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Missing Out: Recent Tax Cuts in Wisconsin Deliver Little to People Who Earn the Least

11:44 am in Uncategorized by WI Budget Project

If the Wisconsin legislature wants to keep taxes low for people with modest incomes, the best way to do that is to strengthen tax credits that keep taxes affordable for low-income people and individuals, not hand out untargeted tax cuts. That’s the conclusion of a new analysis released by the Wisconsin Budget Project, which takes a look at the distribution of the recent tax cuts passed by the legislature.

Three major tax cut packages passed by the Wisconsin legislature in the last year have delivered relatively little benefit to people who earn the least, according to the analysis. In 2013 and 2014, the state legislature passed three substantial tax cuts: A June 2013 cut in income tax rates, an October 2013 property tax cut, and a March 2014 combined property tax cut and income tax rate cut package.The three tax cuts combined give the bottom 20% of income earners in Wisconsin – those earning an average of $14,000 a year – an average tax break of $48 in 2014. In contrast, the top 1% of earners – who have an average income of $1.1 million – received an average tax cut of $2,518, fifty-three times higher than the tax cut received by the lowest income group.

Put another way, people in the top 1% will save more on taxes each week from the tax cuts than the lowest income group will save over the course of the whole year.

Only a very small share of the value of the tax cuts went to people with low incomes. Out of every dollar of tax cuts, just $0.04 goes to the bottom 20% of earners, according to the analysis. Taxpayers in the next highest income group didn’t benefit much either: they received just $0.08 out of every dollar in tax cuts. Together, the bottom 40% of taxpayers receive just $0.12 of every dollar in tax cuts. In contrast, the top 20% of earners receive half the value of the tax cuts, the same share as the rest of the 80% of earners combined.

When the tax cuts are measured as a share of income, the lowest group of earners received the second‑smallest reduction in taxes.

The full analysis, which is based on information from the Institute on Taxation and Economic Policy, is available on the Wisconsin Budget Project website.

Wisconsin State Tax Collections Drop 21% in April

8:18 am in Uncategorized by WI Budget Project

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A dollar bill cut into shreds, with a calculator

Wisconsin’s tax collections declined sharply in April.

Figures released Friday by the Wisconsin Department of Revenue indicate that state tax collections were 21% lower in April than in the same month of 2013 – primarily because of a $332 million drop in individual income tax revenue. Perhaps more importantly, tax collections have been falling for the past several months – to the point that total tax revenue over the first 10 months of the current fiscal year is now a little bit (0.2%) below the total at this point of the previous fiscal year.

Of course, part of the sharp decline in April can be attributed to income tax cuts that took effect at the beginning of tax year 2014, and part is the result of reductions in income tax withholding that took effect on April 1. Those variables and others make it difficult to do the number crunching to assess whether the latest drop in tax collections is cause for alarm – especially on a gorgeous afternoon when I’m anxious to get out of the office and start the holiday weekend. That said, the latest Wisconsin numbers and the recent revenue downturns in a number of other states suggest to me that the state’s fiscal situation bears watching carefully and might not be as strong as many people have been suggesting.

A Legislative Fiscal Bureau paper released Thursday indicates that tax collections in the current fiscal year have been expected to total $14.40 billion. That would be an increase of $244 million over the previous fiscal year, and hitting that level of growth will require a significant upturn in May and June. But in my opinion, whether the state falls short of the projection for FY 2013-14 is probably less important than the question of whether a slowdown in the second half of this fiscal year will signal a significant shortfall in the second year of the biennium.

Here’s where we stand on some of the particular sources of Wisconsin state tax revenue over the first 10 months of the fiscal year:

  • State individual income tax collections are now $265 million or 4.5% below the comparable period in 2012-13.
  • Corporate income tax revenue is up about $29 million (3.9%), but has a long way to go to reach the $140 million increase assumed when revenue estimates were revised in January.
  • On the plus side, sales tax revenue is up by $185 million, or 5.7%. Although that growth slowed a bit in April, it looks like we ought to be able to reach or surpass the 5.2% increase in sales tax revenue assumed for the full fiscal year.

