Junjie Guo and Noah Williams
Executive Summary:
On June 30, 2013, Wisconsin Act 20, which reduced the state’s personal income tax rates for the first time since 1999 and eliminated a tax bracket, was signed into law* This reform was later followed by 2013 Wisconsin Act 145, which further reduced the marginal tax rate for the bottom income bracket. The two acts shape the current income tax structure in Wisconsin. This paper evaluates the revenue and distributional impacts of the tax reductions from the two acts.
We use recent household-level income data to calculate state taxes under both the actual reduced tax rates in effect in 2016 and the counterfactual higher tax rates from 2012. Comparing the two tax regimes, we find the following effects of the income tax rate cuts in Wisconsin:
- State individual income tax revenue in 2016 was cut by about $400 million, or 5% of the revenue that could have been collected under the 2012 tax rate schedule.
- The reduction in state tax liability is larger in percentage terms for low income households. For example, the tax revenue from households with adjusted gross income (WAGI) below $25,000 declines by 13%, while it only declines by about 4% for households with WAGI above $100,000.
- For an average household, the lower tax rates raised after-tax income by about 0.24% and reduced the household state tax liability in 2016 by about $132.
- The reduction in state tax liability and the increase in after-tax income are larger for richer households. This is expected because poorer households pay less in taxes on average. In particular, for households with extremely low income and zero tax liability under both tax regimes, the tax rate reductions have no effect at all.
This paper uses a static analysis of the income tax reforms, applying different tax structures to the same income data. Thus we ignore any behavioral response to taxation, such as the potential positive effect of tax rate reductions on household income arising from increased labor supply and resulting greater economic activity. That is, in the absence of the tax rate reductions, household income in 2016 would have been lower, and so would be the tax revenue. As a result, estimates in this paper likely overstate the (negative) revenue effect and understate the (positive) after-tax income effect of the tax rate reductions. Better estimates require a model to account for behavioral responses. In ongoing research, we are working on such a dynamic model at the Center for Research on the Wisconsin Economy (CROWE) and will use the model to evaluate the economic impacts of relevant policies at the state level.