Extension of Bush Tax Cuts Costs Wisconsin $219 Million of Anticipated Estate Tax Revenue
The fiscal cliff bill enacted this week complicates the task of balancing the next state budget. The latest fiscal challenge doesn’t result from a cut in federal aid, although that is likely to be one of the effects once the “sequester” or alternative budget cuts go into place. Instead, the new budget challenge stems from the extension of the Bush tax changes, one of which prevents the state estate tax from going back into effect Read more – thereby eliminating $219 million of revenue that the Walker Administration’s budget documents had assumed the state would receive in the 2013-15 biennium. To make sense of this development, you need to understand that federal law formerly allowed state estate taxes to be used as a credit against federal estate tax liability. Wisconsin and the vast majority of states took advantage of that and designed their estate taxes so they wouldn’t increase the amount of taxes an estate owed; the states merely captured a portion of the revenue that would otherwise go into the federal treasury.
Day 8: Going over the Fiscal Cliff Could Generate $219 Million for Wisconsin Treasury
Among the many potential effects of the “fiscal cliff” is a surprising outcome that you probably haven’t heard about – restoring the state estate tax. Because of changes in federal law enacted in 2001, Wisconsin’s estate tax ended in 2008, although the state law authorizing it remains on the books. If Congress and the President don’t reach an agreement by the end of the year, the federal estate tax will increase on January 1, 2013, and the state estate tax will resume. The Legislative Fiscal Bureau estimates that resumption of the Wisconsin estate tax would generate $219 million during the 2013-15 biennium. That wouldn’t be an unanticipated windfall because the Walker Administration’s calculations that the state has little or no structural deficit Read more have been premised on the assumption that Wisconsin will be collecting estate tax revenue in 2013-15.
Congress faces a choice.
It can extend a tax break for a tiny number of wealthy estates. Or — for about the same amount of money — Congress can continue improvements to two tax credits that encourage work and help millions of people pull themselves out of poverty.In Wisconsin, the tax break for wealthy estates would benefit only 40 estates a year, according to a new report. In contrast, the improvements to the tax credits would give a boost to 155,000 low- and moderate-income working families in Wisconsin. Read more
3,800 to 1 = Ratio of WI Families Hurt by Tax Credit Changes, Compared to the Estates Benefiting from Estate Tax Cut
In the next two or three months, Congress will have to choose between two starkly different tax options that have divided the U.S. House and the Senate. It’s a choice that has been overshadowed by other parts of the debate over expiring tax provisions, but it will be a telling vote on legislative priorities.Lawmakers can extend a tax break for a tiny number of wealthy estates. Or – for about the same amount of money – Congress can continue improvements to two tax credits that encourage work and help millions of people pull themselves out of poverty.In Wisconsin, the tax break for wealthy estates would benefit only 40 estates a year, according to a new report Read more . In contrast, the improvements to the tax credits would give a boost to 155,000 low- and moderate-income working families in Wisconsin.
H.R. 8 Includes Bush Tax Cuts for the Rich, Reduced Estate Taxes, and Higher Taxes for Low-income Working Families
In the next day or two, the House is expected to vote on tax legislation (H.R. 8) that would substantially increase the federal deficit while doing the following:
- extending all the Bush-era income tax cuts, including those that exclusively benefit the richest two percent of Americans;
- extending the 2010 temporary estate tax cuts that exempt all but the richest 0.3 percent (estates up to $10 million per couple); and
- ending tax credit improvements for low- and moderate income families enacted as part of the American Recovery and Reinvestment Act of 2009 (ARRA).
