The Wisconsin State Capitol reflected in the glass windows of Park Bank on the Capitol Square in Madison. (Wisconsin Examiner photo)
In pushing back last week on Gov. Tony Evers’ new 2023-25 budget proposal, Republican lawmakers claimed it raises taxes — but left out of their statements who would bear those increases.
For the average Wisconsinite, “this is not a tax increase budget, it’s a tax cut budget,” said Department of Revenue (DOR) Secretary Peter Barca during an online press conference the day after Evers’ budget address.
Evers’ budget plan does include some tax hikes, but they are targeted at wealthy people and profitable businesses.
Meanwhile, the plan lowers taxes by 10% for nearly four out of five earners in the state — people with incomes of $100,000 a year or less.
Evers’ proposal also includes a new tax break for family caregivers and expanded breaks for low- and moderate-income workers as well as for people caring for children or other dependents.
Evers and his allies in the Legislature have pushed the income tax cut to the forefront.
- 10% income tax cut. Single filers with incomes below $100,000 a year and married couples who file jointly with incomes below $150,000 would see their income tax liability cut by 10%, according to the Budget in Brief distributed by the Department of Administration (DOA). The tax credit would phase out for single filers with annual incomes up to $120,000 and for married-filing jointly taxpayers with annual incomes up to $175,000.
The DOA estimates overall savings to taxpayers of $840 million over the two-year period. More than 1.9 million tax filers would benefit from the cut, saving more than $200 per year each on average, according to the department estimate.
A 2018 calculation by the Institute on Taxation and Economic Policy (ITEP) in Washington, D.C., estimated that 80% of Wisconsin taxpayers had incomes of $100,000 or less. More recently, the Legislative Fiscal Bureau has calculated about 70% of Wisconsin taxpayers are in that group.
- Family caregiver credit. For people who are taking care of adult family members who need their help with one or more daily activities, the Evers budget proposes a tax credit of up to $500 a year, for up to 50% of the expenses the caregiver incurs while attending to a family member’s needs.
Taxpayers who are married and filing jointly would qualify with incomes up to $150,000, with the credit phasing out gradually for those with higher incomes up to $170,000. Single taxpayers would qualify with incomes up to $75,000, with the credit phasing out for higher earners as their incomes approach $85,000.
DOA estimates a savings of $195 million to 240,000 qualifying taxpayers over two years, about $400 per person.
- Earned income tax credit. The federal Earned Income Tax Credit (EITC) is available to people with incomes of up to just over $59,000 a year from working. Depending on their income as well as on how many children they have, they can qualify for a federal tax credit ranging from $560 to $6,935 for 2022.
Wisconsin gives those same taxpayers a state EITC that is 4% of the federal credit for families with one child, 11% of the federal credit for families with two children, and 34% of the federal credit for families with three or more children, according to the UW-Madison Extension Financial Education program.
Evers’ budget proposal would increase the state credit to 16% of the federal credit for families with one child and 25% of the federal credit for families with two children. The change would affect about 200,000 low- or moderate-income filers who have children, saving them $300 per family on average, or more than $124.5 million over two years, the administration estimates., the administration estimates.
- Homestead tax credit. A longstanding property tax break for low-income homeowners and renters, the credit currently is available only to people with incomes of less than $24,680, including low-income workers, people over age 62 or people with disabilities. The Evers proposal would raise the maximum qualifying income to $35,000 starting in the 2023 tax year, then index the income limit to keep pace with inflation. The DOA estimates savings to affected taxpayers at $100 million over two years.
- Veterans and surviving spouses property tax credit. Evers proposes expanding who qualifies to include veterans who are 70% disabled or more, instead of the current 100%. His proposal also adds renters who meet the other qualifications. The DOA estimates it would save $53.5 million over two years for qualifying taxpayers.
