Do All Taxpayers Get the Same Benefit from the Governor’s Income Tax Proposals?
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. Looking at his income tax plan as a whole, a relatively small group of high income tax filers will get far more of the benefit.
It should also be pointed out that many low-income tax filers won’t benefit from the proposed rate cut. A Legislative Fiscal Bureau (LFB) paper released late today shows that about 819,000 Wisconsin income tax filers (28.5%) don’t have enough income to benefit from that change. Although it’s true that as income tax rate cuts go, that portion of the Governor’s tax plan is an even-handed way to distribute a sizeable tax reduction, legislators could improve upon the plan. They could do a much better job of achieving the Governor’s stated objective of ensuring “we don’t leave anyone behind in our economic recovery” if they would simply increase the Homestead credit, as advocates for the elderly recommended last week.
Among several new LFB papers released today is one that explains the proposed changes to the Alternative Minimum Tax (AMT). It explains how the AMT would grow substantially in the next few years because of the phase-in of a large new corporate tax break, known as the manufacturing and agriculture credit. The LFB estimates that the cost of the proposed AMT changes would be $$36.8 million in this biennium, $40.5 million in the first year of the next biennium, and then $50.8 million in 2016-17 and thereafter.
As of tax year 2012, there were only 7,660 Wisconsin filers who paid the AMT, and it generated just $7.5 million. The LFB paper says that under current law the AMT is expected to apply to 30,000 filers in tax year 2015 because of the large new tax breaks being phased in.
Unfortunately, the LFB paper does not shed light on the income distribution of the AMT changes, nor does the analysis last week by the Institute on Taxation and Economic Policy (ITEP), which examined the distribution of the property tax cut and the $99 million cut from the change in income tax rates. Even without factoring in the AMT changes, ITEP calculated that the top 5% of Wisconsinites, who made $161,000 or more in 2013, will get 18% of the proposed tax cuts, whereas the bottom 40% get just 15% of the benefit. (Read more here.)
We’ll follow up if or when we learn more about the effects of the proposed cuts in the AMT.