Small Business Tax Credit Bill Gets an Overhaul

Friday, January 21, 2011 at 4:00 PM by

Would job growth in Wisconsin get a boost from a bill that would give roughly 250,000 “small businesses” tax credits averaging $145 each? That was one of the questions faced Thursday by the Legislature’s Joint Finance Committee (JFC) as it considered the Governor’s proposal (Special Session SB 7 and AB 7) to provide a new 15 percent tax break to small businesses or individuals with less than $500,000 per year of business income.

A January 17 PolitiFact article in the Journal Sentinel debunked Governor Walker’s claims that his proposed small business tax credit would benefit 98% of small businesses in Wisconsin and spur job creation. Although his initiative would have assisted a smaller portion of small businesses and sole proprietors than the Governor contended, a more significant criticism of his proposal was that it would spread the $40 million per year tax reduction too broadly, making it a very ineffective stimulus for job creation. In light of those sorts of concerns, the JFC passed a much different version of the bill Thursday, which creates a tax deduction of up to $4,000 per new job, and which is no longer limited to tax filers with less than $500,000 gross income.

As we noted in a blog post on Tuesday, the Legislature is considering four Special Session bills that create new or expanded tax breaks that add to the state’s $3.5 billion deficit in the 2011-13 biennium. The most expensive bill of the bunch is Special Session SB 7 & AB 7, which would provide a tax credit for small businesses (mostly sole proprietors and independent contractors) with business income of less than $500,000 per year.

The Joint Finance Committee (JFC) acted on several other tax bills on Tuesday, but held over SB 7, to allow more time to develop an alternative to the version of the bill the Governor introduced. His bill would have cut taxes by about $81 million during the 2011-13 biennium. According to a DOR data table provided to the Journal Sentinel, the Walker version would have benefitted an estimated 252,000 taxfilers in Wisconsin, with an average tax credit of $145.

If credits averaging $145 each can yield job creation, I think those jobs would primarily be among tax preparers, who would have a lot of new paperwork to do for their clients. Most of the estimated 252,000 beneficiaries (72%) have combined business and personal income of less than $100,000, and that group would have gotten an average credit of $64.

Because the tax expenditure proposed by the Governor would have been spread very thin and was unlikely to result in job creation, the Assembly co-chair of the JFC, Robin Vos, proposed changing the measure to a more focused tax break – a deduction of $4,000 for each job created by a business with less than $5 million in annual gross receipts, and a $2,000 deduction for businesses with more than $5 million in gross income. The amendment passed on a 12-4 party line vote, and the Fiscal Bureau estimates the amended bill would reduce state revenue by $33.5 million annually.

The deductions are expected to save tax fillers between $92 and $316 per job, according to a Journal Sentinel article by Jason Stein that does a nice job of summarizing the bill’s develoment and the political arguments on both sides.

Democrats criticized the majority for adding about $67 million to the state’s 2011-13 deficit for a program that they contend won’t tangibly impact jobs. The WisPolitics Budget Blog noted that Senator Bob Jauch (D-Poplar) disparaged the process of adopting numerous tax cuts early in the session, when large but unspecified spending cuts are just around the corner: “You’re doing the dessert and telling people you’re going to put the schools on a diet later on,” Jauch argued.

The bill is scheduled for a vote on the Assembly floor on Tuesday, January 25.

Jon Peacock

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