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Fiscal Cliff Bill Adds to Wisconsin’s Budget Challenges

2:47 pm in Uncategorized by WI Budget Project

Extension of Bush Tax Cuts Costs Wisconsin $219 Million of Anticipated Estate Tax Revenue

Close up of George Washington a dollar bill

The extension of Bush-era tax cuts will cost Wisconsin millions in expected estate taxes.

The fiscal cliff bill enacted this week complicates the task of balancing the next state budget.  The latest fiscal challenge doesn’t result from a cut in federal aid, although that is likely to be one of the effects once the “sequester” or alternative budget cuts go into place.  Instead, the new budget challenge stems from the extension of the Bush tax changes, one of which prevents the state estate tax from going back into effect – thereby eliminating $219 million of revenue that the Walker Administration’s budget documents had assumed the state would receive in the 2013-15 biennium.

To make sense of this development, you need to understand that federal law formerly allowed state estate taxes to be used as a credit against federal estate tax liability. Wisconsin and the vast majority of states took advantage of that and designed their estate taxes so they wouldn’t increase the amount of taxes an estate owed; the states merely captured a portion of the revenue that would otherwise go into the federal treasury.

The tax changes enacted in 2001 repealed that credit for state estate taxes – which had the effect of eliminating the state taxes that were tied to the credit.  That change hurt the states but yielded money for the federal treasury – enabling Congress to make additional cuts to federal taxes while trying to stay within their self-imposed cap on the amount of red ink they were allowed to add to the federal budget.  (Nevertheless, the Bush tax cuts would have exceeded the 10-year limit on red ink, so they were written to expire after 8 years – to create the appearance of staying within the cap.)

When state legislators learned of the elimination of the credit, they quickly amended the 2001-03 budget by adding a measure that created a new Wisconsin estate tax statute, which wasn’t contingent upon the credit against the federal tax.  The compromise approved at that time made the new Wisconsin estate tax sunset in 2008, but kept the previous estate tax law on the books so it would resume if federal law restored the credit.

Because all of the Bush tax changes were set to expire on January 1, 2013 (following a couple of extensions), the credit for state estate taxes would have been restored, which would have resurrected Wisconsin’s estate tax.  With that fact in mind, budget documents prepared by the Walker Administration and the Legislative Fiscal Bureau have assumed that Wisconsin would collect about $219 million in estate tax revenue in the coming biennium.  (See our Nov. 20 blog post.)

The fact that the Wisconsin estate tax is not being resurrected should not come as a shock to anyone.  In a May 2011 blog post about a projection of a state surplus in the 2013-15 biennium, I critiqued the premise that the estate tax revenue would actually materialize in the coming budget and wrote, “no one who follows the estate tax issue closely expects Congress to allow that to happen.”  However, all of the assertions over the last year or two that the state had eliminated the structural deficit have been premised upon the assumption that Wisconsin would resume collecting estate taxes this year.

Not all states are affected by the permanent elimination of the federal credit for state estate taxes.  A number of other states continue to have estate taxes because they followed Wisconsin’s lead in decoupling their statutes from the federal law, but unlike Wisconsin they didn’t sunset their revised estate tax laws.  Now it’s time for Wisconsin to follow their lead and adopt a stand-alone Wisconsin estate tax.

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Could a Prolonged Federal Budget Stalemate Restore the State Estate Tax?

3:55 pm in Uncategorized by WI Budget Project

Walker Administration Has Been Assuming $219 Million in New Estate Tax Revenue 

Among the many potential effects of the “fiscal cliff” is a surprising outcome that you probably haven’t heard about – restoring the state estate tax.  Because of changes in federal law enacted in 2001, Wisconsin’s estate tax ended in 2008, although the state law authorizing it remains on the books.  If Congress and the President don’t reach an agreement by the end of the year, the state estate tax will resume on January 1, 2013, and the federal estate tax will increase.

