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.
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 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
Odd Man Out: Unlike the Rest of the Tax Code, Homestead Tax Credit is Not Adjusted for Rising Cost of Living
When it comes to the Wisconsin tax code, the Homestead Tax Credit, which provides property tax relief to owners and renters with low incomes, is the odd man out. That’s because the Homestead Credit is the only significant portion of the tax code that is not adjusted to keep up with the rising cost of living. The consequence is that Wisconsin residents with low incomes see their property tax relief shrink a little more each year.
Nearly all elements of the tax code are indexed, or adjusted to keep up with inflation and other rising costs. For example, each year the income levels for different income tax brackets increase slightly, so that the brackets are kept comparable from year to year. And in the past year, the Legislature has approved bills adjusting a couple of other tax laws for inflation, such as the recent legislation to annually index the EdVest program, which includes a tax deduction for contributions to EdVest savings accounts. Read more
A broad range of groups sent a letter to state Senators last Thursday in opposition to Assembly Joint Resolution 79, which would require a supermajority vote for legislators to approve certain tax rate increases. The letter, which was signed by 20 organizations, asks Senators “not to tie the hands of future lawmakers by putting a supermajority requirement into the state constitution.”
AJR 79 was approved last week by the Assembly on a straight party-line vote. It would apply to three tax rates: the individual income tax, the corporate income tax, and the sales tax. In contrast to increases in the gas tax and tobacco taxes, which wouldn’t be affected by the proposed amendment, none of the three tax rates that the resolution applies to have increased more than once in the last 28 years.
The letter points out that even though those three tax rates are rarely increased, the proposed constitutional change could have a number of unintended consequences:
“For example, it could have the effect of increasing property taxes by limiting the state’s ability to appropriate funding for property tax relief. Read more
Tiny Piece of Projected Surplus Could Mitigate Recent Tax Increases on Families and Seniors with Low Incomes
Many of Wisconsin’s most vulnerable families and elderly adults would not get much help from the Governor’s plan for the projected state surplus. That could change if the Legislature were to use a small fraction of the surplus to undo recent cuts to the Homestead Credit and Earned Income Tax Credit.
Rejected Plan Included Larger Tax Cuts for Most People and Smaller Structural Deficit
The Assembly approved the Governor’s proposals for the projected state surplus today, without any substantial changes, and rejected an alternative plan offered by Democrats. That plan would have reduced the structural deficit, while also providing larger tax cuts to most Wisconsinites, and more funding for technical school training and K-12 eduction.
The plan offered by Assembly Democrats would have replaced the property tax cuts proposed by the governor with a $500 million increase in a current property tax relief program known as the First Dollar Credit. That credit provides the same amount of property tax relief to the owner of a small home as the owner of a very expensive home or commercial property in the same school district.
The major elements of the Democrats’ proposals are the following:
- Decreasing property taxes by an average of $231 in 2014(15), or $100 more than the Governor’s plan.
Tax Package Costs at least $30 Million More than Generally Acknowledged
Descriptions of the Governor’s tax plan by the executive branch and the media have pretty consistently understated both the total cost and the amount of the income tax portion of the tax cutting that will benefit wealthy Wisconsinites. The reason for that is that the Governor and most reporters have failed to point out that part of the plan is a set of changes in the state’s Alternative Minimum Tax (AMT). Within a few years that part of the Governor’s proposals will increase the size of the income tax cut by about 50%, but it will only benefit a relatively small number of wealthy state residents.
In his “state of the state” address a few weeks ago, Governor Walker described his income tax plan as providing a $58 savings to a family of four making $40,000, and he added that “no one will get a bigger savings than that.” That would have been an accurate assessment if the Governor had made it clear that he was talking about just a portion of his income tax plan, but he seemed to be describing the full plan. Read more
New Analysis Examines Why the Surplus Should be Used to Help Low-income Wisconsinites
In his recent “state of the state” address, Governor Walker said that his plan for using the state surplus aims to “ensure we don’t leave anyone behind in our economic progress.” I applaud the Governor for expressing that objective, but a careful analysis of his plan shows that state lawmakers should amend the special session tax bill if they truly want to accomplish the goal of not leaving behind the Wisconsinites who have been struggling the most in recent years.
After analyzing where the surplus comes from and who gets the benefits, the Wisconsin Budget Project prepared a short paper that explains why some of the surplus should be used to make at least some modest improvements to the state Earned Income Tax Credit (EITC) and the Homestead Credit. You can find that short document here: “Top 10 Reasons to Increase Tax Credits for Low-income Households.”
Our analysis notes that the bottom 40% of taxpayers will get just 15% of the benefit of the Governor’s plan. Read more