Study finds middle class shouldering more state tax burden

Middle-class Wisconsin families have seen it in their paychecks and felt it in their pocketbooks for years.

Now, a UW–Madison study confirms it – over the past two decades, these families have faced the highest tax burdens in the state as Wisconsin’s tax system has become less progressive.

Middle- and lower-income families have endured the largest increases in the percent of income paid to state taxes from 1974-1995, according to the study by Professor Andrew Reschovsky and former graduate student Chad Reuter.

“If we define a tax system as progressive when tax burdens rise as income rises, then we can conclude that the state’s tax system has become somewhat less progressive over the past couple of decades,” write Reschovsky, of the Robert M. La Follette Institute of Public Affairs and the Department of Agricultural and Applied Economics, and Reuter, a 1997 La Follette graduate.

The authors analyzed changes in the distribution of income, sales and excise taxes from 1974-1995 among non-elderly married couples in Wisconsin. Their study was funded by the Institute for Wisconsin’s Future, a Milwaukee-based think tank.

Reschovsky and Reuter compared adjusted 1974 income and tax data from the Wisconsin Tax Burden Study, conducted in 1979 by the Wisconsin Department of Revenue, to data from a 1995 tax-and-income study by the Citizens for Tax Justice and the Institute on Taxation and Economic Policy.

In 1974, couples earning between $68,311 and $234,992 per year faced the highest tax burden in the state, at 6.7 percent of income, the study found. The next highest proportion was paid by couples earning $234,993 or more, at 6.6 percent.

By 1995, the study shows that the tax burden had shifted to middle-class couples – especially when factoring the net offset of deducting state income taxes on federal income-tax returns.

For families earning $30,001-$43,000 per year, the burden was 7.2 percent of income, and for families earning $43,001-$56,000 per year, the rate was 7.3 percent, when counting the net federal tax offset. By comparison, the tax burden was 6.1 percent for couples earning $72,001-$114,000 and 5.7 percent for those earning $114,001-262,000 with the tax offset.

For families earning $262,001 per year or more – the wealthiest 1 percent of Wisconsin taxpayers – the tax burden was 5.2 percent when factoring the tax offset. This was roughly the same tax burden as a percentage of income for the poorest 20 percent of Wisconsin families, defined as those who earn less than $30,000 a year.

Some state tax policies have helped middle-income families, the study says. These include changing itemized deductions to tax credits, increasing the standard income deduction and the use of property-tax and rent credits, the married-couple credit and the earned-income tax credit.

But the gains realized by Wisconsin households with modest incomes have been more than offset by other policy changes, Reschovsky and Reuter found. These changes include increasing income-tax rates for lower-income households and decreasing rates for high-income families; sales tax rate increases; and the increase in the amount of long-term capital gains excluded from taxes.

Reschovsky presented some of his findings to the Wisconsin Assembly’s Income Tax Review Committee in October. Reschovsky told lawmakers that reducing tax rates for low-income residents and creating three additional income tax brackets with higher rates for families earning more than $40,000 per year would make the tax system more progressive and result in no net increase in taxes.

Reschovsky also says that reducing the capital-gains exclusion and expanding the sales tax base to include more services would enhance the progressive nature of the state’s tax code.