New Tax Proposal Overwhelmingly Favors Highest Earners

Thursday, May 30, 2013 at 8:46 AM by

A new tax package proposed this week would largely benefit the very highest earners. More than one-third of the proposed income tax cuts would go to the top five percent of earners, a group with an average income of $392,000.

The new tax plan was proposed by Rep. Dale Kooyenga, a member of the Legislature’s powerful Joint Finance Committee. Here is a short summary of his proposal from our blog post on May 28th; you can read the whole post here for more information:

His proposal would reduce state tax revenue by $752 million over the two-year budget period compared to current law, mostly by reducing income tax rates and making other changes to income taxes. It would make the income tax much flatter by reducing the number of tax brackets from five down to three, which would apply the same income tax rate for all married couples with taxable income between $14,500 and $319,500.

An analysis of the latest plan by the Institute of Taxation and Economic Policy reveals that a very large share of the tax cuts proposed by Rep. Kooyenga would wind up in the pockets of the best off. Here is how the tax cut would be distributed among income groups:

  • The top 5% of earners alone, a group with an average income of $392,000, would receive more than 1/3 of the benefit of the income tax cuts.
  • The top 20% of earners, a group with an average income of $183,000, would receive more than 2/3 of the benefit.
  • The bottom 60% of earners – those making $60,000 a year or less – would only receive 11% of the benefit of the income tax cuts.
  • The 20% of the Wisconsinites with the lowest incomes would receive just two cents out of every $100 in individual income tax cuts under this proposal.

The chart below shows the effect of the change to the individual income tax rates, along with three smaller tax changes included in the package: elimination of the Alternative Minimum Tax, elimination of the Working Families Tax Credit, and increasing the capital gains loss limit. 

 

 Under the tax proposal, the top 1% of Wisconsin earners would receive a tax cut of $2,491, as shown in the chart below. Earners in the top 1% have an average income of $1.1 million. Earners with incomes of $60,000 or less would, on average, receive a tax cut of $34. More than three-quarter of a million people, nearly all with incomes of $30,000 or less, would not receive any benefit from the proposed income tax cuts.

 

 

When Governor Walker released his tax cut proposal earlier this year, we pointed out that his plan was tilted toward high-income Wisconsinites and undermined the state’s ability to invest in things like K-12 education that are critical for Wisconsin’s economic success. But we also pointed out that the Governor’s plan could have been worse, in that it did not reduce the rates for the upper income tax brackets.

Unlike the Governor’s plan, the new tax plan advanced by Rep. Kooyenga does reduce the rates for the upper income tax brackets. In fact, the biggest rate reduction in Kooyenga’s proposal is for income between $217,600 and $319,500. Here are the reductions in rates by bracket:

  • Taxable income less than $14,500: -2%
  • $15,400 to $29,000: -3%
  • $29,000 to $217,600: -9%
  • $217,600 to $319,500: -12%
  • $319,500 and over: -2%

Although the rate reduction is smaller for income over $319,500, people in that bracket do extremely well because they also benefit from all of the cuts in the lower brackets.

That so much of the benefit of the income tax cut goes to the highest earners is a significant drawback to the new tax proposal. But it is not the only drawback. The tax package comes with an alarmingly high price tag, one that would create a very large hole in in the next budget and make it more difficult for Wisconsin to invest in education, health care, and jobs.

Tamarine Cornelius

2 Responses to “New Tax Proposal Overwhelmingly Favors Highest Earners”

  1. Dan says:

    How stupid do you think we are? How about telling us what percentage of income tax revenue comes from that top 5% that’s getting 34% of the cuts? Or how about telling your readers that your bottom 20% group includes a large number of people who DON’T PAY ANY INCOME TAXES at all, and therefore it would be impossible to cut their taxes?

  2. Jon Peacock says:

    Actually, we have often explained that the reason that many people won’t benefit is because they don’t have enough income to owe state income taxes. And then we go on to explain why do don’t think that should be the end of the story. See for example our first blog post about the Kooyenga plan:
    “According to figures from the Department of Revenue, about 800,000 tax filers have no net income tax liability. As a result, they won’t benefit at all from this proposal, which is very disappointing since low-income households generally pay a larger percentage of their income in state and local taxes than the highest income Wisconsinites.”
    http://www.wisconsinbudgetproject.org/new-income-tax-cut-proposal-more-than-doubles-the-size-of-the-governors-plan

    In that blog post and other places we go on to suggest a way to amend the proposed tax cuts in a way that can provide a little relief to those lower-income households — boost the Homestead tax credit or at least index it for inflation (like most of the rest of the tax code). Another option is to restore the cut made last session to the Earned Income tax credit for low-wage workers with children.

    As for providing the percent of income taxes paid by the top 5%, that figure isn’t available in the analysis by ITEP that we cited, but I expect it to be available very soon in an analysis by the Legislative Reference Bureau. If so, we will share it at that time.