In a blog post this afternoon, the WisPolitics Budget Blog quotes Bob Lang, Director of the Legislative Fiscal Bureau, who said that the total collections have been a little “weaker than expected.” Lang added that June is a significant month for corporate revenue and should give us a better idea of whether tax collections are matching projections.  We’ll take a closer look at the data a month from now.

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Downgrade of Kansas Bond Rating Offers Another Warning to Wisconsin

12:13 pm in Uncategorized by WI Budget Project

One more Reason not to be like Kansas

Kansas State Capitol

Tax cuts continue to damage the economy of Kansas.

A bond rating agency has downgraded its rating of Kansas’ creditworthiness, citing revenue reductions from tax cuts and slow economic growth, among other factors.

A few weeks ago on the Wisconsin Budget Project blog, we highlighted how massive tax cuts in Kansas have failed to boost that state’s economy, while harming schools and other services. (Don’t Be Kansas: Impact of Massive Tax Cuts on Kansas Offers a Warning to Wisconsin, 3/27/14.)

What has happened in Kansas should serve as a cautionary tale for tax-cut proponents in Wisconsin, rather than a model.

Now there is additional evidence that enormous tax cuts have not had the result lawmakers intended. Moody’s downgraded Kansas’ bond rating, noting the following areas of concern:

Kansas’ relatively sluggish recovery compared with its peers, the use of non-recurring measures to balance the budget, revenue reductions (resulting from tax cuts) which have not been fully offset by recurring spending cuts, and an underfunded retirement system for which the state is not making actuarially required contributions…The phasing in of increasing income tax cuts, along with rising pension costs, will continue to exert pressure on the budget.

States with lower credit ratings face higher costs when borrowing money for large building projects, such as roads.

There are many similarities between what has happened in Kansas and what has happened – and continues to happen – in Wisconsin. Like Kansas, Wisconsin has pushed through large tax cuts that  helped the rich much more than most state residents. Both states recently raised taxes on low-income families working to climb into the middle class. And like in Kansas, tax cuts haven’t spurred job growth in Wisconsin (Tax Breaks Abound in Wisconsin, but Job Growth Remains Slow, 5/2/14).

There is no indication that a downgrade for Wisconsin is in the works, but the downgrade of Kansas’ creditworthiness should give pause to Wisconsin lawmakers. Tax cuts haven’t done much to create jobs, in either Kansas or Wisconsin, and have led to unintended negative consequences.

Rather than implementing new tax cuts, Wisconsin lawmakers should get invest in the basic building blocks of economic growth: good schools, safe communities, and a solid transportation network.

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Tax Breaks Abound in Wisconsin, but Job Growth Remains Slow

12:02 pm in Uncategorized by WI Budget Project

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Wisconsin lawmakers have cut taxes 43 times since 2011, reducing revenue by $1.9 billion over that period and limiting investments in Wisconsin’s schools, workforce, and transportation networks. Despite – or because of – the substantial tax cuts, private sector job growth in Wisconsin has been slower than the national average.

The largest tax cuts over the four year period include:

  • The income tax cut included in the 2013-15 budget, which reduced revenue by $647.9 million over this period;
  • The January 2014 property tax cut, which reduced revenue by $406.0 million;
  • A tax break for businesses hiring new employees, $134.0 million;
  • A tax cut that will nearly eliminate income taxes for manufacturers once it is fully phased in, $126.6 million; and
  • A tax cut for multi-state corporations that allows them to shift some income to states with no income tax, $126.4 million.

The Wisconsin Legislative Fiscal Bureau, a nonpartisan agency, put together a list of all the tax changes enacted since January 2011. You can read the memo here (.pdf link). In addition to the 43 tax cuts, the legislature approved 10 tax increases over this period, most of which are smaller than $5 million and take the form of eliminating or phasing out specific business tax credits.

Unfortunately, tax cuts haven’t led to job growth in Wisconsin. The rate of private sector job growth in Wisconsin has fallen significantly below that of other states since the fall of 2011, as shown in the chart below. Wisconsin simply isn’t keeping up in terms of job creation.

