Five Things to Know about Wisconsin’s Proposed Tax Cut Package
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. Residents with very low incomes would not receive any benefit from this portion of the tax cut proposal, because they do not have any income tax liability.
- $37 million for cutting the Alternative Minimum Tax, a measure that would benefit a relatively small number of wealthy state residents. The average benefit would be more than $1,000 in 2015 for Wisconsin taxpayers who pay the AMT.
2. A large part of the benefit goes to the highest earners. The top 5% of Wisconsinites would get 18% of the benefits of the property tax cut, rate reduction, and withholding changes portions of the tax cut package. By contrast, the bottom 40% would get just 15% of the benefit of those changes.
Those percentages don’t even take into account the cut to the state’s Alternative Minimum Tax, which is targeted at high earners. If that proposal was included in the calculations, the share of the tax cut benefitting the highest earners would rise even higher.
3. This tax cut comes on the heels of a significant tax increase for Wisconsin residents and families with low incomes. In 2011, state lawmakers made deep cuts in two tax credits aimed at helping keep taxes low for residents with low incomes, resulting in steep tax hikes for many families. The tax increase on low-income families is particularly problematic because Wisconsin taxpayers with the lowest incomes already pay a higher share of their income in state and local taxes than taxpayers with the highest incomes.
The budget surplus represents an opportunity to reverse those tax hikes on Wisconsin residents with low incomes. Instead, lawmakers are proposing an untargeted tax cut, with a significant amount of the benefit going to the highest earners.
4. The tax cut diverts money that would otherwise go to the state’s rainy day fund. 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. Instead, the bulk of the surplus will be dedicated to tax cuts, and Wisconsin will be left with an underfunded rainy day fund and limited options for avoiding painful spending cuts or tax increases during the next economic downturn.
5. The tax cut digs a deep hole in the next budget. If this tax cut passes, the next state budget will be $658 million in the red before budget deliberations even begin. That means the first $658 million of revenue growth – if revenue does grow – will have to be dedicated to paying for this year’s tax cut, or else the state will need to make additional spending cuts on top of the deep cuts that have already occurred. Advocates for the tax cut say that Wisconsin can simply grow its way out of the revenue shortfall, but there are already several indications that revenue growth for Wisconsin in the near future might not be as favorable as some lawmakers are assuming.