Does the State Income Tax Code Provide a Significant Penalty for Marriage?
DOR Floats Ideas for Reducing Income Taxes for Married Couples
The budget request submitted by the Dept. of Revenue last week does something that struck me as unusual – it raises a concern about the current tax code and lays out a range of options to mitigate the alleged problem, but doesn’t endorse any of them. Specifically, the department explains that although Wisconsin’s income tax code attempts to avoid imposing higher state income taxes for married couples than for unmarried partners, it doesn’t fully succeed in that regard.
The DOR budget request lays out six possible approaches for mitigating the concern that married couples will sometimes have to pay higher income taxes than similarly situated individuals or unmarried couples. Those options range in cost from about $63 million in the 2013-15 biennium to $734 million during that period. One option that I was very disappointed not to see in the DOR list is to mitigate the significant marriage penalty in the Homestead Tax Credit.
An article in the Milwaukee Journal Sentinel discusses the marriage penalty issue and the DOR musings about possibly addressing it. The article cites a couple of concerns or considerations that I raised with the reporter, Jason Stein, about potentially forfeiting a large chunk of state tax revenue to address the issue. To elaborate on those points, here are some of the questions I think policymakers need to grapple with:
- Would we make the tax system more regressive (or less so) if we offset the lost revenue with other tax changes?
- If the cost of eliminating or offsetting the marriage penalty is offset with spending cuts rather than additional revenue, what effect would that have on important state and local services and benefits for Wisconsin families?
- Considering the many financial benefits of marriage for most couples, is the marriage penalty in the income tax code much of a disincentive to marriage?
- Should we take a broader look and consider other marriage penalties that might create greater disincentives to marriage, such as some of the eligibility and cost-sharing policies for public benefit programs?
Those questions aside, I give DOR credit for letting us know that they are considering this matter, even though they aren’t ready to make a recommendation. Although that might be an unorthodox thing to do in a department’s budget proposal, I applaud them for: giving us a heads up that the issue is being reviewed, explaining that there’s more than one way to address the concern, and giving interested persons an opportunity to weigh in. All too often we don’t hear anything about major proposals until they appear in a Governor’s budget or budget repair bill or in a late night Joint Finance Committee amendment.
We’ll follow up on this issue after we’ve had a chance to analyze the alternatives, including their effects on tax equity and the broader fiscal implications.