Tuesday, May 28, 2013

A Koo-Koo tax cut idea

After taking a weekend off for the holiday and to take care of some personal needs, I'm back with a brief overview of the additional tax cuts State Rep. Dale (Koo)Kooyenga is proposing and trying to stuff into the state budget at the last minute.

Who gets the tax cuts
Kooyenga's tax cut plan will shut down a number of tax credits, and in return would cut income tax rates for many income levels beyond what Gov. Walker has proposed for this budget.
Currently, Wisconsin employs five tax brackets with marginal rates ranging from 4.60% to 7.75%. Under the proposal, the number of tax brackets would be reduced to four, and the marginal rates would range from 4.50% to 7.60% in tax year 2014, as follows. First, the rates for the two lowest brackets would remain the same as under the Governor's proposal. Second, the rate for the top tax bracket would be reduced from 7.75% to 7.60%. Finally, the third and fourth bracket would be combined, and that bracket would be taxed at 6.27%.....

Beginning in tax year 2015, the number of tax brackets would be reduced to three. Relative to current law, the second, third, and fourth tax brackets would be collapsed into a single bracket, and the income that falls within that bracket would be taxed at a rate of 5.94%.
The upshot of this is that people with 6-figure taxable incomes in Wisconsin would see a significant tax cut, with marginal rates dropping from 6.5% and 6.75% down to 5.94%, or which'll reduce the total taxes paid by these people by 9-13%.

Marginal tax rates, Kooyenga tax plan, 2013 vs. 2015
$0 - $14,510- 4.60% (2013), 4.50% (2015)
$14,510 - $29,020- 6.15% (2013), 5.94% (2015)
$29,020 - $217,630- 6.50% (2013), 5.94% (2015)
$217,630 - $319,460- 6.75% (2013), 5.94% (2015)
$319,460 and up- 7.75% (2013), 7.60% (2015)

And while that marginal tax rate cut for the highest incomes seems small, Kooyenga's plan also gets rid of the state's Alternative Minimum Tax regulations, which tend to grab the richest earners. This means that not only do 6-figure income-makers get an income tax cut from the rates itself, they also are more likely to have the amounts of taxes owed to be near ZERO because of no AMT. When you combine these two variables, it is obvious that the Koo-Kooyenga tax cut has the lion's share of benefits going to the rich.

And in looking at the LFB write-up, there is no corresponding change in the amount of income that is taken off in the standard deduction to take care of basic necessities, so poorer people will have a whole lot less when it comes to disposable after-tax dollars to play with than richer people will. This makes what already looks to be a regressive tax cut all the more so.

Now Kooyenga argues in today's J-S story on the tax cut plan that "It's nearly impossible to create a tax cut that doesn't disproportionately lower taxes for upper incomes." But that's simply not true, as tax savings could be targeted to the lowest-income individuals, or the standard deduction and related exemptions could be expanded. Both moves would give a lot of help to lower income individuals, but not affect richer people as much.

Kooyenga's plan actually goes the other way on this measure, as it repeals the "Working Families Tax Credit", which goes to individuals making under $9,000 and joint returns that make under $18,000, which will raise the taxes that these low-income individuals would have to pay. Especially when combined with the sizable rate reductions on 6-figure earners and the AMT repeal, this tax cut plan is designed as a clear giveaway to the rich.

It also blows a major hole in the state's budget, especially for the future. This year's fluky upside revenue surprise might be able to cover some of this Koo-Koo cut for this year and next year, but not by much. Here's what LFB says about the revenue drop that this tax cut would cause (these numbers are in addition to Walker's proposed tax cuts, expense changes, etc. that are already in the budget), and as you'll see, the loss in revenue from tax rate cuts outpaces the money made back by ending tax credits by 80 TO 1.

Change in funds, Kooyenga tax cut plan, 2013-15
Tax rate cuts, etc. -$408.6 million
Tax credits ended +5.3 million
Increased Gen Fund costs in package $16 million (-$16 million for deficit)

Fee cuts -$8.0 million
Decreased fee revenue with shift to Gen Fund $16 million

Total GPR deficit added = $419.3 million
Total cuts in fees, other revenues = $24.0 million

As you may recall from the revenue estimates given, with current projections and no changes from the Governor's budget, the base state budget would have a surplus around $582 million for 2013-15, and that's before any money is added to K-12 schools (as many legislators have been indicating). This $419 million basically takes care of all but $163 million of that surplus, which would pretty much put the kibosh on any significant increases in K-12 funding ( the LFB paper for tomorrow indicates that $163 million wouldn't even pay for a $100 per pupil increase). So there's a clear choice to be made between funding schools and related services, and giving some property tax relief for the next two years, and going along with these tax cuts.

But the real damage follows in the next budget and later years, as the lower tax cuts fully hit, and the numbers expand.
In the 2015-17 biennium, the proposal would reduce income taxes an estimated $443 million in 2015-16 and $471 million in 2016-17. Those effects come from combining the third and fourth tax brackets with the second tax bracket and taxing income that falls within that bracket at 5.94%.
So that's $914 million that needs to be made up in those years. But wait, there's more! The Fiscal Bureau adds that the Koo-Koo tax cut assumes that the feds will choose not to continue bonus depreciation after this year, despite the fact that this was extended in the fiscal cliff deal and has tended to be extended by members of both parties. If the current 50% bonus depreciation continues, that's another $60 million that goes away, and stays away in later years.

So now we're up to $1 billion in reduced revenue from these tax cuts, and that's a problem, because the LFB figured back in March that the 2015-17 budget already had a $664 million deficit. So while the fluky revenue increase from the Fed-fueled stock market boom might take care of the original $664 million, it doesn't account for the additional BILLION DOLLAR DEFICIT that the Koo-Koo tax cut would cause.

Which leads to the obvious question- what's the other shoe to drop to take care of this tax-cut caused deficit, if this were to become law? Is this where the no-bid sale of state assets comes in? Would it require an increase of the sales tax to 6% (which would make up that billion dollars)? Or would it mean even more cuts to local communities, workers, and/or schools?

Don't deny that this is part of the WisGOP plan. It's classic "starve the beast/ disaster capitalism" economic policy designed to FUBAR Wisconsin's services beyond the point of repair, leading to services being forced to be sold off to campaign contributors for pennies on the dollar.

So no, I don't approve of the Koo-Koo tax cut, and encourage Dems and GOPs that give a crap about the state's future to stand against what is a clear giveaway to the rich that will send the state back into serious deficits without any increase in services or employment to show from it.

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