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
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
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
The tax cut package proposed by Governor Walker is expected to easily pass the Assembly, but some Republican senators are expressing hesitation at approving legislation that digs a deep hole in the next budget.
The tax package sailed through an Assembly committee yesterday, passing on a party-line vote and clearing the way for a vote on the Assembly floor next week.
The Senate has been less eager to approve the package, with Senate leaders citing the need to avoid throwing the budget out of balance in the future. One modification to the Governor’s proposal that may find more favor in the Senate, according to the Journal Sentinel, is to keep the tax cuts largely as the Governor has proposed, but skip the $117 million contribution to the state’s rainy day fund that is included in the package and instead keep that money in the state’s main account. This move would avoid creating a larger hole in the state’s next budget, but would do so by eliminating the most fiscally responsible part of the Governor’s plan. Read more
Governor’s Remarks Omit the Effect of Cuts to the Alternative Minimum Tax
In his State of the State address last week, Governor Walker talked about two tax cuts he plans to make using the state’s projected surplus: a $406 million cut in property taxes and an income tax cut. With respect to the smaller portion of that two-part plan the Governor said:
“…we will reduce income taxes by $98.6 million. To ensure we don’t leave anyone behind in our economic recovery, we will target this tax relief to the lowest income tax bracket. If you’re a family of four making $40,000, your savings will be $58. No one will get a bigger savings than that.” (emphasis added)
That’s an accurate description of the income tax rate cut the Governor proposed, but it’s far off the mark with respect to his full plans for cutting state income taxes. The biggest problem with his statement is that Walker didn’t mention that his new special session bill will also cut the Alternative Minimum Tax – a change that benefits high income Wisconsinites and has a price tag that will grow to nearly $51 million per year by 2016-17. Read more
A proposed amendment to the Wisconsin Constitution amendment limits budget options without offering any meaningful advantages in return, according to a new analysis from the Wisconsin Budget Project.
Under the amendment, a two-thirds majority of both houses of the Legislature would be required to pass an increase in the rate of the state individual income tax, corporate income tax, or sales tax. A supermajority vote would not be required to increase the gas tax or increase fees.
Supporters argue that supermajority requirements keep state taxes lower than they otherwise would be. However, history shows this not to be the case. Tax increases are extremely rare in Wisconsin. The sales tax and corporate income tax rates have not been raised in 32 years. The only increase in the individual income tax rate in the last 28 years, which took place in 2009, affected only about one out of every hundred tax filers. Read more
Tax Plan Increases Red Ink in Next Budget and Leaves Holes in This One
Governor Walker conceded to reporters that his new tax cut proposals will increase the red ink in the 2015-17 state budget by about $100 million – meaning that lawmakers will have to grapple with a structural deficit of more than $800 million as the state goes into the next budget cycle.
According to initial statements to the press corps, his proposal includes a $406 million reduction to property taxes, a $98 million cut in personal income taxes, and the use of nearly $323 million to adjust income withholding schedules (which costs the state up front, but reduces the subsequent refunds the state owes to income tax filers). Another $100 million or so will be put into the state’s rainy day fund.
The deeper structural deficit is likely to be the most contentious aspect of Walker’s plan among Senate Republicans, but it is just one of many reasons why I think his proposal is extremely disappointing. Read more