The potential restoration of estate taxes in Wisconsin and many other states is an anomalous part of the current stalemate on federal budget issues, because it would yield an increase in revenue for states and a decrease for the federal treasury.  That’s markedly different from nearly all the other elements of the so-called fiscal cliff, which will either increase federal tax revenue or will reduce federal spending, including federal aid for the states.

The Legislative Fiscal Bureau estimates that resumption of the Wisconsin estate tax would generate $219 million during the 2013-15 biennium.  That wouldn’t be an unanticipated windfall because the Walker Administration’s calculations about the about the state’s improved fiscal outlook have been premised on the assumption that Wisconsin will begin collecting estate tax revenue in 2013-15.  That strikes me as ironic because the Governor will probably oppose resumption of the tax, if a federal budget compromise doesn’t keep it from happening.

A new blog post by the Wisconsin Budget Project examines how federal law eliminated state-level estate taxes in many states, including Wisconsin. And it examines how the attempt by Congress to maximize the Bush tax cuts had the effect of requiring them to have an end date and to be extended from time to time.  That has bought us to the edge of the so-called fiscal cliff, and provides an opportunity to change the federal estate tax and restore the Wisconsin tax.

Although I believe Wisconsin should restore an estate tax (which could be accomplished by amending state law if it doesn’t happen by default), the chances of it being restored are very slim.  Aside from the fact that the Governor might ask the legislature to block its resumption, I think the fiscal cliff negotiations will eventually prevent or undo the restoration of state estate taxes structured like Wisconsin’s.

In short, although an ongoing stalemate in federal budget negotiations could cause Wisconsin’s estate tax to resume in January, I’ll be quite surprised if Congress allows it to be in effect for very long.  However, if the federal “fiscal cliff” negotiations bog down, the estate tax will become an interesting and important issue for state lawmakers.

Deep Cuts to a Wide Array of Federal Programs: What’s at Stake for Wisconsin in the Fiscal Cliff

12:59 pm in Uncategorized by WI Budget Project

As part of the fiscal cliff, deep cuts in federal programs are scheduled to go into effect at the end of the year.  These cuts, collectively known as the sequester, could cause Wisconsin to shed thousands of jobs and could have very detrimental effects on the health of our communities and the state’s public education system.

The sequester reduces federal spending by $1.2 trillion over the next nine years, with the amount split equally between defense and non-defense programs.  Next year, these across-the-board cuts will result in an 8% cut in most affected non-defense spending.  A report by the Senate Appropriations Committee Majority Staff warns that the sequester would “have destructive impacts on the whole array of federal activities that promote and protect the middle class in this country – everything from education to job training, medical research, child care, worker safety, food safety, national parks, border security and safe air travel. These essential government services directly touch every family in America, and they will be subject to deep, arbitrary cuts under sequestration.”

The specifics of how the sequester will be implemented are not completely settled, but here are some examples (from the report referenced above) of deep cuts that could result from the sequester, and the very negative effects those cuts could have on communities and job creation in Wisconsin in the next year:

  • A $17.8 million cut in grant funds to help schools educate disadvantaged children, resulting in 20,856 fewer students served, 92 fewer schools receiving funds, and 244 education jobs lost;
  • $8.2 million cut to Head Start funding in 2013, resulting in 1,324 fewer children served and 276 Head Start jobs lost
  • $2.8 million cut to the child care and development block grant, resulting in 940 fewer families receiving child care subsidies.
  • $271,000 cut to childhood immunization grants, resulting in 3,961 fewer children receiving immunizations.

These drastic cuts would hurt Wisconsin communities and the Wisconsin economy.  Congress should find a way to lessen the negative effects of the sequester.

A Tax Break for the Heirs of the Very Biggest Estates: What’s at Stake for Wisconsin in the Fiscal Cliff

10:48 am in Uncategorized by WI Budget Project

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An especially generous version of a tax break for the heirs of the very biggest estates is slated to expire at the end of the year, as part of the combination of events known as the fiscal cliff. Congressional Republicans favor reinstating the lavish estate tax break, initiated in 2010, which lets couples pass on $10 million to their heirs without paying any taxes; single people may pass on $5 million tax free. President Obama advocates letting the estate tax break return to the 2009 level, which lets couples pass on “only” $7 million before paying any estate taxes; single people may pass on $3.5 million untaxed. Under President Obama’s plan, 99.7% of estates would be exempt from the estate tax.

