Low-income tax credits not being cut this year, but will pay less

I was looking at the appropriations in Governor Walker’s 2015-17 budget, and it appeared that there were two tax credits widely used by lower-income Wisconsinites that were facing more cuts – the state’s version of the Earned Income Tax Credit (EITC) and the Homestead Credit. EITC was slated to go down from a combined total of $93.6 million in general tax funds in the 2013-15 budget to $86.1 million in this one, and the budgeted payout for the Homestead Credit is slated to go from a combined $262.0 million to $229.0 million. Was this a back-door cut to these tax credits, and a violation of Gov Walker’s claim of “no tax increases?”

That question piqued my interest, and what I found is that the eligibility for these credits aren’t being cut this year, but instead it is prior cuts in the credit and changes to eligibility in the age of Fitzwalkerstan have led to what looks like reductions today.

First I’ll look at the EITC, and I’ll compare what was in the 2013-15 budget (and adjusted by a couple of tax changes in 2014), and what was proposed by Governor Walker earlier this week. The first thing to know about the EITC is that it is split between two funding sources, as the Legislative Fiscal Bureau explains to us.

The state earned income tax credit is currently paid from two sources: (a) a sum sufficient, gen-eral purpose revenue (GPR) appropriation; and (b) federal funding from the temporary assistance for needy families (TANF) program. TANF funding was first used to cover a portion of the cost of the EITC in the 1998-99 fiscal year, when it became clear that federal regulations permitted the use of TANF funds for this purpose. According to federal regulations for the TANF program, TANF funding may be used to cover the share of the EITC that is refunded to the claimant (rather than used to reduce the claimant's income tax liability). However, TANF funds may not be used to provide the credit to certain legal immigrants. Based on the federal requirements and on past experience with refundable credits, and allowing for amounts paid to legal immigrants, it was previously estimated that about 80% of EITC costs could be paid with TANF funds. As the EITC income thresholds have increased due to indexing and law changes, the percent of EITC costs that can be paid with TANF funds has been re-estimated at 60%.

And as the LFB notes, the TANF share has been rising in recent years, which indicates that more of the funds are going to people with no tax liability. It was as low as 6.8% of total funds in 2008-09, but has increased steadily since then and jumped from 43.2% of total funds in 2012-13, to just over 60% in 2013-14, which is the last year measured.

That’s one reason that GPR state tax money going toward the EITC has been reduced over the last three years, and the other is because of changes in the law made when Gov Walker and the Wisconsin GOP came to power in 2011. The amount that the state pays in EITC is a percentage of what the federal credit is, and Walker’s first budget reduced the percentage of the credit from 14% to 11% for people with two children and from 43% to 34% for parents of three or more children. As a result of that move in 2011, the amount of Wisconsin EITC payments dropped by more than 18% vs the previous year, and it has stayed at that lower level. Combine that with the increased TANF share, and the amount of general tax dollars going into the EITC has declined greatly over the last 5 years.

Wisconsin EITC payments
2009-10 $129.2 million total ($103.3 GPR, $25.9 TANF)
2010-11 $126.2 million total ($82.5 GPR, $43.7 TANF)
2011-12 $103.3 million total ($59.6 GPR, $43.7 TANF)
2012-13 $101.2 million total ($57.5 GPR, $43.7 TANF)
2013-14 $103.8 million total ($41.3 GPR, $62.5 TANF)

Gov Walker’s budget request keeps the $62.5 million in TANF funding for each of the two years of the budget, and asks for $43.78 million in 2015-16, and $46.53 million in 2016-17. With that in mind, those numbers seem reasonable, but it also illustrates that the state’s credit stays well below the levels that were set in 2009, despite the fact that the expanded EITC that was part of President Obama’s first moves in office are still in place through 2017.

A similar story holds for the Homestead Credit, which goes to low-income homeowners and renters. The LFB explains how it works, and what has changed about it in recent years.

For claimants with incomes below the income threshold, the credit is equal to 80% of their property taxes or rent constituting property taxes up to the maximum in property taxes or rent. Rent constituting property taxes is 25% of rent if payment for heat is not included in rent and 20% of rent if payment for heat is included.

Under 2009 Wisconsin Act 28 (Doyle-Dem budget) , beginning with tax year 2010, the three formula factors were to be indexed annually by comparing the 12-month average of the Consumer Price Index from August through July of the prior year to the comparable average from August, 2007, through July, 2008. The three formula factors were indexed for tax year 2010. However, 2011 Wisconsin Act 32 (first Walker-WisGOP budget) repealed the annual indexing of the formula factors beginning with tax year 2011. Therefore, tax year 2010 was the only year in which indexing of the credit's formula factors took place. As a result, the credit formula factors remain as follows: the maximum property taxes or rent constituting property taxes is $1,460; the income threshold is $8,060; and the maximum income level is $24,680. These factors produce a maximum credit of $1,168.

The lack of indexing means that many Wisconsinites have had their Homestead Credit payments reduced if not outright eliminated simply due to inflation. And given that low-income individuals are also people that are less likely to file taxes in the first place (either because they have paid no state income taxes, or don’t think they can claim the credit), this makes it likely that those who have earned the chance to receive the credit may not get it without adequate outreach about how it works.

With the removal of the Doyle-Dem indexing in 2011 and an improving economy during the Obama Recovery, we have seen payments for the Homestead Credit go down in each of the last three years.

Homestead Credit payments, 2009-2017
2009-10 $129.2 million
2010-11 $133.9 million
2011-12 $133.7 million
2012-13 $122.8 million
2013-14 $118.0 million

2014-15 (budgeted) $130.3 million
2015-16 (request) $114.6 million
2016-17 (request) $113.0 million

This means that the $130 million that is being asked for in this current fiscal year will likely not all be paid out (and could be lapsed to fill the current year's budget hole), and explains the lower request in Walker’s 2015-17 budget.

To have the amount paid out under these credits go down at a time when the rich and corporate have received huge amounts of tax breaks that have resulted in lagging job growth should make you question the priorities of what’s been going on at the Capitol in the last 4 years. And if things turn bad economically, as they might with many Wisconsinites who would be affected the huge cuts in this Waler budget, these credits may have to be used more in the coming two years (as we saw in late 2000s). Which would make this fragile, deficit-ridden budget implode even more.