By Katherine Loughead
for The Badger Institute
Wisconsin Governor Tony Evers (D) last week vetoed Assembly Bill 4, legislation introduced by House Speaker Robin Vos (R-Rochester) that would have provided targeted low- and middle-income tax relief through a more generous standard deduction in the state’s individual income tax code.
Like many states, Wisconsin offers a standard deduction that reduces the amount of a taxpayer’s income that is subject to the state’s individual income tax. However, unlike most states, Wisconsin’s standard deduction is hardly “standard” at all. Instead of offering a standard deduction at a set value, Wisconsin’s sliding-scale standard deduction is highly progressive in nature; individuals with the lowest incomes can claim the highest amount, and the higher a taxpayer’s income, the less of a deduction he or she is eligible to claim. In fact, the deduction phases out completely for taxpayers with income above a certain level.
Due to inflation indexing, Wisconsin’s standard deduction and income thresholds vary from year to year. In Tax Year 2018, single filers with Wisconsin Adjusted Gross Income below $15,500 can claim a $10,580 standard deduction, and married couples filing jointly with income below $22,000 can claim a standard deduction of $19,580. Taxpayers with incomes above that amount can claim decreasingly lower amounts using a complex sliding-scale formula. The standard deduction then phases out completely such that single filers with $103,500 or more in income and married couples with $121,009 or more in income are not eligible to claim Wisconsin’s standard deduction at all.
Assembly Bill 4 would have made the standard deduction available to more taxpayers while increasing the amount of the deduction eligible to be claimed at every income level. Specifically, under this legislation, single filers with less than $18,790 in income would be eligible to claim a standard deduction of $13,360, and married couples making less than $27,120 would be eligible to claim a standard deduction of $24,740. While this legislation would have increased the standard deduction and made it available to more filers, it stopped short of reducing the standard deduction’s progressivity or simplifying its complex structure.
One option to reduce complexity is to conform to the federal standard deduction or use it as the starting point for Wisconsin’s own calculation. The Tax Cuts and Jobs Act (TCJA) increased the federal standard deduction to $12,000 for single filers and $24,000 for married filers, adjusted annually for inflation. In addition to making the standard deduction more generous, conformity with the federal provision would allow Wisconsin taxpayers to claim the standard deduction regardless of income.
Another structural improvement worth considering is eliminating the marriage penalty inherent in Wisconsin’s standard deduction. Under current law, a single filer with $30,000 in income is eligible to claim a standard deduction of $8,780, but two individuals who are married and each make $30,000 in income can claim a standard deduction of only $12,017. If the marriage penalty were remedied, the standard deduction for a married couple making $60,000 in combined income would be double the amount available to single filers, or $17,560 in Tax Year 2018.
Should Wisconsin policymakers reconsider a similar proposal to offer individual income tax relief through the standard deduction, structural reforms should also be considered, such as eliminating the marriage penalty and perhaps conforming to the federal deduction. Policymakers might also consider changes to the standard deduction as part of a broader comprehensive tax reform package. Wisconsin Tax Options: A Guide to Fair, Simple, Pro-Growth Reform, published earlier this month by the Tax Foundation and the BadgerInstitute, offers four comprehensive tax reform options for policymakers to consider, each of which makes changes to the standard deduction. Specifically, Options A, B, and C would conform to the new federal standard deduction, while Option D would eliminate the standard deduction’s marriage penalty while maintaining the current sliding-scale structure.
Katherine Loughead is a Policy Analyst with the Center for State Tax Policy at the Tax Foundation. The mission of the Badger Institute, formerly WPRI, is to ensure opportunity and advance economic prosperity through free markets, individual initiative, limited and efficient government, and education reform.