Alternatives to Increasing Taxes on the Working Poor

Thursday, June 2, 2011 at 8:01 PM by

The Joint Finance Committee (JFC) voted Tuesday evening for a package of state policy changes that cut taxes for multistate corporations and the wealthy, while raising taxes on working poor families with two or more children. As Jason Stein reported in the Milwaukee Journal Sentinel, Rep. Tamara Grigsby (D-Milwaukee) called the committee’s combination of actions “Robin Hood in reverse.”

The changes to the Earned Income Tax Credit (EITC) endorsed by the JFC will reduce the state credits in the coming biennium by a total of $56.2 million (relative to the cost to maintain current law). The Finance Committee’s actions not only increased that cut, but also changed how working families will be affected. Their version will reduce the maximum cut for families with two children to $154 (compared to $307 in the Governor’s plan), while increasing the annual cut to families with three or more kids to as much as $518 (versus $154 in the Governor’s bill).

Republican members of the committee argued that the cut to the state EITC is necessary to help close the $3 billion state deficit. However, the Legislature has a number of viable alternatives for balancing the budget while preserving the credits. The most obvious option is using some of the $636 million increase in revenue recently identified by the Legislative Fiscal Bureau. Other relatively easy alternatives include: 1) not creating new tax breaks for wealthy Wisconsinites and large corporations, 2) using federal TANF dollars to fund the EITC, rather than to supplant state funding for the EITC, or 3) making the cuts to the EITC end when changes in federal law reduce the cost of the state credits.

There are many compelling arguments why the state shouldn’t cut the EITC, but I won’t go into those now. (You can find some of those arguments in an editorial today in the La Crosse Tribune  and in a May 31 column.) The point of this blog post is not to reemphasize that cutting the EITC is unwise, but to elucidate why it’s unnecessary. Elaborating on the alternatives noted above, the Finance Committee and full Legislature have at least four relatively easy ways of averting or mitigating cuts to the state EITC:

1) Using some of the new state revenue – A few weeks ago the Legislative Fiscal Bureau projected that state revenue will be $636 million higher than previously estimated. Using less than 10 percent of that newfound revenue would allow the state to avoid a tax increase for the working poor.

2) Different priorities – The juxtaposition of the EITC vote and the vote on expanded tax breaks for multistate corporations and the wealthy highlights the second alternative available to legislators – preserving the EITC by rejecting some or all of the new tax breaks. Wisconsin already has one of the most generous capital gains tax breaks in the U.S. (see Figure 3 in this January 2011 ITEP report), and by not expanding that tax break or by not undercutting last session’s progress in closing corporate tax loopholes, Governor Walker and the Legislature could avoid raising taxes for the working poor.

3) Using TANF funds to protect the credit – One of the surprising and frustrating things about the cut to the EITC is that the budget repair bill and biennial budget both increase the amount of funding for the state credit that comes from the federal TANF block grant – an increase of $37 million/year (thereby decreasing the TANF funding available for things like child care and W-2). Yet while more TANF funding is being siphoned off to finance the credit, an even larger amount of state General Purpose Revenue (GPR) is being taken from the EITC for deficit reduction. The cuts to the EITC could be avoided simply by taking three-fourths of the $37 million per year of TANF funds being transfered and using that as advertised – to actually support the EITC – rather than for the supplantation of state funds for the EITC.

4) Reducing the cuts in future years, when federal changes reduce the credit – State spending for the EITC has jumped over the last couple of years (prior to these cuts) because: a) the recession has made more working families eligible, and b) the federal Recovery Act temporarily increased the size of the federal EITC.  Since the state credit is a percentage of the federal credit, the Recovery Act indirectly increased state spending for the EITC.  The legislature could address that fiscal challenge by temporarily reducing the state credit, until the federal credit goes back to its lower level (as WCCF recommended in a recent memo to JFC). The LFB paper on the EITC notes that the federal change is expected to reduce state spending on Wisconsin’s EITC by $54 million in 2013-15 (point #15 in LFB paper 312).

The Finance Committee is expected to finish up its work on the budget bill this weekend, and then the question of whether the EITC cuts should be approved and made permanent will be handed off to the full legislature. As they weigh their options, legislators need to understand that they have a number of fiscally viable alternatives for preventing or mitigating the very harmful effects of the JFC budget for low-wage workers with children. (See the recent WCCF paper for our effort to quantify those impacts to a numbr of programs and a range of families.) 

Jon Peacock

Categories: Blog, capital gains, corporate tax, EITC, Recovery Act, refundable tax credits, TANF | Comments Off on Alternatives to Increasing Taxes on the Working Poor

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