Not only have the tax cuts not created jobs, they have made it harder for Wisconsin to build a strong economy, by reducing the revenue that Wisconsin needs to invest in schools, transportation, safe communities, and other tried-and-true building blocks of economic growth. In 2014, tax cuts drained state coffers of $1.2 billion – about the same amount of money that the state spent on the University of Wisconsin System– in money from the General Fund. Imagine the job growth Wisconsin could sustain if we had put those resources to use making sure we have a highly-educated workforce that can compete in a global economy.

At the Corner of Lawful and Shameful: Walgreens Considers Becoming a Foreign Company to Avoid U.S. Taxes

8:42 am in Uncategorized by WI Budget Project

Walgreens portrays itself as America’s pharmacy, located in communities across the country “at the corner of happy & healthy.” But if a group of hedge funds gets its way, Walgreens could become a “foreign” corporation for tax purposes – operating at the intersection of lawful and shameful.

Walgreens Sign: Walgreens Open 24 Hours, Drive Thru Pharmacy. Digital Prints 29cents. We Have Chicken Poop $3.99 ea or 3/$10.00

“America’s pharmacy” or offshore shell game?

America’s sixth largest retailer, Walgreens had $67 billion in sales (as of 2012), the vast majority of which are in the U.S. Federal laws that are supposed to prevent corporations from dodging taxes on their U.S. profits are very weak, and as we reported in a recent WI Budget Project Blog post, the use of foreign tax havens to evade federal and state taxes is a growing problem.

A recent blog post by Citizens for Tax Justice (CTJ) explains that some Walgreens shareholders want to exploit the loopholes in those laws to substantially reduce the company’s U.S. taxes. Walgreens is allowed to change its tax status if at least 20% of its shares are in foreign hands. (News reports Tuesday said Pfizer might also become a foreign company for tax purposes.)

Of course, we don’t know yet whether the hedge funds pushing for this tax avoidance scheme will prevail. Apparently Walgreens management has reservations about the idea – worried that becoming a foreign corporation to shelter profits overseas has political risks and will alienate a lot of loyal Walgreens customers – like me.

Alarmed as I am that stockholders would push this tax avoidance strategy, my beef isn’t primarily with them; it’s with lawmakers who stand by while a growing number of very profitable American corporations exploit loopholes in the tax code to avoid paying their fair share of taxes on their U.S. profits. Unless or until Congress and the states act, the large multinational corporations that have the capacity to exploit tax loopholes will continue to be under pressure to maximize profits and the returns for their stockholders by hiding profits offshore.

The CTJ blog post explains that President Obama’s most recent budget plan would make several changes to tighten the loopholes. For example, “a company that results from the merger of a U.S. corporation and a foreign corporation will be taxed as an American company if more than half its voting stock is owned by shareholders of the original U.S. corporation.” Another part of the president’s proposal would mean that a merged company would be taxed as an American corporation if it has substantial business in the U.S. and is managed and controlled in the U.S., regardless of how much of its stock is in foreign hands. In addition, the President’s budget would make it more difficult for all U.S. corporations to hide profits in foreign tax havens.

A report issued last week by WISPIRG explains how Wisconsin could save an estimated $28.8 million by enacting proposed legislation that would prevent corporations from evading income taxes on profits that they move offshore.  The WISPIRG report examines the tradeoffs faced by other businesses and Wisconsin taxpayers when large multinational companies are allowed to exploit the tax code and evade the taxes they would otherwise owe.

All of these loopholes should be closed because corporations like Walgreens need to pay their fair share of state and federal taxes. In the meantime, we should keep a close eye on what Walgreens’ management decides. If it chooses to evade income taxes by becoming a foreign corporation, I suspect that I wouldn’t be the only person who would take my business to a pharmacy operating on a happier and fiscally healthier corner of our community.

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Don’t Be Kansas: Impact of Massive Tax Cuts on Kansas Offers a Warning to Wisconsin

12:04 pm in Uncategorized by WI Budget Project

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Kansas State Capitol

Deep tax cuts have devastated Kansas’ schools and social services.

