March 6, 2023 at 9:48 a.m.
The jockeying in Madison over taxes gets serious
Everybody wants taxes cut; the question is how and by how much
Last week, in a bid to bolster GOP-led efforts to pass a flat tax, the Center for Research on the Wisconsin Economy (CROWE) presented a comprehensive analysis of Wisconsin tax reform options, in which it asserted that adopting a flat income tax rate of 3.25 percent would boost state gross domestic product and increase household consumption and well-being.
Previously, CROWE has pushed for a complete elimination of the state income tax, but the new report suggests that Republicans and conservatives are rallying around a flat tax plan being offered by state Senate majority leader Devin LaMahieu (R-Oostburg).
"We are excited to present a complete analysis of tax reform that takes into account everyone in Wisconsin," said Ananth Seshadri, CROWE's co-director. "While modest tax cuts result in modest increases in output, more significant tax cuts increase state GDP and household wellbeing by even more."
Overall the report offered 12 different tax reform options involving the reduction of income tax rates and brackets but singled out LeMahieu's plan to reduce the tax rate to 3.25 percent for all taxpayers in its analysis of the positive impacts of a flat tax.
There are signs LeMahieu needs the help. Despite the coalescence of support around his plan, not even all Republicans are necessarily on board. In particular, Assembly speaker Robin Vos (R-Rochester) has said he would not insist on the inclusion of a flat tax in the budget, given Gov. Tony Evers's opposition to it.
"Look, if we had Gov. Michels, tax reform and a flat tax obviously would've been my top priority," Vos told WisPolitics.com. "It's still a huge priority, but I'm not going to die on that hill and say we can't do anything if we don't do it."
Meanwhile, Evers continues to tout his own tax cut plan, which would reduce taxes by around $1.2 billion if enacted. However, Republicans say that's not enough, with the state sitting on a budget surplus of around $7 billion.
So, by all accounts a tax cut of some kind is coming, though the devil is in the details. Here are some of those details.
Evers: Delivering on a
middle-class tax cut
The centerpiece of Evers's plan is a 10-percent middle-class tax cut, which he promised last August to deliver. Evers says the plan would send $1.2 billion in targeted relief to working families, parents, veterans, caregivers, seniors, and student loan borrowers, while limiting tax giveaways to wealthy earners.
"I promised the people of this state I'd fight to deliver a 10-percent tax cut for middle-class and working families, and, I'm proud to deliver on that promise," Evers said in his budget announcement. "I've said all along that we'd deliver real, responsible tax relief targeted to the middle class and working families - not spending big on breaks for the wealthiest 20 percent of earners in our state who don't need the extra help affording rising costs."
The governor also promised to deliver the tax relief without cuts to public schools or public safety programs and without new borrowing.
Specifically, the governor's budget would create a nonrefundable Family and Individual Reinvestment (FAIR) Credit, which would cut taxes by 10 percent for single filers at or below $100,000 in annual adjusted gross income and married-joint filers at or below $150,000.
Evers says the provisions would provide total tax relief of $418.7 million in fiscal year 2023-24 and $420.9 million in fiscal year 2024-25, with more than 1.9 million Wisconsin tax filers seeing an average tax cut of over $200 annually.
In addition, the governor's plan would boost Wisconsin's supplement to the federal Earned Income Tax Credit (EITC) for working families with one or two children. Beginning with tax year 2023, the budget would increase the percentage of the federal credit that filers with one dependent child may claim from 4 percent to 16 percent and increase the percentage that filers with two children may claim from 11 percent to 25 percent.
With those changes, almost 200,000 filers with children would receive total tax relief of $60.7 million in fiscal year 2023-24 and $63.8 million in fiscal year 2024-25, and the average tax relief for those taxpayers would be more than $300 annually.
What's more, the governor would expand the current state Child and Dependent Care Tax Credit from 50 percent of the federal credit to 100 percent beginning with tax year 2023. Most people eligible for the credit could receive up to $600 if they were claiming it for one qualifying individual's expenses or $1,200 for two or more qualifying individuals' expenses.
That provision would provide more than $27 million annually in tax relief to more than 100,000 Wisconsin taxpayers at an average benefit of more than $260 per filer.
The governor also wants to create a caregiving tax credit equal to 50 percent of the qualifying expenses incurred by those providing care or support to adult family members requiring assistance with one or more daily activities, limited to $500 in a tax year.
In addition, Evers is calling for targeted tax relief for seniors and veterans. He would enhance the Homestead Credit to provide increased property tax relief to lower-income Wisconsinites, particularly seniors and individuals with disabilities. Evers says beneficiaries would see approximately $100 million in targeted property tax relief over the biennium through that expansion.
The governor would expand the Veterans and Surviving Spouses Property Tax Credit to include renters and increase availability of the credit to those with disability ratings in excess of 70 percent. The administration says those provisions would provide $26.2 million in relief in fiscal year 2023-24 and $27.3 million in fiscal year 2024-25.
The governor also would eliminate state taxes on federal student loan debit relief, and, to help small businesses, increase the refundable share of the research credit for businesses, as well as repeal Wisconsin's personal property tax to provide more than $200 million in tax relief for businesses.
The plan would provide $202.4 million in fiscal year 2024-25 to compensate all local taxing jurisdictions for the reduction in their property tax bases.
To make the tax code fair for all, Evers says he would limit the manufacturing portion of the Manufacturing & Agriculture Credit to only apply to the first $300,000 in qualified production activities income for each firm qualifying for the credit and preserving the agricultural portion of the credit as it is under the current law.