H.R. 8 would ensure that no millionaire or billionaire would lose a penny of tax cuts, but 13 million middle- and lower-income families would lose tax benefits – including almost three-quarters of low-income families with children and 37% of all families with children. Read more
The estate tax has been watered down to the point where only a few hundred Wisconsin estates paid the tax each year, according to a new report from Citizens for Tax Justice. President Obama has proposed making the estate tax rules that were in effect in 2009 permanent starting in 2013. If his proposal is passed into law, estates of individuals worth up to $3.5 million (effectively $7 million for a couple) would not pay any estate taxes, and the number of wealthy Wisconsin estates paying the tax would remain tiny. Read more
The estate tax has been gradually phased out over the last decade, to the point which just 290 Wisconsin estates owed the tax in 2009, or about 1 out of every 167 estates. That’s down considerably from 2000, when 803 Wisconsin estates paid the tax, or 1 out of every 59 estates. In 2013 the tax is slated to return to its 2001 levels, with exemptions of $2 million per couple.
New Budget Project Report Cautions Lawmakers Not to Count on a Significant Balance in the Next Budget
Sometime in the next week or two, the Wisconsin Department of Revenue will release a new Quarterly Economic Outlook report. That report will include revised assumptions about economic growth, which could look considerably different than the growth projections contained in the May report that was used as the basis for increased revenue projections in the 2011-13 budget. (A Bloomberg article today illustrates the downward revisions in the latest national economic projections.) The Wisconsin Budget Project released a new issue brief today that examines some of the implications of the 2011-13 budget for the state’s fiscal health in the following biennium: What’s Passed Is Prologue: Looking Ahead to 2013-15 Read more . The new brief cautions legislators not to make plans for using state tax revenue before taking a much closer look at the soon-to-be-revised economic projections, as well as some of the political developments that could turn a projected balance into a structural deficit in the 2013-15 budget.
The Legislative Fiscal Bureau issued a memo last week that has generated some confusion about the state’s fiscal situation. The June 13 memo concluded that the recently approved 2011-13 budget bill puts Wisconsin in a position to have a surplus of $306 million in the 2013-15 biennium. Read more
This post will explain that the preliminary LFB calculation (which may need to be adjusted slightly to reflect an amendment adopted last week) is not a surplus that will accrue in 2011-13 budget. The LFB projection that the state is in a position to be in the black in 2013-15 is good news, but there are a number of reasons why I think the $306 million figure creates an overly positive impression of the state’s fiscal condition. At the top of the list is that the LFB analysis assumes that the state estate tax would be restored in 2013 and will generate $219 million in 2013-15.
President Obama and Congressional Republicans have reached an agreement on a tax deal, and first the Senate and now the House have voted to approve the proposal. The package now moves to Obama for his signature.
However, some House Democrats let it be known they were reluctant to support the proposal. One of the main sticking points was a provision that would limit the estate tax to only the largest estates.
“The estate tax is the choking point for the great majority of our members,” said Representative Chris Van Hollen said (D-MD), who represented House Democrats in the negotiations on the tax issue, according to a New York Times article Read more . The tax deal would set a two-year estate tax exemption level of $5 million per person, or $10 million per couple. Estates would be taxed at a maximum rate of 35% for assets above that level. The estate tax provision in the tax cut proposal would cost $68 billion over 10 years, according to the Joint Committee on Taxation, compared to letting the tax return to its 2001 levels.
It seems strange to hail as positive news that Wisconsin faces a budget deficit of $2.2 billion over the 2011-13 biennium. But that estimate, released today by the Wisconsin Department of Administration (DOA), is less than we would have guessed and less than the $3.1 billion estimated by a prominent Wisconsin economist two months ago.
However, before we breathe a big sigh of relief, it should be noted that the DOA calculations leave out a number of factors that are likely to increase the size of the state’s revenue shortfall — even without factoring in the proposals by incoming lawmakers to cut taxes.
Although the DOA report is sobering, it’s generally better news than we were expecting – in the following ways:
- DOA projects that the state will finish the current fiscal year with a balance of $10 million.
- The projected shortfall of $2.2 billion at the end of 2012-13 (based on a slightly adjusted comparison of the projected revenue and agency requests) is far below the $5.4 billion figure in the comparable DOA report two years ago.