Budget includes Tax Increase for the Working Poor and Tax Cut for Wealthiest

Monday, March 14, 2011 at 11:26 PM by

Governor Walker’s budget would cut the Earned Income Tax Credit (EITC) by $41 million over the biennium, a harsh blow for the states’ struggling low-income families. This proposal stands in stark contrast to his recommendation to reduce the capital gains tax by more than $36 million, with nearly all the benefit accruing to the state’s wealthiest taxpayers.

In some ways, the EITC has been the anti-poverty program that everyone can agree on. The legislation creating it was co-authored by many Republicans, and the credit was signed into law by Governor Tommy Thompson. Even Ronald Reagan was a supporter – he heralded the EITC as “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress,” and said that the credit “serves as an offset to social security and income taxes and provides work incentives for many low-income families with dependents.” Closer to home, Rep. Tom Petri (R-WI) said that the EITC “is especially good news for the working poor,” and that it helps “reward work, and to help families stay off welfare and continue in the world of work where they can work their way up.”

Wisconsin, like many other states, has its own EITC, which supplements the federal credit. Only low-income workers with children are eligible for the state’s EITC, which is refundable. In fiscal year 2009, the state spent $127.9 million for the credit, funded through a combination of General Purpose revenue (GPR) and federal TANF dollars. Nearly three-quarters of that amount went to families making less than $25,000 in adjusted gross income, according to a Legislative Fiscal Bureau publication. The EITC is estimated to cost the state $132.9 million in fiscal year 2011.

The changes to the EITC that the Governor is proposing would hit families with two kids the hardest. A single mom who has two children and is making the minimum wage would lose $302 per year (43% of her current credit.)  A family with three or more children would lose up to $170 per year.  Families with just one child would actually get slightly more – an increase of up to $31 per year.

Governor Walker’s proposal to reduce the EITC has drawn the attention of the Center on Budget and Policy Priorities, which says that the proposed change would “would more than double the tax bill for a single working parent with two kids and earnings of $25,000.” Also, Dee Hall’s article in the Wisconsin State Journal quotes several state policymakers and advocates who are critical of the proposal, including Jon Peacock of the Wisconsin Budget Project.

In the same legislation in which he proposes to increase taxes paid by the working poor, the Governor is proposing a change to reduce taxes primarily paid by the well-off.  The Governor has recommended creating an exclusion from Wisconsin income taxation for capital gains reinvested in Wisconsin-based businesses within 180 days of the realization of those capital gains, a change to state tax policy that would reduce state income tax revenue by $36.3 million over the next biennium.

Reducing the capital gains tax overwhelmingly favors the wealthiest state residents. When the Legislature made changes to capital gains in the 2009-11 budget, the Legislative Fiscal Bureau found that the top two percent of Wisconsin tax filers – those with incomes of $200,000 or more – got 51 percent of the from the capital gains exclusion. The bottom 67 percent – those with adjusted gross income under $50,000 – got only 15 percent of the benefit.

The state budget is a collection of trade-offs. The budget must be balanced; the state can only spend as much money as it collects through taxes, fees and other sources. That means priorities must be weighed against each other. By increasing the taxes paid by the working poor and decreasing taxes paid by the wealthiest state residents, the Governor has made his priorities clear. The decision to cut the EITC is made all the more disappointing by the long history of bipartisan support for the credit.

Tamarine Cornelius

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