Wisconsin lawmakers advocating for more tax cuts should consider the example of Kansas, a state that has pushed through enormous tax cuts and that has been held up by tax-cut proponents as a model worth replicating.

The massive tax cuts in Kansas have deepened the damage done to schools, colleges and universities, and other key services by the recession and have failed to improve Kansas’s economic performance, according to a new report from the nonpartisan Center on Budget and Policy Priorities. Kansas should serve as a cautionary tale for Wisconsin, not a model.

The tax cuts passed in Kansas are larger than the ones that have been passed in Wisconsin starting in 2011, but otherwise they share many characteristics. In both states, tax cuts helped the rich much more than most state residents, making income inequality worse. And both states have recently raised taxes on low-income families working to climb into the middle class.

We already know that a series of tax cuts in Wisconsin have done little to improve the state’s economy. Despite claims that cutting taxes would spur job creation, Wisconsin continues to lag the national and regional averages in job growth. Personal income has grown more slowly than the national average, according to new figures released this week. The loss of revenue caused by the tax cuts contributed to deep cuts in state support for schools, ranking Wisconsin among the states that have made the steepest cuts to education. This loss of investment in Wisconsin’s future workforce will have long-term damaging effects on the economy.

Like Wisconsin, Kansas has failed to receive an economic boost from tax cuts. Job growth in Kansas has been slower than the national average since the tax cuts took effect and its labor force has actually shrunk during that period. The number of new businesses in Kansas grew more slowly last year than in the year before the tax cuts took effect.

The huge tax cuts in Kansas have left the state’s schools stuck in the recession and continuing to decline. School districts across the state have had to layoff teachers and counselors, and cut programs for students since the recession hit.

Instead of following the example of Kansas, policymakers in Wisconsin should acknowledge that high-quality schools and universities as well as other key services are a crucial building block of economic growth and help make communities healthier, safer and more livable – all important factors in attracting businesses and boosting long-term growth. By focusing on tax cuts and shortchanging other priorities, Wisconsin, Kansas, and other states that follow in the same footsteps are setting themselves up for trouble down the road.

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Top 10 Reasons to Increase Tax Credits for Low-Income Wisconsin Households

12:56 pm in Uncategorized by WI Budget Project

1. The top 5% of taxpayers in Wisconsin will get more than 18% of the benefit from the Governor’s tax plan, whereas the bottom 40% of taxpayers will get just 15% of the benefit.1

A broken piggy bank, inside some change and an IOU note

Increased income tax breaks would help low income families.

2. The largest source of increased tax revenue contributing to the projected surplus is faster-than-expected growth in sales tax collections, which are now expected to be $350 million above the previous estimate for the 2013-15 budget. The sales tax falls most heavily on lower income taxpayers.

3. The 2011-13 budget increased taxes for low-income families by making a significant cut in the Earned Income Tax Credit (EITC) and whittling away at the Homestead tax credit by ending the practice of adjusting it annually for inflation. (Read more here.)

4. Because other factors have also reduced those credits, underspending in the EITC added $15 million to the General Fund balance at the end of fiscal year 2012-13.

5. According to the latest Legislative Fiscal Bureau (LFB) paper regarding estimated state revenue and spending, an additional $31.5 million of the projected surplus is from lower-than-expected spending for the refundable credits in 2013-15 ($8.2 million less for the EITC and $23.3 million less for the Homestead credit).

6. The state has also been building up the General Fund balance by substantially increasing the amount of federal welfare reform block grant funding being used to finance the EITC over the last few years, even as the state has decreased total EITC spending.2

7. The Homestead tax credit provides very well targeted tax relief for low-income homeowners and renters, except for one problem – unlike most of the rest of the tax code it isn’t indexed for inflation. We could easily remedy that and make it a very efficient mechanism for delivering property tax relief.

8. From 1993 to 2013, the inflation-adjusted value of the maximum Homestead credit fell 38% and the value of the average credit fell 26%.

9. From 2003 to 2013, the inflation adjusted cost of the state EITC has declined by 11% (in state and federal funding combined).

