Fix Wisconsin’s Tax System by Keeping Taxes Low for Working Families
Targeted tax credits are far more effective than broad-based income tax cuts in keeping taxes affordable for working families, according to a new report from the Institute for Taxation and Economic Policy. Wisconsin could cut taxes for working families by making improvements to its Earned Income Tax Credit, for a small portion of the cost of the recent across-the-board tax cuts in Wisconsin.
To be eligible for Wisconsin’s EITC, taxpayers must be working and must be parents. The EITC encourages work, helps families lift children out of poverty, and has long-term benefits on school achievement and health for children whose families receive the credit.
In Wisconsin, as in virtually every other state, the taxpayers who earn the least pay a greater share of their income in state and local taxes than taxpayers with the highest incomes. In Wisconsin, taxpayers in the bottom 20% — a group with incomes of less than $21,000 – pay 9.6% of their income in taxes, compared to just 6.8% of income for taxpayers in the top 1%, as shown in the chart below. Wisconsin’s EITC reduces the taxes paid by low-income taxpayers, but they still pay a significantly higher share of income than taxpayers with the highest incomes.
One way Wisconsin could cut taxes for low-income working families would be to increase the EITC credit level for all families. Wisconsin’s EITC is calculated as a percentage of the federal EITC, and based on the number of children in the family. Wisconsin’s EITC is 4% of the federal EITC for families with one child, 11% of the federal EITC for families with two children, and 34% of the federal EITC for families with three or more children.
If Wisconsin’s EITC was increased to 50% of the federal credit for all eligible families, taxpayers in the bottom income groups would pay a smaller share of their income in taxes. Currently, taxpayers in the lowest income group pay 9.6% of their income in state and local taxes after taking into consideration the effect of the EITC, but that figure would drop to 7.5% if the EITC was boosted to 50% of the federal credit. The chart below shows how such a move would affect tax burdens for various incomes groups.
The cost of the boosting the credit to 50% of the federal level is an additional $273 million above the current cost of the EITC. That’s a lot of money, but it represents less than half the 2014 cost of recent tax cuts passed by the legislature. The ITEP report also presents other, less costly, options to strengthen Wisconsin’s EITC.
Wisconsin’s legislature has shown a great deal of interest in cutting taxes, but very little interest in implementing targeted tax cuts for low-income working families. In fact, in 2011 state lawmakers actually cut the state’s Earned Income Tax Credit. The result: families struggling to pull themselves out of poverty are paying more in taxes. The 2011 cut to the EITC cost low-income working families $114 million in higher taxes over the last four years.
The fact that Wisconsin has an Earned Income Tax Credit shows the state’s commitment to keeping taxes low for working families – after all, not every state has an EITC. But in order to give more tax relief, Wisconsin’s EITC needs to be strengthened, not weakened.