Only 40 of the very biggest estates in Wisconsin each year would benefit from the more generous Republican plan, compared to the President’s position. Put another way, only the richest 1 out of every 1,000 Wisconsin estates would benefit from the additional tax break proposed by Congressional Republicans.

The more generous version of the estate tax plan would increase the deficit by $141 billion over the next ten years. For estates that receive it, the bigger break would be worth more than a million dollars.

Given the cost of the more generous version of the estate tax break and the very small number of estates that would benefit, Congress should let the estate tax revert back to its previous status.

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Unemployment Benefits End for Long-Time Unemployed: What’s at Stake for Wisconsin in the Fiscal Cliff

10:46 am in Uncategorized by WI Budget Project

The 'fiscal cliff' will hurt many in Wisconsin and the USA by ending their unemployment benefits.

At the end of the year federal unemployment benefits come to an abrupt end, ending all unemployment benefits beyond the 26 weeks of benefits provided by the state. This change, which is part of the fiscal cliff, will make it harder for jobless workers in Wisconsin to make ends meet and could slow the Wisconsin economy.

Right now, jobless workers in Wisconsin have access to 37 weeks of federal unemployment benefits. About 44,000 Wisconsin workers who haven’t been able to find a job currently receive federal unemployment benefits, pumping $42 million a month into the Wisconsin economy. Those out-of-work workers will see their benefits suddenly terminated.

Nationally, more than two million jobless workers could lose their federal unemployment benefits at the end of the month.   In addition, nearly one million people who would otherwise become eligible during the first three months of 2013 may not be able to receive any EUC benefits if this lifeline for the long-term unemployed is not extended.  The failure to extend it would remove close to $30 billion of income from the pockets of jobless workers next year, which would be a huge hit for local communities and the national economy.

This is a bad time to end federal unemployment benefits. Wisconsin’s unemployment rate has been slow to drop – in October 2012, Wisconsin’s unemployment rate was 6.9%, the same that it was nine months earlier in January 2012. To get back to pre-recession levels of employment, Wisconsin needs to add nearly 250,000 new jobs, according to the Center on Wisconsin Strategy. Wisconsin isn’t making meaningful progress towards that goal – in fact by some measures, Wisconsin’s job growth has been among the slowest in the country.

There simply aren’t enough jobs in Wisconsin for everyone who is seeking work. Congress should wait until the economy is on a sounder footing to let federal unemployment benefit expire.

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Photo by DonkeyHotey released under a Creative Commons license.

A Tax Hike on Every Paycheck in Wisconsin: What’s at Stake for Wisconsin in the Fiscal Cliff

12:23 pm in Uncategorized by WI Budget Project

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More than three million Wisconsin workers would pay a total of two billion dollars more in federal taxes next year unless the payroll tax cut, which is scheduled to expire at the end of the year as part of the fiscal cliff, is extended. A typical Wisconsin worker will pay $546 more in payroll taxes next year if the tax cut is not extended.

The payroll tax cut temporarily reduced the taxes that workers pay into the Social Security trust fund from 6.2% of their income to 4.2%. Money from the general treasury was then shifted to the Social Security trust fund to make up for the loss in tax revenue.

Until recent days, the expiring payroll tax cut has received little attention in the fiscal cliff discussions. That may be starting to change. President Obama’s most recent offer to House Republicans in negotiations to avoid the fiscal cliff called for extending the payroll tax cut or a similar tax cut, and Congressional support is rising.

The payroll tax cut has been one of the most effective tax cuts in terms of bang for the buck, which makes it even more disappointing that the idea of continuing the tax cut has received so little attention. Allowing the payroll tax cut to expire would cause the economy to shed more than one million jobs in next year, according to the Economic Policy Institute, and would slow next year’s economic growth by 0.6%.

