The FY 2015 budget proposal unveiled by the President this week addresses an issue that many politicians, researchers and commentators across the political spectrum have recently been talking about – providing assistance to low-income working adults who don’t have dependent children. We were very pleased to see the part of his budget that would help that long-overlooked population by making more “childless” workers eligible for the federal Earned Income Tax Credit (EITC) and increasing the small credit for those who are already eligible.
The EITC encourages and rewards work, offsets federal payroll and income taxes, and boosts living standards. As the Center on Budget and Policy Priorities (CBPP) points out: “Next to Social Security, the EITC combined with the refundable portion of the CTC [child tax credit] constitutes the nation’s most powerful anti-poverty program.” However, the federal EITC currently provides little or no benefit for adults who don’t have dependent children, and the Wisconsin EITC doesn’t apply to that population. Read more
State lawmakers seem intent on passing the property and income tax cut package proposed by Governor Walker. So far the proposal has passed the Assembly, has been approved with minor changes by the legislature’s budget panel, and was approved by the Senate today. The proposal will need to head back to the Assembly for final approval before being signed by Governor Walker.
Here are five things to know about the tax cut proposal. Some of them have been well-reported in the media, but others have received little attention.
1. The proposal cuts income and property taxes, for a total of $537 million in tax cuts over two years after factoring in indirect impacts. Here is how that amount breaks down:
- $404 million in an across-the-board property tax cut.
- $99 million for reducing the bottom income tax bracket from 4.4% to 4.0%. The maximum benefit from this measure would be about $58 per year.
Perhaps, but Further Budget Cuts Are Likely to be Part of the Solution
It appears that the Wisconsin Legislature is on the verge of passing a slightly amended version of the Special Session tax cut bill, which uses the projected state surplus in a way that leaves the state with a “structural deficit” of about $700 million at the beginning of the next session. (See note below.) The good news is that the way the Fiscal Bureau calculates structural deficits doesn’t make any estimate of revenue growth in the next biennium. The bad news is that it also doesn’t account for any spending growth, and it depends on fairly strong revenue growth over the next 15 months, which is by no means guaranteed. (Technical correction: The structural deficit was reduced to $658 million by a Finance Committee amendment that requires $38 million to be cut/lapsed at the outset of the next biennium.)
Proponents of the proposed tax cuts contend that tax growth in the next biennium can be expected to surpass the amount needed to close the structural deficit. Read more
EITC Cut Takes a Large Toll on Low-income Families
A recently released national report found that the city of Milwaukee had the 6th largest increase in income inequality among the 50 largest U.S. cities. That finding is particularly troublesome when considered in the context of the substantial increase in income inequality across the nation, which we wrote about in last Friday’s blog post.
The study by the Brookings Institute examined the change in income inequality in major cities from 2007 to 2012. Their analysis found that Milwaukeeans at the 95th percentile of the income scale had a $237 increase in income over that five-year period, whereas those at the 20th percentile lost $3,481 in annual income over those five years.
Closer by, a report by researchers at UW-Milwaukee examines income inequality within Milwaukee County and sheds light on some of the causes of the widening income divide. The report by Lois Quinn and John Pawasarat at the UW-Milwaukee Employment and Training Institute (ETI) found that the average family income in the lowest income zip codes within the county was less than one-twelfth of the average in the highest income “North Shore” zip code ($20,260 vs. Read more
Income inequality in Wisconsin is widening, according to a new report by the Center on Wisconsin Strategy (COWS) and the Wisconsin Budget Project. The top 1% of earners in Wisconsin have experienced tremendous gains in average income in recent decades, while incomes for the bottom 99% have declined.
Key findings of the report include:
- Between 1979 and 2011, the average income of the top 1% in Wisconsin grew by 104%, while the average income of the bottom 99% dropped by 0.4%.
- The top 1% in Wisconsin had an average income of $783,000 in 2011, more than 18 times the average income of the bottom 99%.
- In 2011, 15.7% of income went to the top 1% in Wisconsin, a share that has more than doubled since the 1970s.
Over the last hundred years, income inequality has followed a U-shape in Wisconsin, with very high levels of income inequality during the 1920s and 1930s, much lower levels in the middle part of the century as economic gains were made at all income levels, and then climbing again to very high levels. Read more
This week, on the same day that GOP legislators in Congress were unveiling a plan to sharply reduce federal income taxes for corporations, a DC-based think tank released a comprehensive study showing that many highly profitable Fortune 500 companies pay little or no federal corporate income tax. In fact, the analysis of five years of tax data during the period 2008 and 2012 from 288 profitable Fortune 500 companies finds that 26 paid no federal corporate income tax over that five-year period, and one-third paid a U.S. tax rate of less than 10 percent during that period.