10. People across the political spectrum have lauded the effectiveness of the EITC. President Reagan called it “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”

Wisconsin Budget Compounds the Economic Challenges for Low-Wage Workers

11:46 am in Uncategorized by WI Budget Project

The underside of the Wisconsin Capitol Dome

How Wisconsin’s budget cuts hurt workers.

Workers in Wisconsin and across the U.S. must still cope with a relatively weak labor market.  That is especially challenging for low-wage workers who are struggling with the declining value of the minimum wage, reductions in employer benefits like health care, and growing inequality. Those challenges are exacerbated in Wisconsin by budget decisions made by state lawmakers.

A new Wisconsin Budget Project issue brief examines how the how state budget choices are affecting low-wage workers in Wisconsin.  It focuses primarily on the effects of the new budget bill, but also examines a few instances of how that bill continues or compounds the challenges for low-wage workers caused by the 2011-13 budget.

Some of the major effects include the following policy choices relating to health insurance, child care, taxes and unemployment insurance:

Making health insurance and care much more expensive for many parents now in BadgerCare

The 2013-15 budget bill cuts in half the income eligibility ceiling for adults participating in BadgerCare – reducing that cap from 200% of the federal poverty level to just 100%.  That change is expected to cause nearly 90,000 low-income parents and about 5,000 childless adults to lose their BadgerCare coverage, beginning in 2014.  The good news is that Wisconsin is extending coverage to about 80,000 childless adults below the poverty level, but the decision to cap eligibility at that level and turn down enhanced federal funding from the health care reform law means that a single individual with a minimum wage job is ineligible for BadgerCare if he or she is working 30 or more hours per week.

The issue brief analyzes the effect of the budget for a single mother who has two children and an income of $11 per hour (and currently has now BadgerCare premiums and minimal copays).  Beginning in January, when she loses her BadgerCare coverage, she will have to buy insurance through the new Marketplace and will have to pay premiums of about $460 per year and will have significant co-pays and deductibles, which could be as much as $2,250 per year.

Charging premiums for parents in Transitional Medicaid

The state is now seeking a federal waiver that would not only restrict eligibility for BadgerCare, as described above, but would also change another form of Medicaid, known as Transitional Medical Assistance (TMA) by initiating premiums for parents between 100% and 133% of the federal poverty level. If that waiver is approved, parents who climb above the poverty level would struggle to be able to regularly pay the premiums and many are likely to lose their insurance coverage.

Additional cuts in child care subsidies – adversely affecting accessibility and affordability of care

The budget cuts an additional $31 million over the next two years from the Wisconsin Shares child care subsidy program for low-income working families (on top of large cuts in prior years).  Although that cut reflects the estimated cost of maintaining the status quo, it is likely to adversely affect many low-wage workers by causing more child care providers to drop out of the subsidy program and by indirectly increasing co-pays for parents participating in Wisconsin Shares.

Continuing last session’s tax increases for low-income households                                                         

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Working Family Tax Credits Help Wisconsin’s Military Families

8:43 am in Uncategorized by WI Budget Project

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Middle Class to Working Poor

Middle Class to Working Poor

About 22,000 military families in Wisconsin receive the federal Earned Income Tax Credit (EITC) or the low-income component of the Child Tax Credit (CTC), according to a new report from the Washington, DC-based Center on Budget and Policy Priorities.

Nationally, roughly 1.5 million military families, which include about 3 million children under age 18, received one or both of the credits. The credits make a major difference to their economic security:

  • The EITC and CTC together keep more than 140,000 military families — with nearly 300,000 children and 600,000 total family members — from falling below the poverty line, based on the federal government’s Supplemental Poverty Measure, which counts income from tax credits.
  • These credits reduce the severity of poverty for about another 800,000 members of military families.
  • The credits also help working families with incomes modestly above the poverty line who still struggle with basic expenses like housing, school clothes, car repairs, and groceries.
  • The tax credits can also increase opportunity for children in military families. Recent academic research demonstrates that EITC receipt is linked to improved performance (including better test scores) by children in school — and to increased employment and earnings when the children reach adulthood.

