Junjie Guo and Noah Williams
Abstract:
Wisconsin has a progressive individual state income tax system, which features increasing marginal tax rates (the tax rate on the last dollar earned) as income rises. However other aspects of the tax code, such as the earned income tax credit (EITC) and standard deduction, change the effective marginal tax rate that taxpayers face. We consider the case of a married couple with two children, and evaluate the net tax bill and marginal tax rates they face as income rises under current law and two recent tax reform proposals in the state. We show that under current law households earning just below the state median income face the highest marginal tax rates of 9.3-9.8%, while a broad middle range of incomes face effective rates well above their statutory rates due to the unconventional structure of the state standard deduction. We then show that although both of the recent tax reform proposals were aimed at providing middle class tax relief, they have very different implications for marginal tax rates and next tax benefits. Overall, our results illustrate some of the complication caused by credits and deductions in the state tax code, and suggest potential scope for more comprehensive tax reform.