Low-income Families Contributed to the Budget Surplus

Sunday, February 9, 2014 at 8:24 PM by

New Analysis Examines Why the Surplus Should be Used to Help Low-income Wisconsinites

In his recent “state of the state” address, Governor Walker said that his plan for using the state surplus aims to “ensure we don’t leave anyone behind in our economic progress.”  I applaud the Governor for expressing that objective, but a careful analysis of his plan shows that state lawmakers should amend the special session tax bill if they truly want to accomplish the goal of not leaving behind the Wisconsinites who have been struggling the most in recent years. 

After analyzing where the surplus comes from and who gets the benefits, the Wisconsin Budget Project prepared a short paper that explains why some of the surplus should be used to make at least some modest improvements to the state Earned Income Tax Credit (EITC) and the Homestead Credit.  You can find that short document here:  “Top 10 Reasons to Increase Tax Credits for Low-income Households.”

Our analysis notes that the bottom 40% of taxpayers will get just 15% of the benefit of the Governor’s plan.  (And those figures would be worse if we factored in changes to the Alternative Minimum Tax, which will skew the benefits even more toward the wealthy.)  The lopsided distribution is despite the fact that low-income Wisconsin households have been contributing to the surplus in a number of ways, including the following: 

  • The largest source of the higher-than-anticipated tax revenue is growth in sales tax collections, which are now expected to be $350 million above the previous estimate for the 2013-15 budget.  The sales tax falls most heavily on lower income taxpayers. 
  • Each of the last two budgets have built up the General Fund balance by using substantially more federal funding from the welfare reform block grant to supplant state support for the EITC, to the detriment of programs for low-income families (such as W-2 and Wisconsin Shares).  
  • Beyond the EITC savings noted above that were already built into the budget balance, the state’s General Fund reserves have also grown or are expected to grow because EITC spending was $15 million less than expected in fiscal year 2012-13. 
  • On top of that amount carried forward from the last biennium, the Fiscal Bureau now expects an additional $31.5 million contribution to the surplus from lower-than-expected spending for the refundable credits in 2013-15 (including $23.3 million less for the Homestead credit).

The Homestead credit has been declining for many years because it is one of the only parts of the state tax code that isn’t adjusted each year for inflation.  As a result, from 1993 to 2013, the inflation-adjusted value of the maximum credit fell 38% and the value of the average credit fell 26%.  Legislation passed in 2009 called for annual adjustments in the Homestead credit formula, but that law was repealed by the 2011-13 budget bill, resulting in a resumption of the long decline in the size of the credit and the number of people who are eligible. 

If state lawmakers are genuinely interested in ensuring that “we don’t leave anyone behind in our economic progress,” they could easily improve the Governor’s proposal for the surplus by increasing the Homestead credit and EITC.  At a minimum they should reverse the tax increases for low income families that resulted when the legislature changed both of those credits in 2011.

Jon Peacock

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