Saturday, February 15, 2014

Your (somewhat complete) Wisconsin tax guide

I finally have a bit of time to dive into this, so I wanted to go over where the tax bills in the Wisconsin Legislature are, and explain the budgetary impacts of them.

First of all, the State Assembly passed Scott Walker's tax cut bill this week, and also threw in a goodie for contractors that added to the amount of the tax cut. However, this goodie had to be reduced in scope when this sales tax exemption was shown to be a lot bigger than first thought.
Republicans did support one change to the bill that would extend a sales tax exemption to construction companies doing work for schools, local governments and some nonprofits. The estimated cost was $20 million a year, but that was scaled back to $7.5 million by not allowing the exemption for state government projects.

Current law grants the tax exemption to schools and the local governments for materials they purchase, but contractors must pay the sales tax. The proposed expansion of the exemption would take effect starting in July 2015.
Fitting that they don't have this kick in before the next 2-year budget starts, since the LFB noted this week that under the original tax cut bill, there is no breathing room left in the budget to add any cuts or spending.
The gross balance under the special session would have been $74,163,800 and the net balance $9,163,800 ($74,163,800 - $65,000,000). However, current law requires a transfer to the budget stabilization fund of $9,163,800 in 2014-15. This transfer would be reduced by the enactment of any bills with general fund fiscal effects of up to $9,163,800. Under current law, the Legislature may not pass legislation that would reduce the general fund balance below the required $65 million.

Recently, the Governor signed into law seven bills dealing with mental health (2013 Acts 126 to 132). For 2013-15, those bills appropriate $4,220,000 from the general fund to various programs. Thus, the transfer to the budget stabilization fund is reduced by that amount to $4,943,800 ($9,163,800 - $4,220,000).

If additional bills are enacted during the current legislative session, the general fund fiscal effect of those bills cannot exceed $4,943,800 if the statutorily required balance of $65 million is to be maintained.
But what this also means is that the sales tax exemption is adding another $15 million to the next structural deficit, which the LFB estimated at $807 million before the sales tax exemption was added in. So now the deficit is up to $822 million, and this reality is leading to some heartburn for GOP State Senators, many of whom have been in office long enough to remember how similar giveaways by Scott McCallum and Tommy Thompson in the late '90s and early 2000's led to chronic fiscal problems in Wisconsin, and how similar tax-cut foolishness and arrogance by the Bush Administration helped to lead to big Dem victories in 2006 and 2008.

So how can we get both tax relief and the structural deficit reduced? The answers may lie in looking at the original Walker tax bill, and then comparing it to a proposal put forth by Assembly Dems (which Robbin' Vos and his GOP lackeys in the Assembly rejected out of hand, as they do anything with a "D" behind it).

Income tax cuts
A big problem with the Walker tax cuts is the timing of them are done intentionally to have the impact hit before the November 2014 elections, and have the consequences hit after it. The $98 million added tax cut to the lowest bracket (dropping it from 4.4% to 4.0%) hits retroactive to January 1, 2014. Then you combine that with the indexing of the withholding tables, which applies the Koo-Koo tax cuts from last year and the effects of inflation since October 2009, and you have a massively lower amount of money coming into the State Treasury between now and early 2015. This explains how a projected surplus near $1 billion for this biennium can get drained down to $0 with these bills.

A better solution would be to delay the change in withholding tables to July 2015, and not have the new 4.0% bracket hit till 2015 either. This spreads out those tax cuts, and gives time to adjust in case there's a downturn between now and next year. With the state's recent rise in unemployment claims and this brutally cold winter piling up the bills, this would seem to be an especially good time to be cautious. In addition, a wise budgeter would follow the Dem proposals to get rid of the $35 million in tax cuts geared toward the rich and corporate, which deal with previous Walker giveaways that the LFB points out will go into effect in future years.
Modify the current law procedures for claiming the manufacturing and agriculture credit so that the credit may be claimed as an offset to both the regular tax and the alternative minimum tax under the individual income tax. These provisions would apply retroactively to tax years beginning on January 1, 2013. Decrease estimated individual income tax collections by $11,300,000 in 2013-14 and $24,000,000 in 2014-15. Due to the credit's phase-in, this provision would reduce estimated individual income tax collections by $39,000,000 in 2015-16 and by $49,300,000 in 2016-17 and thereafter.

The credit was created in 2011 Act 32 and is being phased in between tax years 2013 and 2016. The credit is available to taxpayers to offset the tax on income from manufacturing and agricultural activities in Wisconsin. Currently, individual income tax provisions allow the manufacturing and agriculture credit to be used only to reduce regular tax liability.
So by throwing this one item out, you're saving $35 million this year, and reducing the next structural deficit by $88 million in the next budget.

Tech College Funding and Property Tax Relief
Another place to look at is the $406 million to be added to tech schools as a property tax relief measure. On its face, I like the provision, as I think the state should be more involved in these institutions, instead of having unelected, regionalized tech college boards call the shots and use property tax dollars to do so. But the problem is that it also raises the expenses that are expected to be used for future years, which drives up the structural deficit by $812 million for the next budget. It also means that tech colleges are put under a revenue limit, which could lead to major property tax increases or tuition hikes in future years if fiscal restraints require this extra state funding to be pulled back (especially if Walker and the Assembly GOPs intend to use this as a one-time gimmick that goes away after 2014, which would be their style).

Perhaps a better idea is to use the Dems' idea of expanding the First Dollar Credit (which also offsets property taxes) and also gives a flat amount to everyone that owns something other than unimproved properties. This improves equity, since higher-priced properties don't get a bigger tax break (sorry, Waukesha and Ozaukee Counties), and the LFB indicates that it'll also reduce property taxes on a median-value home by another $100 over the Walker plan. This expanded credit could even be cut in half for the same level of tax cut as the Walker plan, with less money being spent in the process.

So once again, even when the Walker Administration and the GOP goofs in the Assembly want to do questionable tax cuts, they do it in a more fiscally irresponsible manner, which drives up the future structural deficit and reduces flexibility in later years. But then again, when the ultimate goal of you and your puppetmaster is to FUBAR government functions so that they have to be made less effective and/or sold off so you can make big bucks and grab power in the process, maybe this setup makes perfect sense.

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