GOP tax cut looks good on paper, but Evers sees through it

With the economy moving along, and being pumped up beyond potential in 2018 due to the GOP Tax Scam, it means that many states have decent finances due to continued job growth and less need for services such as Medicaid and unemployment benefits. And Wisconsin is among that group of states, as they ended Fiscal Year 2018 with $588 million in the bank. This led the Wisconsin GOP to break out their typical strategy when faced with such a situation - cut taxes!

The Republican proposal would use a budget surplus to expand the sliding scale standard deduction for the individual income tax to give "targeted relief to the middle class," said state Rep. Terry Katsma, R-Oostburg, in a news conference announcing the plan...

Assembly Speaker Robin Vos, R-Rochester, said Republicans introduced the plan on Thursday so the governor could include it in his upcoming State of the State address, scheduled for Jan. 22. Evers has said he will include his tax proposal in the state budget, but Vos said he wants the Republican plan to be passed outside of the budget process.

"What a fantastic chance for (Evers) on Tuesday to say, 'I accept the offer of legislative Republicans to be able to use the surplus they developed' for the tax cut that he wants," Vos said. "Seems like a win-win to me."

Big fish, small ponders unite!

Umm, Robbin', "the surplus [the legislative Republicans] developed"? That money is only available because of years of WisGOP underfunding schools, roads and local government, and as the Wisconsin State Journal's Matt DeFour pointed out today, money in the bank does not mean you have a "surplus".

A surplus is the annual difference between revenues and costs. The $588 million is a pile of cash, not really a surplus. Last year the surplus was $9.8 million. This year it's $33.9 million. How does it pay for an ongoing $338 million annual reduction in revenue?

— Matthew DeFour (@WSJMattD4) January 17, 2019

But let's set aside the debate about what to do with the extra money can be set aside for the time being, and take a look at what the Assembly GOP proposed today. As the Legislative Fiscal Bureau explains, the GOP’s tax cut would cut taxes by lowering the amount of money that is taxed in Wisconsin. For 2020, the LFB estimates this would affect married couples that make less than $155,413, and single people that make less than $127,408.

The proposal would increase the maximum deduction by 20.6% for each filer type, increase the income levels for beginning the deduction phaseout by 17.6%, and modify each of the phaseout percentages so that they are closer together…

After looking at the LFB analysis and this year’s state tax form (it’s line 15, and page 55 of these instructions shows how much the deductions are today), it sounds like a decent idea. It lowers taxes specifically for people in the middle and upper-middle classes, drops the tax burden of some lower-income Wisconsinites to $0, and the rich don’t benefit at all (they would still make too much to get anything from this expanded deduction).

While the changes seem cosmetic, the LFB says it’ll boost take-home pay for most middle-income taxpayers by a few hundred dollars a year. And that adds up to a sizable price tag.

The proposal would reduce individual income tax collections by an estimated $490.2 million in 2020-21, the second year of the upcoming 2019-21 biennium. The proposal would require the Secretary of the Department of Revenue to change withholding tables to reflect the decrease, effective no later than July 1, 2020, resulting in a one-time revenue reduction of $152.1 million in 2020-21. If the Secretary acts before the specified date, some of the one-time effect would occur in 2019-20…..For the 2020 tax year, the decrease is estimated at $338.1 million.

This amount also includes interactive effects related to the state’s itemized deduction credit (see Schedule 1 on your state tax form for more info). Because the calculation of the credit is based, in part, on the claimant’s standard [state] deduction, a higher standard [state] deduction will result in a decrease in tax credits. For tax year 2020, itemized deduction credits are estimated to decrease by $55.0 million, from $3160 million to $261.0 million.

And it’s not just the cost that exposes the trickery to the GOP’s tax cut plan. It’s not slated to start until 2020, and while there might be a minor bump in take-home pay before the 2020 elections (via the lower withholdings), Wisconsinites won’t see most of the benefit from this until they file their taxes in early 2021 – after the next election.

It’s pretty easy to see a scenario where this tax cut is agreed to (and GOPs take credit for it) before the 2020 elections. But after those elections, the tax cut becomes a $676 million hole in the next budget, which would keep Evers from starting new initiatives. If the plan works even better for WisGOP, then this tax cut leads to a budget deficit (as we saw in a similar pre-election surplus giveaway in 2014).

As that cartoon illustrates, a budget deficit would then force Evers to have to raise taxes or propose budget cuts, which would give Republicans something to run against in 2022. And we all know GOPs are better at whining about “libs” than actually telling voters the truth about their disliked and failing policies.

Fortunately, it seems like the Evers Administration recognizes this as the cynical gimmick it is, as spokeswoman Melissa Moore Baldauff came out within a few hours to point out where the GOP’s plan falls short.

The governor’s sustainable plan to cut taxes for middle-class families—which is funded by rolling back tax giveaways for millionaires—would provide relief for 86 percent of taxpayers without adding to the deficit or relying on one-time funds.

In contrast, Speaker Vos’ spending plan continues to grow. Between this unfunded proposal, their refusal to accept federal funds to expand Medicaid, and growing legal fees for outside counsel to defend their lameduck laws, Republicans are willing to leave taxpayers on the hook for hundreds of millions of dollars.

It is our hope that legislators who believe in protecting the taxpayers and our state’s bottom line will support the governor’s sustainable tax plan.”

And by the way, we might not have the extra money to blow in the first place. Also on Thursday, the Department of Revenue released the state’s collections for December, and it included this shocking detail.

Adjusted Income Tax collections, Wisconsin
Dec 2018 vs Dec 2017- DOWN 19.8% (-$195.1 million)
First half of FY 2019 vs FY 2018- DOWN 0.04% (-$1.8 million)

Now maybe it’s a weird calendar quirk, as the timing of the end of the year fell on extended weekends in both years. But the Wisconsin DOR seems to be aware of that.

For fiscal years (FY) 2018 and 2019, the adjusted line includes withholding that was received on the first working day of January, rather than the last day of December, which was a weekend or a holiday. The year-to-date amounts were affected for both fiscal years.

That withholding amount on January 2nd was $258.2 million in 2018 and $72.5 million this year, and that’s a lot (but not all) of this difference. But it still doesn’t explain why revenues are flat for the first 6 months of the fiscal year.

The revenue estimates the outgoing Walker Administration made back in November had income taxes going up by 3.99%. If they end up flat, that’s a “miss” of more than $338 million – ironically, the same amount that the tax cut will cost for the first year it’s in effect – and the remaining revenues wouldn’t even make up half the difference as it stands today.

If revenues come in soft for 2018-19 and lowers the $623 million that’s supposed to be carried over, it means there is less money to give away in tax cuts for future years. Now add in the shaky outlook of the US economy over the next 2 years and the unknown effect that the GOP’s Tax Scam from DC will have on how much (or how little) is filed in taxes over the next 3 months, and there are a lot of variables that still have to play out.

Also remember that GOPs already cut income taxes by $60 million a year during the Lame Duck session last month, (with most of it going to the rich). It seems Evers and his administration would be wise to continue to call out this GOP tax cut plan as the cynical scam it is, and say the debate over tax cuts can come during budget deliberations when we know more about how much money we have to play with, and what that money could be invested into instead of giving it away.

Either that, or Evers should throw another gambit. Make the GOPs start the tax cut THIS year, and pay for it by getting rid of the wasteful M&A credit, and have it be both fiscally responsible and with more immediate impact for Wisconsinites. I’d love to see the pretzels Robbin’ Vos and Nygren and the other GOPs turn into as they justify making Wisconsinites wait a year for a tax cut that the WisGOPs can’t wait to put into law.