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Proposed Income Tax Cut Likely to Hurt, Rather than Help Wisconsin Economy

12:32 pm in Uncategorized by WI Budget Project

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The income tax cut proposed for Wisconsin is more likely to hurt, rather than help the state economy, if past history in other states continues to hold true.

Critics of the income tax cut have raised a number of concerns about the proposal, including:

Added to this list of concerns is the fact that the tax cut is not likely to help Wisconsin’s economy, and in fact could do the opposite. A new report by the Center on Budget and Policy Priorities examines the track record of states that cut personal income taxes in the 1990s and 2000s and found that those states lagged the rest of the country in economic growth.

In the 1990s, the five states with the deepest tax cuts grew at less than a third the rate of all the other states over the next economic cycle. Colorado, Connecticut, Delaware, Massachusetts, and New York made deep income tax cuts in the 1990s. Employment in those states grew more slowly in the period 2000 to 2007 compared to other states.

In more recent history, six states made significant income tax cuts in the 2000s, prior to the recession. Once again, income tax cuts did not lead states to greater prosperity, according to the report:

“Of the six states that cut income taxes sharply between 2000 and 2007 (when the recession hit), three grew more slowly than the rest of the country in the years that followed. The other three saw above-average growth, but they are major oil-producing states (Louisiana, New Mexico, and Oklahoma) that benefitted from a sharp rise in oil prices.”

Income tax cuts like the one Governor Walker has proposed come with hefty opportunity costs: they take resources away from public services that are crucial to building the foundation for future economic growth. And if history continues to hold, then Wisconsin will receive little or no economic boost from the tax cut.

If we want to promote real, long-term economic growth in Wisconsin, then we should invest in quality schools to create a skilled workforce, an efficient transportation network, and safe communities. The cost of the income tax cuts mean that Wisconsin will have a harder time affording those investments in the future.

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“Middle Class Tax Cut” Will Mostly Wind up in the Pockets of the Highest Earners

8:47 am in Uncategorized by WI Budget Project

Governor Walker has proposed an income tax cut that would benefit the highest earners the most, and would result in insignificant tax cuts for low-income Wisconsinites.

The Governor has been talking about his plans for an income tax cut for several weeks now, but the details of his proposal were revealed just last night, when Walker unveiled his two-year budget recommendations.  He has proposed reducing the tax rate for three of the five income tax brackets, as shown in the table below. (The income amounts reflect the brackets for a married couple filing jointly; most of the brackets are lower for people filing singly or as head of household.)

Income  amount Current tax rate  Proposed rate 
Under $14,000  4.6%  4.5%
 Income over $14,000 and below $28,000  6.15%  5.94%
 Income over $28,000 and below $211,000  6.5%  6.36%
 Income over $211,000 and below $310,000  6.75%  No change
 Income above $310,000  7.75%  No change

If you’re among the fortunate Wisconsinites who have an annual income of more than $211,000 (after all deductions and exemptions) and you’re concerned you won’t enjoy any of the tax cut, you needn’t worry!  You’ll actually get the largest cut, $300, because the tax rate will be reduced for all of your income up to the $211,000 level.

Close up of George Washington a dollar bill

New "Middle-class tax cuts" in Wisconsin help the rich even more.

The estimated cost of the tax cut is $342 million over the two year budget period. To put that amount in context, that is more than the state plans to spend on the entire Wisconsin technical college system over that period.

Governor Walker has described the tax cut as benefiting the middle class, but most of the dollars will go to the pockets of the best-off.  Fifty-four percent of the tax cut will go to the top 20% of tax filers, according to an analysis of the proposal by the Institute on Taxation and Economic Policy.  The bottom 20% of taxpayers would get just 1% of the tax benefit.

In dollar amounts, people at the bottom of the income ladder will receive virtually no benefit from the income tax cut. The lowest 20% of tax filers would receive a tax cut of just $2 a year. People in the top 1% of filers would average a tax cut of $285.

The distribution of benefits could have been much worse; it would have skewed much more heavily in favor of upper income tax filers if the rates for the upper income tax brackets had also been reduced.  However, even an income tax rate cut aimed at income below about $220,000 primarily helps people near the top, since they get the full benefit.  Read more in this Capital  Times article by Mike Ivey.

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Five Alternatives to an Income Tax Cut

1:18 pm in Uncategorized by WI Budget Project

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Governor Walker and legislative leaders are laying the groundwork for a significant income tax cut, probably to be introduced in the upcoming budget. If in fact such a move is sustainable, then we have some ideas about how that money could be better spent in a way that would boost Wisconsin’s economic competitiveness.

Governor Walker has tied the amount of a potential income tax cut to the budgetary surplus that is expected for this fiscal year:

Walker said Tuesday, following a speech at the Wisconsin Technology Council, that he was eying the state’s current projected budget surplus of $342 million for the income tax cut.

“We think it’s reasonable to focus in on the surplus. The surplus is $342 million,” he said. “The taxpayers are obviously at the forefront of making that possible.”

Lawmakers should steer clear from using this year’s surplus to fund the cost of the income tax cuts. Doing so would be problematic because the surplus is a one-time boon, while an income tax cut represents an ongoing cost that could not be covered by one-time surplus revenues.

