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First in the Midwest: A century ago, Wisconsin adopted a new kind of revenue source — the income tax; its decision has had a lasting impact on state governments

by Mike McCabe ~ June 2013 ~ Stateline Midwest »
When Wisconsinites went to the polls in 1908, they had tax reform on their minds. The existing state revenue system was perceived by many as being unfair, and reformers, including former Gov. Robert “Fighting Bob” La Follette, had been calling for change for years.
And so, by a margin of better than two-to-one, voters overwhelmingly approved a constitutional amendment that paved the way for the nation’s first modern state income tax.
A century later, the Wisconsin income tax stands out as a landmark in the evolution of state revenue systems, but the idea of taxing earnings was not new at the time.
As early as 1643, the Puritans in Massachusetts imposed taxes on income, and as many as 16 states had experimented with similar levies. For various reasons, all of these efforts had failed. Non-compliance was common, enforcement tended to be lax, and income was hard to verify.
By the early 20th century, most state revenue systems relied principally on locally administered property taxes, but Progressive-era dissatisfaction with inequities in these systems inspired reformers in the Badger State to take another pass at taxing income.
By most accounts, the primary goal of the reform movement was not to raise more money for the state, but rather to distribute tax burdens more fairly.
The first step was to amend the Constitution, which had limited the state’s taxing authority to property. To do so, the legislature had to pass a joint resolution in each of two successive legislative sessions and then submit the proposed amendment to the electorate by referendum. An initial proposal passed the legislature in 1903 but was later nullified on a technicality, so the process began again in 1905. The joint resolution adopted that year received the required second approval in 1907 (with just one dissenting vote), thus setting the stage for the voter referendum that followed in 1908.
Voter approval then triggered an intense two-year legislative effort to craft a state income tax. In 1911, lawmakers approved the landmark legislation, which established a centralized administrative system and a graduated income tax featuring 13 brackets and rates ranging from 1 percent to 6 percent.
The new tax was collected for the first time in 1912, a year before the 16th Amendment to the U.S. Constitution authorized the establishment of a federal income tax.
In the decades that followed, the Wisconsin legislation served as a model for others; currently, 43 states (including every Midwestern state except South Dakota) impose taxes on earnings. Nationwide, individual income taxes account for 35.3 percent of total tax collections, making them the largest single source of state tax revenue.
The success of the Wisconsin model compared to previous attempts at taxing income is commonly attributed to several factors. Most importantly, the progressive scaling of the levy at relatively reasonable rates contributed to a widely shared perception that the tax was fair. Second, the enabling legislation provided for the administration of the tax by commissioners who were appointed rather than elected. It also made income verification easier and called for most of the new revenue to be returned to local units of government.
Over the years, lawmakers in Wisconsin have repeatedly tinkered with their state’s creation, first expanding and later contracting the number of brackets while the corresponding rates gradually rose and then declined. Today, the Wisconsin income tax features five brackets, with rates ranging from 4.6 percent to 7.75 percent. Competing proposals now pending before the legislature could result in additional adjustments.
According to Ronald Alt, senior manager of economic and policy research at the Federation of Tax Administrators, the principal appeal of the income tax is that “revenues tend to grow with economic activity in the state.”
The flip side, however, is that economic downturns can lead to declines, whereas sales taxes are somewhat less susceptible to such fluctuations.

 

Article written by Mike McCabe, the director of CSG Midwest. First in the Midwest highlights important and influential “firsts” in public policy that occurred in this region. If you have ideas from your state, please contact Mike.