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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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Proposed Wisconsin Income Tax Cut Leaves Out Many with Lowest Incomes

8:11 am in Uncategorized by WI Budget Project

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The income tax cut proposed by Governor Walker would cut taxes for many Wisconsinites, but more than three-quarters of a million Wisconsinites would not receive any benefit from the tax cut. Nearly all the people who would not receive a tax cut make less than $30,000.

The proposed income tax cut would reduce income taxes for 73% of tax filers, according to an analysis from the Legislative Fiscal Bureau. The remaining 27% of tax filers – an estimated 757,000 people – would not receive any benefit from the income tax cut.

Nearly all of the tax filers who would not receive an income tax cut are low-income. More than half a million Wisconsinites who earn less than $10,000 a year would not benefit from the income tax cut. Another 166,000 people earning between $10,000 and $20,000 would not receive a benefit, as would 32,000 people who earn between $20,000 and $30,000. About 9,000 people who earn $30,000 and more a year would not receive an income tax cut.

Most people earning under $30,000 would not receive an income tax cut under the plan that Governor Walker has proposed. Just 41% of tax filers who earn under $30,000 would receive a tax cut. In comparison, more than 99% of tax filers earning more than $100,000 would receive a tax cut.

Although many low-income earners have no income tax liability and would not receive any benefit from the income tax cut, they typically pay a higher share of their income in state and local taxes than do Wisconsinites with the highest incomes. People in the bottom fifth of earners, who on average earn about $13,000, pay 9.6% of their income in state and local taxes. That’s a bigger chunk of their income than people in the top 5% of earners pay in taxes, yet most of those low-income earners would not receive an income tax cut under the current proposal.

If lawmakers want to implement a tax cut that would primarily benefit moderate and low-income families, they should beef up the Earned Income Tax Credit. The EITC encourages work, helps families lift themselves out of poverty, and reduces taxes paid by the lowest-income earners. The current budget surplus means we have an opportunity to undo the very significant cuts to the EITC that were included in the 2011-13 budget.

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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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