- Child and dependent care tax credit. Increasing Wisconsin’s child and dependent care tax credit, currently 50% of the federal credit, to 100% of the federal credit starting with tax year 2023. DOA projects a $27 million benefit to about 100,000 Wisconsin qualifying families, who would save on average $260 a year.
The Evers proposal does include some tax increases, largely targeted at high incomes.
- Limiting the manufacturing tax credit. The manufacturing and agricultural tax credit, in place since 2013, exempts profits from manufacturing firms and from farming operations from state individual or corporate income taxes.
“Currently if you’re a manufacturer, you don’t pay a nickel on any of your profits,” Barca said. He noted that some of Wisconsin’s fastest growing industries, including retailers and the Madison health care software company Epic, don’t enjoy the same exemption that manufacturers currently get.
Nearly two weeks before Evers unveiled his budget, State Sen. Dianne Hesselbein (D-Middleton) released reports she had requested from the nonpartisan Legislative Fiscal Bureau. One showed that manufacturing employment has grown faster in three out of six Midwestern states than in Wisconsin from 2012 to 2021, and that Wisconsin’s average annual manufacturing employment growth over the decade lagged the U.S. as a whole.
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Average manufacturing wages have lagged the U.S. in that same period, rising 27% in Wisconsin and 34% nationally — while non-manufacturing wages in Wisconsin have risen 41%, the second report found.
Hesselbein called the credit “an abject failure” that didn’t live up to promises it would be “a boon to job creation.” “It is time to end this failed credit,” she declared in her Feb. 2 statement.
Evers’ budget doesn’t end the credit, but limits it to the first $300,000 of manufacturing profits — yielding $655 million for the state, the administration estimates.
The agriculture portion of the credit remains unchanged in the proposal.
- Limiting the state’s tax break for long-term capital gains. A person who holds an asset not related to farming for at least a year, then sells it at a profit, can take 30% of that capital gain off their taxable income — paying taxes on 70% of the profit rather than the entire profit.
Evers proposes limiting that break to single filers with incomes below $400,000 or married-joint filers with incomes below $533,000. “The modifications will preserve the exclusion for low- and middle-income investors while creating greater equity in the tax treatment of different sources of income for higher-income taxpayers,” the governor’s budget summary argues.
The change would reap about $340 million in new revenues from the change over two years, according to the administration’s estimate.
The state’s separate 60% exclusion on capital gains from the sale of farm assets would not be affected under the proposal.
Boosting a business tax break
At the same time, however, Evers is proposing to expand one business tax break in particular: a tax credit on research and development spending. The tax break is refundable — meaning that it sends money back to taxpayers who qualify for the break but who end the year with no tax liability at all.
Currently 15% of the credit is refundable; Evers is proposing to make that 50% starting with the 2024 tax year. The administration argues that refundability allows the credit to benefit start-up companies that typically don’t have a tax liability they need to offset with a credit. The administration estimates the change will offer $16.1 million in savings to businesses in the 2023-24 fiscal year and $64.4 million in the following fiscal year and annually thereafter.
One economist’s perspective
Tim Smeeding, an economist at the UW-Madison’s Robert M. La Follette School of Public Affairs, says the Evers proposals generally add up favorably for the state.
In cutting taxes, the Evers administration is calling for help “for people who need it the most,” he says. “That’s the middle income, the working class and the middle class.”
At the same time, gains to the earned income tax credit and the child and dependent care tax credit can help draw more people into the workforce, Smeeding believes.
“We have a system now that already gives a break to people at the top and this will give a huge break to people” in the middle and at the bottom of the income ladder, he says.
He sees no evidence that cutting taxes more for the wealthiest — the net effect of legislative leadsers’ proposed “flat tax” that would reduce everyone’s income tax rate to the same figure, 3.25% — will benefit the economy of a state as a whole.
Nor does he think it would draw more investment, or people, to Wisconsin.
“It’s pretty blatant,” Smeeding says. “Give really low tax rates to rich people who are already here.”
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