work in advancing free markets, opportunity and prosperity in the Badger State is only made possible by generous donations from our supporters. We never have, and never will, accept government funding. Donate online or email Angela Smith, Executive Vice President. The Badger Institute is a 501(c)(3) tax-exempt nonprofit organization.