New Year Brings Tax Reductions, At a Cost

Thursday, December 30, 2010 at 10:00 PM by

As we ring in the New Year, we will also see the initiation or phased-in increase of at least eight new or expanded state tax cuts and tax credits that take effect in 2011.  Some of these tax cuts are rather obscure, but others are higher profile changes that are very popular — such as the phased-in deductions for health care premiums and child care expenses.

These tax changes add up to an estimated $210 million cut in state taxes over the 2011-13 biennium, according to a new analysis by the Wisconsin Budget Project. After adding in other tax reductions with different effective dates, the analysis calculates that tax changes contribute more than $320 million to the structural deficit for the coming biennial budget.

The tax breaks taking effect in Jaunary include a new deduction for child and dependent care expenses and an increased deduction for health insurance premiums paid by employees whose employer pays a portion of those insurance costs. Large investors can benefit handsomely from a new tax break for capital gains income that begins in 2011 and is expected to save $25 million per year for people who reinvest their profits in qualified Wisconsin enterprises. 

Because states are constitutionally required to balance their budgets, delayed tax cuts eventually require reductions in state spending or increases in other taxes. The 2011-12 Wisconsin Legislature will have to decide how to pay for the tax deductions and credits that are being phased in over the next two years.

In a Wisconsin Budget Project press release today regarding the new tax breaks, project director Jon Peacock commented on the practice of adopting delayed tax breaks:

“All of the tax and spending choices have tradeoffs, such as potentially reducing aid to local governments for property tax relief.  Although we might like many of the new tax breaks taking effect in 2011, before those were enacted the public deserved an opportunity to know how the revenue loss would affect other taxes or would change spending in areas such as education and property tax relief.”

During campaign season nearly all candidates for public office vowed to employ more responsible budget practices that do not add to the deficit in future years. In the coming months we’ll see if they meant that, or if they decide to enact more tax cuts with delayed effective dates that continue the practice of digging the budget hole deeper and leaving it to future lawmakers to make the hard choices about balancing the budget.

Click here to read the new Budget Project report, “New Year Brings at Least $210 Million in New Tax Cuts.”

Tamarine Cornelius

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