Big Change #2: Corporations and Well-Off Are Paying Less in Taxes, and Working Families are Paying More
One year into the state’s two-year budget period, corporations and well-off individuals are paying less in taxes than they did before the budget, and working class individuals and families are paying more.
The budget included two significant tax breaks that have already kicked in. One tax change that benefits multi-state corporations partially rolls back a recent law that made it difficult for big businesses to shift their income between different states to avoid taxation. This tax break reduced the state income tax these corporations pay in Wisconsin by $9 million in fiscal year 2012 (which ended on June 30, 2012), and will cut their tax liability by another $37 million this fiscal year. A second tax cut in the budget reduced the tax that individuals pay on their capital gains, or profits from investments.
In his State of the Union address, President Obama proposed what many are calling the “Buffett Rule,” which would ensure that taxpayers earning $1 million would pay a minimum of 30 percent of their income in taxes. This proposed policy is named after billionaire investor Warren Buffett, who spoke out against tax breaks that result in Buffett’s secretary paying a higher percent of her income in taxes than he did.
One of the reasons that very wealthy people sometimes pay a smaller percentage of their income in tax than middle class taxpayers is that a greater share of wealthy people’s income comes in the form of capital gains. Capital gains are taxed at a special low rate, lower than the rate that must be paid on income earned through work. If implemented, the Buffett rule would raise an additional $50 billion Read more in revenue, according to a new analysis by Citizens for Tax Justice.
The Senate Committee on Public Health, Human Services, and Revenue held a public hearing today on a bill (SB 160) that would reduce state tax collections by an estimated $27 million per year, starting with tax year 2012. The tax cut would result from making state income tax treatment of capital losses on investments consistent with federal law. The bill is authored by Senator Kedzie, co-authored by Rep. Ott, and there are seven co-sponsors. Read more
Under current state law, the maximum amount of net losses (after comparing gains and losses from various investments) that may be deducted from income each year is $500, whereas the federal limit is $3,000. Net losses that exceed the state or federal cap may be carried forward and used as offsets against capital gains in future years (or deducted against other income, up to the level of the cap). Beginning on January 1, 2012, SB 160 would “federalize” the state cap on capital losses by raising it to $3,000.
Quickly growing CEO pay is a significant contributor to income disparity, according to a recent Washington Post article that ran in the Milwaukee Journal Sentinel. Executive pay has increased fourfold since the 1970s according to the article, while the average worker pay remained relatively flat. Of the top 0.1% of earners in 2008, 59% were CEOs, managers, or financial professionals. This top 0.1% of earners took in more than 10% of total personal income in the U.S.
A number of recent public policy decisions at the federal and state level also contribute to and reinforce income disparity. The Bush tax cuts are among the policies that predominantly help high earners. In a recent blog post, the Wisconsin Budget Project highlighted Read more a new report showing that the top 1% of income earners in the state alone receive 28% of all the Bush tax cut dollars in Wisconsin, almost twice the combined tax savings of the lowest three-fifths of income earners (whose share of the Wisconsin total is just 15%).
Despite widespread concerns over falling revenues and significant cuts in education, health care, and other areas, the budget passed last week by the Assembly and Senate contains a number of new or expanded tax breaks, at a cost of more than $90 million over the biennium and $1.6 billion over the next 10 years. Two of these tax breaks are targeted to benefit Wisconsin investors by reducing taxes on capital gains (i.e., the profits resulting from the sale of stock, businesses, real estate, or other assets). These tax breaks recently received attention from the Capital Times’ Mike Ivey, who wrote about the tenuous connection between these tax breaks and increased economic growth in Wisconsin, as well as the regressivity of these new tax cuts. Read more
This blog post describes the two capital gains tax breaks that were just approved by the Legislature and two other pieces of legislation that would also increase the preference given to income generated by investments, relative to income from one’s own labor.
A couple of industry-backed studies that have come out over the two months cast Wisconsin in a positive light – as a place to do business and make money. As we discussed in a blog post on April 27, a study by Ernst and Young, in conjunction with the Council on State Taxation, ranked Wisconsin as having the 4th lowest state and local taxes on investments made in a new facility or for upgrading an existing facility.
A more recent study contains data estimating the percentage increase in millionaires over the next decade in each state, and it projects that growth to be 12th highest in Wisconsin. According to the industry-sponsored analysis, Wisconsin’s increase is supposed to be 131%, well above the national average of 110%.
The Oregon Center for Public Policy posted an interesting and informative commentary Read more on the study’s findings and their implications for the public policy choices facing that state.
Throughout the debate on the budget repair bill and most of the debate on the biennial budget, we have heard lawmakers argue for the importance of sacrifices that will eliminate Wisconsin’s structural deficit and get the state’s fiscal house in order. Until last week the Joint Finance Committee (JFC) seemed genuinely committed to eliminating the structural deficit, at least while the committee was deliberating on spending issues. But that commitment was no longer in evidence last week when the topic turned to taxes.
The biggest surprise came late on Friday night as the committee was finishing up its work. On a 12-4 party line vote, the JFC approved a motion that adds substantially to the structural deficit by nearly eliminating the income tax for many corporations that produce goods in the state. (See the June 7th Journal Sentinel article Read more by Kathleen Gallagher.) It will have the effect of slashing the tax rate for manufacturers from 7.9 percent down to just 0.4 percent – phasing in a 95 percent reduction in their income taxes over a four-year period.
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.” Read more
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).
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.
As policymakers contemplate how to create jobs in Wisconsin and how to finance state services and local aid, they might want to take a look at A Capital Idea: Repealing State Tax Breaks for Capital Gains Would Ease Budget Woes and Improve Tax Fairness, a new report issued by the Institute on Taxation and Economic Policy (ITEP).
The report makes a convincing case that tax breaks for income derived from capital gains decrease revenue at a time when the state already has a significant shortfall, disproportionately benefit the very best-off taxpayers, and do little or nothing to promote economic growth.
Until recently, Wisconsin had the most generous provision in the nation for exclusion of capital gains income from state income tax, with 60 percent of net income gained from selling assets exempt from state income taxes. In 2009 the exclusion was cut in half to 30 percent.According to the report, Wisconsin is one of only eight states with substantial capital gains tax breaks.