Thanks goes out to the Wisconsin Budget Project for tipping me off about the annual release of the Institute on Taxation and Economic Policy’s “Who Pays” report. ITEP’s report breaks down the various state and local taxes for all 50 states, and identifies which income levels pay the largest burdens, and why.
Taking a look at the “Who Pays” report for Wisconsin, you’ll find that it’s the middle and lower classes that are paying the highest percentage of state and local taxes, while the richest Wisconsinites are paying less.
So why does Wisconsin's taxes work out this way? A big culprit is property, sales and excise taxes, which hit middle and lower income Wisconsinites much harder than the richest Cheeseheads. Only the top 1% of Wisconsinites pay an average property tax that is less than 3% of income (all the other income levels pay property tax rates between 3.0% and 3.5%) which makes sense when you think about it, because it is unlikely that a 1%er making 10 times the income of a middle-class family will own a house that is worth 10 times as much.
And the sales and excise tax ends up being completely regressive in Wisconsin, with the burdens consistently lowering as you go from the poor to the rich.
Sales and excise taxes as % of income, Wisconsin
Bottom 20% of income- 6.0%
Middle 20% of income- 3.9%
Top 20%- top 5% of income- 2.4%
Top 1% of income-0.8%
Some of these regressive differences are made up by Wisconsin’s income tax structure, where the rich do pay more than others (5.1% for 1%ers vs 3.2% for middle incomes and a refund of 0.2% for the poorest 20%). But even then, this “penalty” on the rich at the state level masks the advantages that rich people get from the federal tax code, including not having to pay Social Security tax after $118,500 of income, and the reality that the rich and connected have the time and resources to do activities that give themselves more deductions and tax breaks than most of us can ever get.
Included in those advantages in the federal tax code is another item that makes state and local taxes in Wisconsin more regressive than it may seem at first glance. When people pay property taxes and state income taxes, those numbers can be written off on their federal taxes, lowering the total amount of net taxes that you pay. Obviously, richer people have more of these taxes to write off, and at a higher federal tax rate, so it’s a double-bonus for them. In property and income tax-reliant Wisconsin, this is an extra boost for those who make the most money.
State/local “tax cut” due to federal offset, Wisconsin
Top 1% of income 1.5%
Top 20%- top 5% of income 1.3%
Middle 20% of income 0.4%
Bottom 20% of income 0.1%
Interestingly, ITEP places this somewhat regressive system in Wisconsin is in the top third of the least unfair state and local tax system of all of the United States. In fact, ITEP ranks two of Wisconsin’s Midwestern bretheren in the “top 10” for unfair taxes, led by a certain state I profiled earlier this week for its flat income tax and budget problems caused by….not taxing for what it needed to pay.
ITEP rankings on tax unfairness, Midwest
Minnesota is a clear outlier when it comes to taxing the rich- the 1%ers pay 7.5% of their income there, while not paying anything more than Wisconsin’s 6.2% in any other Midwestern state (in Illinois, it’s 4.6%). And yet Minnesota keeps adding jobs at a faster rate than almost any other state in this group, while low-tax-for-the-rich Illinois is battling with Wisconsin to stay out of the basement for job growth over the last 4 years. Funny how that works.
So keep these numbers in mind when you hear discussions of tax policy in Wisconsin over the upcoming budget debate, as it looks like the rich are already getting a pretty good deal in the state when it comes to how heavy a burden they have to pay.