Cutting Taxes by Increasing Spending & Phasing in Tax Cuts
If you look at a new memo from the Legislative Fiscal Bureau (LFB) that itemizes the tax and fee changes in the biennial budget bill, you wouldn’t know that the net effect of the bill is to cut taxes. The fact that the budget bill does cut taxes isn’t obvious in the latest LFB document for a couple of reasons:
- First, the LFB memo summarizes the state-level tax changes and doesn’t examine the reductions in local property taxes that result from increases in state spending for property tax relief and restrictions on local spending.
- Second, the bill uses short-term tax increases to provide a temporary offset to larger long-term tax cuts (and the latter are beyond the two-year time horizon of the LFB analysis).
Until one digs deeper, these are the most obvious takeaways from the LFB memo:
- The budget bill produces a net increase in estimated state taxes of $19.2 million in the 2015-17 biennium, which is the combined effect of a $30.1 million increase in the first year of the biennium and a $10.9 million cut during the second year.
- In addition, the budget beefs up Dept. of Revenue staffing for tax collection, which is expected to yield $124.7 million in increased general fund tax revenue over the next two years.
- Various fee changes are projected to yield a net increase of about $8.4 million during the biennium.
However, a broader analysis of the budget’s impacts on taxes reveals that the $10.9 million tax cut in the second year of the biennium will grow to a cut of roughly $60 million in fiscal year 2018-19 and thereafter (based on the cost of eliminating most of the alternative minimum tax and the average annual cost of increasing the number of enterprise zones). Beginning in that fiscal year, the sharp reduction in the alternative minimum tax – which currently applies to only about 28,000 tax filers – will reduce income taxes by about $30 million annually, primarily for people making more than $200,000 per year.
In addition, the bill uses several strategies to cut local property taxes, or to at least prevent their growth. Most importantly, it increases the school levy tax credit over the next two years by $211 million, which is paid to municipalities who must pass the money through to property owners in the form of lower property taxes. In addition, the bill increases school aid in the second year, and by capping school spending it requires districts to use most of that increased aid for property tax reductions.
Because the school levy credit isn’t aimed primarily at middle-income and low-income households, the increase doesn’t provide significant reductions for typical Wisconsinites. In fact, the increased credits and state aid barely offset the property tax increases that would otherwise occur. A recent LFB analysis of how the bill affects owners of median value homes concluded that their taxes will decline by an average of just $1 (-0.04%) in 2015(16) and $2 (-0.07%) in 2016(17). (The memo doesn’t specify how much their property taxes are likely to have increased without the changes in the budget bill.)
The combined effects of the tax changes and fee increases will vary significantly from one person to another, depending on a number of factors – including the value of their property and their income. Most Wisconsinites will see little, if any, reduction in taxes. However, the budget bill will hold property taxes flat, and the phased-in cut to the alternative minimum tax will provide a substantial benefit in future years to a small number of wealthy Wisconsinites.