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Extending the Bush Income Tax Cuts: What’s at Stake for Wisconsin in the Fiscal Cliff

11:39 am in Uncategorized by WI Budget Project

For more, see the Wisconsin Budget Project blog.

The underside of the Wisconsin Capitol Dome

The Wisconsin Capitol Dome. Fiscal cliff budget cuts could have a dire effect on Wisconsin families.

One of the biggest components of the fiscal cliff is the year-end expiration of the Bush income tax cuts. In theory, an agreement to extend the Bush income tax cuts for middle-class families should be the easiest part of the fiscal cliff negotiations, since both President Obama and Republican members of the House of Representatives say they want to avoid an income tax hike on middle class families. But GOP members of the House are refusing to agree to extend the tax cuts for middle class families unless the tax cuts are also extended for the very biggest earners.

How would the competing income tax proposals affect Wisconsin residents? Under President Obama’s approach to extending the expiring tax cuts, which preserves tax cuts on income under $250,000, the top 1% of earners in Wisconsin would still get very sizable tax cuts in 2013 – 11% of the total benefit, according to the Institute on Taxation and Economic Policy.

Republican members of the House are pushing to extend the Bush tax cuts for all income levels, not just income under $250,000. Under the GOP plan, the top 1% of Wisconsinites would receive 28% of the total benefit, meaning that more than a quarter of the overall benefit would accrue to just one out of every 100 people. (These dollar amounts also include the effects of proposed changes to tax credits for working families, and to the estate tax, which we’ll be talking about in a few days.)

Under the Obama plan, the top 1% of Wisconsin earners would receive an average tax cut in 2013 of more than $18,000, compared to letting the tax cuts expire. In contrast, the GOP plan would hand the richest 1% of Wisconsinites a tax cut of nearly $57,000 – more than most Wisconsin households earn in a year.

If we look at the impact for families, rather than individual income tax filers, the dollar amounts go up. According to a White House factsheet for Wisconsin, the expiration of the tax cuts would increase income taxes by $2,200 per year for a Wisconsin family of four with an income of between $50,000 and $85,000. The Council on Economic Advisors estimate that the expiration of the middle class tax cuts would reduce consumer spending by $200 billion next year, including $3.8 billion in Wisconsin alone.

In contrast, extending tax breaks for the biggest earners would have minimal impact on the economy and comes with a hefty price tag: $824 billion over the next ten years, according to the Congressional Budget Office. Given that President Obama’s proposal would keep taxes the same on 98.7% of Wisconsinites, we shouldn’t hold middle class tax cuts hostage in order to obtain favorable tax rates for the best off.

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Photo by Cimexus released under a Creative Commons No Derivatives license.

The Fiscal Cliff: What’s at Stake for Wisconsin, Day 1

3:26 pm in Uncategorized by WI Budget Project

Wisconsinites have a lot at stake in the negotiations about the fiscal cliff. Depending on how the negotiations around the fiscal cliff are resolved, the amount of federal taxes Wisconsin families pay in 2013 could change dramatically, some jobless workers could experience an abrupt end to their unemployment benefits, and potentially far fewer people could have access to federal programs that help Wisconsinites make ends meet.

At the end of 2012, a combination of federal spending cuts, program changes, and tax increases are scheduled to go into effect. This combination of events, often referred to as the “fiscal cliff,” would have the effect of raising taxes and making sudden, severe reductions in federal spending that could have the effect of slowing economic growth.

President Obama and Congress are deep in negotiations to address the various components of the fiscal cliff, and are aiming to reach an agreement before the end of the year when the changes go into effect. President Obama is advocating for a balanced approach to the fiscal cliff, one that includes revenues as well as spending cuts, but many GOP members of the House of Representatives remain opposed to any increase in revenue.

Over the next few days, we’ll be taking a look at what the fiscal cliff means for Wisconsin, and what Wisconsin families have at stake in the negotiations. Each day, we’ll focus on one part of the fiscal cliff and describe how potential changes could affect the bottom line for Wisconsinites.

Next: How would extending the Bush income tax cuts affect Wisconsinites?

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