Wisconsin’s increasingly uncompetitive tax structure

By Mike Nichols

You don’t have to think Wisconsin’s trailblazing 100-year-old progressive income tax was always a bad idea to know that it’s worse than a bad idea today.

At the time it was adopted in 1911, it was a logical remedy to an obvious problem.

Before it was passed into law in June of that year, Wisconsin raised revenue almost exclusively through property taxes – a system that was inherently unfair to farmers, inefficient and wasteful.

“The wastefulness and looseness of the present system are such as no businessman would tolerate in his own business for a moment,” wrote the authors of a Wisconsin State Tax Commission report in 1898. “That such abuses are allowed to continue is not creditable to the intelligence and good sense of the people of the state and can only be accounted for on the theory that the actual conditions are not known or understood.

“Even when officials are honest and faithful a large amount of money is annually lost by methods which are a part of our system…”

The question, of course, was whether there was a better alternative. Sales taxes in Wisconsin wouldn’t be adopted for another 50 years. They weren’t even on the radar. Income taxes had been tried – and failed – elsewhere but were a feasible alternative. Progressive income taxes, which were levied on both individuals and corporations, also fit into the Progressive milieu of the time.

Bob La Follette, tapping into anger over economic disadvantage, advocated for them as early as 1897. Individuals with little income would pay 1% in taxes under the legislation adopted in 1911. Those at the top of the scale would pay 6%.

It was, to say the least, a very different time.

The Sixteenth Amendment creating the federal income tax wouldn’t be ratified until 1913.

FDR’s New Deal – with its massive public works spending and government employment programs, pensions, unemployment insurance – was still over 20 years away. Lyndon Johnson’s Great Society, which produced Medicare and Medicaid and food stamps among many other things, was still more than half a century away.

Eliminating the progressive income tax, in other words, is no longer the same thing as eliminating progressivity.

“Even with a less progressive income tax structure, Wisconsin’s tax and transfer system would continue to be progressive, given state and local spending on food and nutrition assistance programs like SNAP[1] and WIC[2], affordable housing, health care, childcare and utilities payment assistance, vocational education and training and other income-tested programs providing financial support to lower-income individuals and families,” wrote Katherine Loughead in Tax Reform Options to Improve Wisconsin’s Competitiveness, a paper released this week by the Tax Foundation and the Badger Institute. “The tax code is not always – or even often – the best way to provide income supports or other varieties of low-income assistance.”

Loughead makes an essential point. At least some of the aforementioned programs have a combination of federal and state funding, and it is certainly true that states should have more leeway in how the dollars are spent. As things stand right now, though, a major function of the federal government is to redistribute money and provide a safety net for Americans at the lower end of the economic spectrum. State taxes serve many other, different functions.

In the meantime, the negatives of a progressive state tax structure are clear. We exist in a uniquely competitive time when individuals and businesses are able to relocate in ways unimaginable 100 years ago.

It’s no coincidence that 13 states have already or are in the process of moving toward a flat tax that is less harmful to business and less disdained by high-net-worth individuals who can easily relocate to Florida or Tennessee. Nine states, after all, have no income tax whatsoever.

It’s unrealistic to think that Wisconsin can completely eliminate its individual income tax (a subject for another day) but moving to a flat tax is not only possible, it’s essential for any state trying to ensure opportunity and prosperity and competitiveness in this modern world.

Which is a very different place than the one that existed 100 years ago.

Mike Nichols is the president of the Badger Institute

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