Evers said 67 percent of that total tax break went to taxpayers with incomes greater than $1 million, and more than half of those claims were to taxpayers with incomes greater than $5 million. Limiting the credit would generate $348.7 million in fiscal year 2023-24 and $306.4 million in fiscal year 2024-25, the administration projects.
Finally, the governor would limit the current 30 percent long-term capital gains exclusion to individuals with incomes below $400,000 and married-joint filers with incomes below $533,000.
Evers says those limits would raise an estimated $185.2 million in fiscal year 2023-24 and $154.2 million in fiscal year 2024-25.
Broader aim
While Evers's plan involves cutting through the thicket of the tax code, slashing away brush over here and shrubs over there, Republicans in the legislature want deeper and much broader tax cuts aimed at the overall rates taxpayers pay on taxable income, also known as a flat tax.
LaMahieu's plan, introduced with Rep. Rob Brooks (R-Saukville), would phase in a 3.25 percent flat tax in Wisconsin by tax year 2026.
"Since 2011 legislative Republicans have reduced the tax burden on Wisconsinites by a cumulative $22 billion," LeMahieu said when he released his plan. "Despite these bold reforms, our state government is still taxing its citizens too much. We are beginning this new session facing a projected record $7 billion dollar surplus. This proposal will fundamentally transform Wisconsin's individual income tax and keep more money in the pockets of hardworking Wisconsinites."
Right now, LaMahieu observed, Wisconsin's four tax brackets range from 3.54 percent to 7.65 percent. Only nine states have an individual income tax rate higher than Wisconsin's top rate, the majority leader observed, while 31 states have a top individual income tax rate lower than Wisconsin's third tax bracket of 5.3 percent.
Nearly two-thirds of Wisconsin income tax filers fall into that third bracket, LaMahieu said.
"Moving to a 3.25 percent flat tax will provide a tax cut for all Wisconsinites," he said. "I'm looking forward to continuing to work with the governor and the state Assembly to provide this much-needed tax relief for middle class Wisconsinites and main street businesses."
This past week LaMahieu released a letter from the nonpartisan Legislative Fiscal Bureau outlining the cumulative tax savings for Wisconsin taxpayers since 2011, when Republicans gained control of the governor's office and both chambers of the legislature. It showed $21.9 billion in tax reductions from 2011 through the 2021-23 state budget.
The tax burden on Wisconsinites also dropped faster than any state in the nation since 1999, LeMahieu said.
"In 2011, Republicans were elected to turn our state around," he said. "We promised to dig out of debt, save for the future, fix problems, and cut taxes to keep more money in family budgets. Now, after 12 years of consistent tax cuts, fundamental reforms of government, and responsible budgeting, we've reduced the tax burden on Wisconsinites by $22 billion."
And, LeMahieu said, despite consistent tax cuts and the massive drop in overall tax burden, state revenues continue to rise due to strong economic growth.
"This is an incredible success story for hard-working taxpayers," he said. "The Legislature will continue our work to reduce the tax burden and the size of government so the people of Wisconsin can keep moving our state forward."
Of course Evers has promised to veto a flat tax if it gets to his desk, and, again, last week Assembly speaker Robin Vos said he wouldn't insist on including a flat tax as part of a Republican budget proposal.
Eating CROWE
Last year the Center for Research on the Wisconsin Economy (CROWE) aggressively touted the benefits of eliminating the state income tax and gained impressive support from the likes of former Gov. Scott Walker, Wisconsin Manufacturers and Commerce, and Americans for Prosperity-Wisconsin.
This week CROWE released a comprehensive analysis of Wisconsin tax reform and began to push instead for a flat tax.
"Tax reform is an important topic being discussed in Wisconsin," said Kim Ruhl, Curt and Sue Culver Professor of Economics and CROWE co-director. "Both the governor and the legislature want tax reform and our analysis lays out the benefits of creating a more efficient tax code in Wisconsin."
In the report, authors Junjie Guo, Ruhl, and Seshadri found that reducing the state's individual income tax rates would increase output and household well being significantly.
"Because most income from pass-through businesses is subject to the top statutory rate, reducing the top rate is more effective in promoting investment and capital formation," the authors wrote. "Lowering the tax rates for other income brackets leads to more skill investments and higher levels of worker productivity."
The report found that switching from the current graduated tax system to a flat tax rate of 3.25 percent would increase gross state product by 4.5 percent, about $13.7 billion.
The switch would increase household consumption by 4.4 percent and after-tax income by 5.27 percent, the authors found. It would lower tax revenue by 16.8 percent, though the report acknowledged that the LRB forecasts a 21.5 percent decrease in revenue under the plan.
"The difference ($1.1 billion) arises because our estimate accounts for increased economic activity from lower tax rates," they wrote.
In other words, the LRB conducted a so-called static score that does not factor in increased economic growth due to lower taxes.
"The Legislative Fiscal Bureau's methodology does not consider behavioral responses from households and firms and does not provide estimates of the response of investment, labor supply, or human skills upgrading," the CROWE report states. "We provide a more comprehensive analysis of this policy and other options that lower the state's individual income tax rates ..."
The latter way of scoring, known as dynamic scoring, is controversial. On the one hand, raising or lowering taxes unquestionably impacts investment and labor decisions. On the other hand, critics say dynamic scoring historically misses the mark, most often overstating the economic growth that lowering taxes causes, primarily by building unproven assumptions into the macro models used in scoring.
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