Only people who are working can claim the credits, which were modestly expanded in recent years so they provide more help to more families. On average the credit amounts to $1,000 per household from the low-income portion of the Child Tax Credit in 2011 and $2,650 from the EITC.

Wisconsin also has a state version of the EITC, which only benefits working families with children. The Legislature made a substantial cut to the state EITC in the 2011-13 budget, resulting in higher taxes for working families with children.

You can read the full report on military families and working family tax credits here.
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State Lawmakers Should Match Their Rhetoric by Making the Tax Cuts Help More People

11:53 am in Uncategorized by WI Budget Project

Gov Scott Walker

Does Scott Walker really want to help low income families?

I was surprised to read the following statement in a message that Governor Walker recently distributed via e-mail and tweet:   “Including a tax cut in the 2013-15 budget will help those hit hardest by economic difficulties get back on their feet.

It’s a great sentiment and I’d like to applaud the Governor for expressing it, but unless he’s working on a new tax cut plan that he hasn’t unveiled yet, it’s far off the mark.  I think that if you took the Governor’s statement and changed “will” to “should,” there would probably be broad agreement in the goal of helping those hit hardest by the recession.  And if lawmakers can agree on that goal, they should start working on passing a budget that will achieve it.

As it stands now, the Governor’s tax plan does little or nothing to help Wisconsin workers who are unemployed, working in minimum wage jobs, or working sharply reduced hours because of the deep recession and Wisconsin’s anemic recovery.  According to statistics from the Department of Revenue, more than three-quarters of a million tax filers in our state would not benefit at all from the $343 million tax cut recommended by the Governor.   And keep in mind that low-income Wisconsinites generally pay a higher percentage of their income in state and local taxes than the highest income state residents.

Whenever progressives draw attention to the fact the proposed tax cuts don’t help low-income households, someone inevitably accuses us of being too dense to understand that income tax cuts shouldn’t be expected to help people who pay little or no income taxes.  Of course, they are right in arguing that high income Wisconsinites pay a significantly larger percentage of income taxes than the low and middle income residents of our state, so the wealthy will benefit much more by cutting income tax rates.  But why do the people who make that point so often argue erroneously that the proposed income tax cut will help “all taxpayers” and that there aren’t alternatives that could help more people?

In short, a major part of the debate over the shape of the proposed tax cuts comes down to a basic question of whether the goal should be to lower taxes just for those who have an income tax liability (and especially those who pay the most income taxes) or to help all taxpayers, including those “hit hardest by economic difficulties.”  Here are the major reasons why I think it would be unfair and unwise to adopt a tax plan that leaves out so many Wisconsinites (including 27% of those who file tax returns with the Department of Revenue):

  • Lower-income households who don’t owe income taxes nevertheless pay other taxes; in fact, they typically pay a higher percentage of their earnings in state and local taxes than the richest 5% of Wisconsinites. (See Table 6 on p.7 of Fiscal Bureau paper # 280.)
  • Reducing taxes for low-income people generally stimulates the economy more, because they are much more likely to spend their savings locally and keep that money circulating in the Wisconsin economy, whereas much of the tax cuts enjoyed by wealthy people is saved and has less of a multiplier effect.
  • There is already a growing gap between the rich and the poor, and the proposed income tax cuts would widen that gap.
  • The last biennial budget raised taxes on low-income working parents and the elderly by cutting the Earned Income Tax Credit (EITC) and ending the annual adjustments to the Homestead tax credit.
  • Part of the funding that is being used for tax cuts comes from cutting or lapsing funds for programs intended to help low-income and disadvantaged families – including the funds siphoned off from the Temporary Assistance to Needy Families block grant, the foreclosure settlement funds, and the federal bonus funds earned by Wisconsin for the success of BadgerCare.
  • Because the tax cuts are partially funded with one-time savings, they are likely to create a hole (“structural deficit”) in the 2015-17 biennial budget, and the spending cuts or tax increases needed to close that hole could adversely affect all Wisconsinites.

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