Wisconsin Cannot Tax What Leaves

Ananth Seshadri

Executive Summary

• Wisconsin’s talent problem is old, not new. The state ranks near the bottom nationally in retaining educated adults in their thirties, and it did fifteen years ago as well. Taxes did not create that problem. But Wisconsin already needs to work harder than most states to keep and attract talent, so policy should not make that job harder.
• At high incomes, Wisconsin has something worth protecting. From 2012 through 2023, 96 working-age people on returns with AGI above $200,000 moved in for every 100 who moved out. Minnesota was at 73; Illinois at 49. Wisconsin is not a high-income magnet, but it is close to break-even.
• The tax base at the top is unusually business-heavy, and it can move without the taxpayer moving. Filers above $1 million were only 0.3 percent of returns in 2023 but paid 12.5 percent of individual income tax. On comparable 2022 returns, 44.7 percent of income came from partnerships and S corporations, versus 21.3 percent from wages. A firm can put its next expansion elsewhere, an owner can change residence before a sale, and a large gain can be realized later or in another state.
• Milwaukee County shows what new revenue can and cannot do. Act 12 materially improved the county’s finances, helped address legacy pension costs, and initially reduced the property-tax levy. But by 2027 the county projects all $88.6 million of additional sales-tax revenue going to pension costs and a $50.8 million structural gap. New revenue can solve a financing problem without solving the expenditure-growth problem.
• The 17.7 percent proposal is a useful Wisconsin stress test. The bill failed, but it shows how quickly Wisconsin’s competitive tax position can change when permanent commitments are concentrated on a narrow, responsive base. On an additional $1 million of taxable income, the proposed top rate would have implied about $177,000 of Wisconsin individual income tax, versus roughly $98,500 in Minnesota and $49,500 in Illinois.
• Wisconsin should favor broader tax bases, lower marginal rates, competitive treatment of business and investment income, and tighter control of recurring spending. Permanent spending requires permanent financing; permanent tax relief requires a permanent spending path. Reform should remove barriers to work and investment, protect high-return public investment, and restrain lower-return recurring spending. Fiscal policy should expand the income earned here, not claims on a narrow and responsive tax base.