This post originally appeared at https://reforminggovernment.org/first-analysis-historic-middle-class-tax-relief-vetoed/

WHAT HAPPENED:Governor Evers signed the 2023-2025 state budget, but not before issuing 51 partial vetoes, including vetoes that remove 95% of the income tax relief that was included in the legislature’s budget. Because of his veto, taxpayers will only see a $175 million income tax cut – $37 per taxpayer annually – instead of a historic $3.5 billion reduction.

Last week, the legislature passed the state budget with a historic $3.5 billion income tax. The legislature’s plan would have reduced the bottom bracket from 3.54% to 3.5%, collapsed the two middle brackets into a new lower rate of 4.4%, and reduced the top bracket from 7.65% to 6.5%. The Governor vetoed the changes to the two top rates, eliminating $3.325 billion in tax relief for middle-class families and small businesses around the state.

WHAT IT MEANS: The Governor’s veto removes $3.325 billion in tax relief for middle-class Wisconsinites.

• The state’s struggle to keep residents and attract new residents will persist as migration patterns continue to favor low- and no-tax states.
• The legislature’s plan would have delivered an average annual tax cut of $573 to taxpayers, the Governor’s veto drops that to $37 annually.
• Additionally, he vetoed a provision that makes the new tax rates, minimal as the change might be, effective in January – instead giving the power to his administration to make the change as it sees fit.
• Wisconsin will continue to have a higher income tax on the middle class than most states.
• Over 90% of small businesses in Wisconsin pay taxes via the individual income tax and in 2019, over 55% of those businesses were taxed at the state’s highest marginal rate of 7.65%.
  • These businesses employ about half of Wisconsin’s workers and are owned by average middle-class Wisconsinites.
• Wisconsin’s uncompetitive 38th (worst) ranking for business tax climate goes unchanged.
• The $6.9 billion surplus will largely not be sent back to taxpayers.
• Wisconsin will not realize the economic gains of a $3.5 billion tax cut as modeled by the Center for Research on the Wisconsin Economy (CROWE) at the UW. According to CROWE, the legislature’s plan would have boosted key economic indicators:
  • Capital Investment +1.51%
  • Economic Output +1.25%
  • Labor Rate +1.08%
  • Wages +.17%
  • Corporate Tax Revenue +.82%
  • Sales Tax Revenue +1.17%
• Wisconsin will continue to fall further behind its neighboring states, the majority of which enjoy a low flat tax.
  • Michigan 4.05%
  • Illinois 4.95%
  • Iowa 3.90% (by 2026)
  • Indiana 3.15%

WHAT IRG HAS DONE: Over the last few months IRG has demonstrated the need for tax relief in Wisconsin and provided solutions that could work in Wisconsin. In May, IRG released its Playbook for Income Tax Relief in Divided Government which outlines several options with estimated economic impact for policymakers to consider. The legislature’s tax cut mirrored one of these options by eliminating a tax bracket and making cuts to the remaining three. In June, IRG completed an analysis of recent migration data that showed Wisconsinites leaving the state for better tax environments. In 2021, almost 60% of those leaving Wisconsin, moved to states with a flat tax or no income tax at all.