Shifting Sands: A Closer Look at the Badger State’s New Budget and Its Tax Implications
Wisconsin’s latest budget, signed into law with some adjustments, introduces significant tax policy changes that could reshape the state’s financial landscape. While some reforms aim to ease the burden on lower and middle-income residents, one major proposal – a substantial increase in the retirement income exclusion – has raised concerns about fairness and long-term economic impact, potentially shifting tax responsibilities onto the shoulders of working families.
The Big Exclusion: A Windfall for Retirees, a Weight for Workers?
The Republican-backed tax relief plan dramatically expands the amount of retirement income exempt from state taxes. Currently, single filers can exclude up to $5,000 and married couples up to $10,000. The new proposal would boost these limits to a generous $24,000 for single filers and $48,000 for married couples filing jointly. While the eligibility age moves from 65 to 67, a critical change is the removal of the income-testing requirement.
This means that for many retirees, including those with substantial savings, their state income tax bill could be eliminated entirely.
Consider a married couple with $60,000 in non-Social Security retirement income. Under current law, they’d owe around $1,553 in state income taxes. But with the proposed changes, if they take at least $48,000 from qualifying retirement accounts, their Wisconsin taxable income effectively drops to zero, wiping out their state tax liability.
Now, compare that to a working-age couple earning the same $100,000. Even with other proposed tax breaks, they’d still pay roughly three-and-a-half times more in state income taxes than a retired couple with the same annual income. This stark difference highlights the non-neutrality this exclusion would inject into Wisconsin’s tax code, extending preferential treatment to older Wisconsinites over those actively contributing to the workforce.
Unintended Consequences: What’s the Real Cost?
While well-intentioned to help retirees and encourage them to stay in the state, critics argue the broad retirement income exclusion could lead to several undesirable outcomes:
- Unequal Burden: By significantly cutting taxes for retirees, including the affluent, the proposal could inadvertently place upward pressure on income tax rates for the narrower base of primarily working-age Wisconsinites.
- Migration Magnets? This preferential treatment might attract more seniors from other states, potentially straining state resources without a corresponding increase in the working-age tax base. Conversely, working-age individuals might be more inclined to leave for states with lower or no income taxes.
- Wealth vs. Income: Annual income alone isn’t always a true measure of wealth. Many retirees hold substantial assets beyond their annual distributions, such as vacation homes or investments. They may be more able to afford state income taxes than younger individuals burdened by student loans and mortgages.
- Limited Economic Growth: While increased retiree consumption might slightly boost sales tax revenues, a large retirement income exclusion is less likely to spur long-term economic growth compared to tax relief that directly lowers the burden on labor and investment.
A Better Path: Fairer Tax Relief for All
Instead of such a sweeping retirement income exclusion, Wisconsin policymakers have other options for creating a more equitable and growth-friendly tax system:
- Broad Income Tax Rate Reductions: Lowering income tax rates for all taxpayers, including retirees and current workers, would be a more universally beneficial approach.
- Targeted Aid for Seniors: For fixed-income individuals truly struggling, increasing the generosity of existing age- and/or income-tested provisions would be a more precise solution. Policymakers could also modestly increase the income threshold for the current $5,000 per person retirement income exclusion and index it to inflation, ensuring it benefits those who need it most.
Expanding the Bracket: A Step in the Right Direction
Beyond the retirement exclusion, the budget does include a more structurally sound tax reform: expanding Wisconsin’s second-lowest individual income tax bracket. Starting in tax year 2025, an additional $21,110 for single filers and $28,150 for married couples filing jointly will be taxed at the lower 4.4% rate, rather than 5.3%.
This change is a positive move, as Wisconsin’s 5.3% rate currently kicks in at relatively low taxable income levels, affecting many lower and middle-income residents. By expanding this bracket, the state provides genuine tax relief to a broader segment of its workforce.
Charting a Course for Balanced Growth
While the expansion of the 4.4% tax bracket is a commendable step, the proposed retirement income exclusion risks creating an imbalance in Wisconsin’s tax structure. Shifting significant tax burdens from retirees to working families is short-sighted and could lead to undesirable long-term consequences for the state’s economy and its residents.
For a truly competitive and equitable tax system, policymakers should focus on reforms that benefit all taxpayers, such as broadly reducing income tax rates, modifying the sliding-scale standard deduction for more neutral application, or indexing the personal exemption to inflation. These approaches would foster stronger economic growth and a fairer tax environment for all Wisconsinites.