The study by Citizens for Tax Justice and the Institute on Taxation and Economic Policy (The Sorry State of Corporate Taxes: What Fortune 500 Firms Pay (or Don’t Pay) in the USA and What They Pay Abroad — 2008–2012) also concludes that: “Most multinationals are paying lower tax rates here in the United States than they pay on their foreign operations.”
The study analyzed the taxes of the 288 Fortune 500 companies that met two criteria: 1) they were profitable in each of the 5 years, and 2) they provided sufficient, reliable information in their financial reports to allow calculation of their effective U.S. Read more
In their eagerness to provide tax cuts, state lawmakers have pushed aside a law aimed at encouraging fiscal responsibility that requires half of state surplus revenue be set aside for a rainy day.
When the budget surplus of nearly $1 billion over two years was announced earlier this year, it seemed likely that Wisconsin’s rainy day fund would get a much needed boost. State law requires that when revenues exceed budgeted amounts, half the additional revenue must be deposited into the state’s rainy day fund, which is used to cushion against future economic downturns. In the absence of a tax cut package, the projected level of surplus would result in an additional $443 million transferred to Wisconsin’s rainy day fund over the next two years.
Wisconsin’s rainy day fund has long been underfunded. In fact, for years that fund was nearly completely empty. Since the end of the recession, the state has been regularly depositing money into the rainy day fund when revenues have exceeded projected amounts, and Wisconsin’s rainy day fund currently has a balance of $279 million. Read more
A broad range of Wisconsin organizations sent a letter to state senators today in opposition to the resolution (AJR 81) calling for a Constitutional Convention on a balanced budget amendment. The letter raises substantive concerns about putting a balanced budget amendment into the U.S. Constitution and procedural concerns about the risks of holding a convention to amend the Constitution for the first time in over 225 years. It cites the trepidations expressed by Constitutional experts regarding the unpredictability of what might emerge from a Constitutional amendments convention.
The substantive concerns about a balanced budget requirement include the following:
- It would deepen and lengthen recessions by making it extremely difficult for federal lawmakers to increase spending when it is most needed for counter-cyclical safety net programs, such as food stamps, unemployment insurance, and Medicaid. “Since tax revenue typically falls as the need for those programs rises, a balanced budget would require either making cuts to these safety net programs and other areas of spending at the worst possible time, or increasing taxes at a bad time for the economy.”
- “…Depending on how it is written, a balanced budget amendment might also make it very difficult for Congress to respond to national disasters and other emergencies.
Insights from a New Survey and the “Epic” Growth in Dane County
In recent years, many policymakers have set their sights on trying to attract entrepreneurs and new start-ups to their communities and states. In some cases they have used that goal to justify tax cuts, which some lawmakers think will be an inducement for innovative entrepreneurs. Scott Walker is among the Governors who are seeking to promote development of new businesses and employing tax cuts as a tactic to pursue that goal.
But are tax cuts an effective strategy for attracting entrepreneurs and boosting the number of start-ups? A new report adds to the evidence that reducing taxes is not what entrepreneurs are looking for, and is likely to be a counterproductive strategy. And if we turn our attention to the Dane County economy, the extremely dynamic growth of health care IT companies , led by the explosive growth of Epic, reinforces the conclusion that the playbook of conservative politicians pushing for lower taxes and reduced regulation is not what drives the growth of small businesses. Read more
A constitutional amendment that would make tax reform more difficult, could deepen recessions, and potentially make it more expensive for the state to invest in building projects is making its way through the Wisconsin legislature.
The proposed amendment would change the state’s Constitution to require a two-thirds majority of both houses of the Legislature to pass an increase in the rate of the state individual income tax, corporate income tax, or sales tax. Under this amendment, the Legislature could raise tax rates without a supermajority if voters approved the change in a statewide referendum.
This proposed amendment was approved by the Assembly earlier in February, and is now under consideration in the Senate. A proposed constitutional amendment requires passage by two consecutive legislatures and approval by voters to be enacted.
If implemented, this constitutional amendment could cause a number of problems, including making it more difficult to reform the tax system, limiting options for cushioning the effects of a recession on Wisconsin’s families, and causing fees to rise. Read more