If Wisconsin does in fact have enough revenue that we can afford income tax cuts on an ongoing basis, then there are better ways we could use that money. Here are five ways, each of which would result in a bigger bang for the buck than an income tax cut would.

1. Roll back recent tax increases on low-income Wisconsinites. In the last budget, the Legislature cut $56 million over two years from state’s Earned Income Tax Credit, which resulted in higher taxes for modest-income working families with children, and another $14 million from a tax credit that helps make sure that seniors on fixed incomes and other people of modest means aren’t taxed out of their homes. We should reverse the tax increases in the last budget before implementing new income tax cuts.

2. Invest in technical colleges to boost the manufacturing sector. The state’s technical college system is one of the most important resources we have in making sure that Wisconsin has a well-educated workforce, and that employers can find employees with the necessary skills sets. State support for Wisconsin’s technical college systems has tanked over the last decade when measured on a per-student basis. It’s time we turn that trend around.

3. Create jobs by hiring back laid-off teachers in public schools. Governor Walker is framing the income tax cut in terms of job creation, but it’s hard to imagine families creating jobs with an extra dollar or two per week, which appears to be what most families would receive under the plan the Governor has outlined. Instead, we could use that money to create jobs by hiring back the public school teachers that were laid off due to budget cuts. Wisconsin’s 424 school districts lost a total of 2,312 full-time positions during the 2011-12 school year, a net loss of 2.3% of school staff statewide, compared to the previous year. By bringing those teachers back, we could help Wisconsin’s children and create jobs at the same time.

4. Fuel the state’s economic engine. Investing in our state’s higher education system would bring more benefits to the state than income tax cuts. The University of Wisconsin-Madison alone contributes more than $12 billion to the Wisconsin economy and supports 128,000 Wisconsin jobs. But the university system can’t bring that kind of benefit to Wisconsin without state dollars. Additional support for the UW System could help keep higher education affordable for Wisconsin residents and help the university system attract more outside investment.

5. Ensure a healthy workforce. Wisconsin could use the income tax cut money to firm up the Medicaid budget, and to ensure that health care supports for low-income Wisconsin families, the elderly, and people with disabilities are adequately-funded through BadgerCare and Family Care.

Rather than rushing to implement an income tax cut, legislators should consider all options. There are several alternatives that have a bigger return for Wisconsin in terms of job creation and economic benefits than an income tax cut.

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What Sorts of Tax Changes Does Wisconsin Need?

12:24 pm in Uncategorized by WI Budget Project

In his State of the State message this evening, Governor Walker reiterated his intent to cut the state income tax for “middle class” Wisconsinites. We won’t learn any details until the Governor’s 2013-15 budget is introduced next month, so it’s hard to critique the plan now. However, it’s not too soon to raise the sorts of questions and concerns that state policymakers should be considering in the months ahead, as they debate the budget bill.

Photo of Scott Walker

Can Wisconsin afford Gov. Scott Walker's proposed tax cuts?

Can the state afford a significant cut in the income tax?

Policymakers need to carefully consider whether cutting income tax revenue would undermine the state’s ability to maintain support for state investments that are critically important to the state’s workforce, quality of life, and economic competitiveness – such as support for K-12 and higher education. They will need to take into account that new or phased-in tax cuts already on the books are going to reduce state General Fund revenue by $262 million in the 2013-15 budget, and even more in the following biennium. (See our 2-page issue brief.)

In addition, the fiscal cliff bill prevents the automatic restoration of Wisconsin’s estate tax, which erases $219 million of revenue the Walker Administration had included in their 2013-15 budget projections. (See my Jan. 4th blog post.) The Governor’s tentative plan to move General Fund dollars into the Transportation Fund adds to the reasons that cutting income tax revenue is likely to undermine support for things like education, health care and property tax relief.

How will the proposal affect the distribution of state taxes?

We don’t know the details yet, but we can make some general observations about the effects of cutting income taxes. Because the income tax is the one progressive part of state and local taxes, cutting this part of the tax mix will make a larger percentage of Wisconsin’s state and local taxes fall onto low- and middle-income Wisconsinites, who already pay more taxes than high-income state residents. (See the chart in this issue brief.) Reducing the rate for the middle tax bracket sounds at first blush like an even-handed approach, but it would provide no help for the bottom two-fifths of Wisconsin tax filers, and a disproportionate part of the benefit would go to taxpayers making more than $200,000. Making our tax system more regressive and cutting support for safety net programs would accelerate the growing disparities between low-income and wealthy Wisconsinites. (See our Nov. 20th paper.)

How will the proposal affect local aid, property taxes and equal opportunity?

If the proposed cut in income tax rates isn’t offset by tax reforms that generate revenue, the plan is likely to further erode funding for Shared Revenue and school aids. That could lead to higher property taxes and/or deeper cuts for schools and local services. In addition, cutting local aid could exacerbate the growing disparity between low-income parts of the state and more prosperous communities. Until recently, Wisconsin had a long and proud tradition of trying to equalize opportunity; however, substantial reductions in school aid and Shared Revenue are already creating a growing divide in the state, and a continuation of that trend would hurt the state’s economic competitiveness.

Another very significant issue is the potential effect on the state’s structural deficit. We’ll take a look at that issue in a future blog post, and we’ll also follow up with more information about the distribution of a rate cut for the middle tax bracket.

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