Guest Column from The Badger Pundit
Most people want more government services. Few want to pay more in taxes. All too often vote-seeking politicians will try to convince voters that they have a way to give the public something for nothing.
Louisiana Senator Russell Long summed it up with a rhyme: “don’t tax you, don’t tax me, tax that fellow behind the tree.”
For the five Democrats appearing on the gubernatorial debate stage at Marquette University on Tuesday evening, that fellow behind the tree is “the rich.” They claim that tapping into a narrow set of Wisconsin’s most wealthy and successful citizens will produce the revenues to fund their spending programs.
How will that work out? Not so well based on evidence from other states that raised tax rates.
Instead of producing a tax revenue boom, New York’s finances have tanked. Thomas DiNapoli, New York State’s Comptroller,projects the state faces a $7 billion budget gap in 2027.
In 2022, New York State raised its top tax rate from 8.82% to 9.65% on incomes over $2.1 million; 10.3% on incomes over $5.0 million; and 10.9% on incomes over $25 million.
At the time New York Governor Kathy Hochul was unapologetic. She derisively told those objecting to the tax hiketo “just jump on a bus and head down to Florida where you belong. OK? Get out of town. Because you do not represent our values.”
Lots of New Yorkers took Governor Hochul’s advice. Florida doesn’t have a state income tax. Nor does Texas or Tennessee.
Outmigration is now costing New York State around $10 billion a year in lost taxable income as its most productive and entrepreneurial citizens decamp to states with less punitive tax regimes, oftentimes Florida.
Instead of producing a tax revenue boom, New York’s finances have tanked. Thomas DiNapoli, New York State’s Comptroller,projects the state faces a $7 billion budget gap in 2027. It gets worse from there.
Today, Governor Hochul sings a different tune. She’s begging New York’s tax exiles to return: “I need people who are high-net-worth … maybe the first step should be to go down to Palm Beach and see who we can bring back home because our tax base has been eroded.”
Current Democratic front-runner Francesca Hong wants to raise Wisconsin’s top income tax rate to 17.7 percent. At 17.7 percent even New York State would be a bargain relative to Wisconsin from a tax perspective, let alone no-tax Florida.
As in New York State, plans to “tax the rich” will likely fail here in Wisconsin. Here are four reasons that taxing the rich won’t work.
1. Wisconsin Tax Rates Are Already High
Wisconsin’s top personal income tax rate of 7.65% is the tenthhighest in the nation. Among the Midwestern states, only Minnesota taxes its most successful citizens more heavily than Wisconsin.
And Wisconsin’s top rate kicks in earlier than most. A Wisconsin couple with $450,000 in taxable income pays at the 7.65% rate—the sixth highest rate in the nation at that income level. In New York State that couple’s marginal tax rate would be just 6.85%.
Now $450,000 or a million dollars a year might sound like a lot. But remember that taxes are applied to one’s annual earnings rather than earnings over a lifetime. A nice income today is in most cases the product of years or decades spent building a business, training in medical school, or frugal living. Current year income is the end result. No credit is given by the taxmanfor the sweat, sacrifices and risks taken along the way.
Because Wisconsin income tax rates are already high, the state has less headroom to raise rates before revenue losses from outmigration overwhelm any gains. As New York State has found out to its chagrin, higher tax rates don’t necessarily mean more revenue.
2. Wisconsin Doesn’t Have Many Billionaires
Francesca Hong wants to “tax the frickin’ billionaires.” That’s agreat applause line for the Democratic base. But it runs intopractical limitations: Wisconsin doesn’t have many billionaires.
Wisconsin has six million residents. Only nine Wisconsinitesare billionaires. Tying state finances to such a small number oftaxpayers would be a very risky proposition.
Another problem is that Wisconsin’s billionaires tend to be olderand as such, are less likely to be tied to the state for business reasons. The average age of a billionaire on Forbes Magazine’s list of the 400 richest Americans is 70. The average age of the Wisconsin billionaires on the list is 75.
The three Wisconsin billionaires on the Forbes list that made their fortunes by starting a business are in their eighties or close to it. That’s a sure sign that Wisconsin isn’t creating new wealth. John Menard is 86; Diane Hendricks is 79; and Judy Faulkner is 82.
One wonders what these individuals did to deserve the wrath of the left. John Menard created a string of retail stores that allow consumers to save big money on home improvement supplies. Judy Faulkner developed systems for managing medical records. Diane Hendricks sold roofing supplies. Each of these Wisconsin entrepreneurs made life more affordable and enjoyable for everyday Americans.
3. The Rich Already Pay a Lot in Taxes
A common trope on the left is that the wealthy pay little or nothing in taxes. That’s not true.
Tax returns are confidential so the claims of the left are difficult to refute.
However, the U.S. Internal Revenue Service has everyone’s tax return in its files. The IRS produces a wealth of data and research on who pays how much in taxes.
David Splitner, an economist who works for the IRS, used actual tax returns to figure out the average effective tax rate (taxes paid relative to income) of those appearing on Forbes Magazine’s list of America’s 400 wealthiest individuals. He found that on average they paid 38 percent of their income in taxes. That includes taxes paid to federal, state and local government. By comparison, the average American in the middle of the income distribution pays about 16 percent.
One reason the effective tax rate of the wealthy is not higher is that they give a lot to charity. Charitable contributions are tax deductible. That drives down one’s effective tax rate. But money given to charity is not retained by the giver. When Splitner considered charitable contributions in addition to taxes paid, he found that the wealthiest Americans either pay in taxes or give away roughly 59 percent of their income. And if end-of-life giving is factored in, chiefly to foundations, taxes and charitable contributions come to roughly 73 percent of the income of America’s wealthiest individuals.
Milwaukee and Wisconsin have benefitted greatly from the work of the Bradley Foundation and local charitable organizations. Taxes crowd out private charity. Local charitysuffers when wealth moves out of state.
4. It’s Not Just the Rich That Leave
It’s not just the rich that leave when income taxes go up. So do top scientists, engineers and entrepreneurs.
Economists Enrico Moretti of the University of California-Berkeley and Daniel Wilson of the San Francisco Fed found that star scientists tended to move from states with high- to low-income tax rates. That’s true for both personal and corporate income taxes.
Tax competition between states is more intense than ever beforeas a result of the rise of remote work arrangements. Remote work arrangement sever the physical link between employer and employee allowing talented entrepreneurs, engineers and scientists to work in satellite or home offices in low-tax states.
Raising Wisconsin tax rates would put Wisconsin companies behind the competition in the race to attract the talent necessary to compete in today’s marketplace. That drags down economic growth rates, job creation and wages; a loser for everyone in Wisconsin.
