RESEARCH REPORT: JUNE 22, 2021
BY: JUNJIE GUO and NOAH WILLIAMS
As an amendment to our initial report on June 17 titled “Middle Income Tax Reform Options for Wisconsin”, we evaluate the potential impacts of cutting the third income tax rate from 6.27% to 5.3%, a proposal approved by the Joint Committee on Finance on the same day. We find the JCF proposal would cut annual tax revenue by about $927 million, which is roughly comparable with both the official estimate by the Legislative Fiscal Bureau and the cost of a proposal discussed in our initial report: simultaneously eliminating the phase-out of standard deductions and removing the second income tax bracket. Comparing the two proposals, we find both would cut the net tax and the marginal tax rate significantly for a large group of households. However, relative to the JCF proposal, simultaneously eliminating the phase-out of standard deductions and removing the second income tax bracket would lead to a larger benefit for middle income families, including a larger percentage increase in after-tax income and a larger reduction in the marginal tax rate which would provide them with more work incentive. The exercise illustrates the importance of considering different options to find the best approach to reforming the state’s complicated tax code.