A good income tax cut comes out of Finance, but the bad, regressive taxes didn't go away

So now that the dust has settled from a frantic session of tax changes in the Joint Finance Committee, what do we have? Let's start with the first of 2 income tax cuts put through by the Republicans who control the committee, one that will net the average Wisconsinite an estimated $77 a year. Not bad, but interestingly, it's also notably less than what the Governor asked for.

The income tax cut is smaller than one proposed by Democratic Gov. Tony Evers, who tried to trim taxes on average by $216 per person this year. Evers' plan also included tax increases for manufacturers and on capital gains — ideas Republicans who control the Legislature have rejected.

"I was just excited we could do this tax cut without a tax shift," said GOP Rep. Terry Kastma of Oostburg, a member of the committee. (How DARE we do that, right Terry?

Republicans stressed that the vast majority of the tax cut would go to people making less than $150,000 a year.

Republicans in February approved a similar income tax cut for the middle class, but Evers vetoed it because he wanted to pay for it in part by raising taxes on manufacturers.

Both of these points are true. The GOP tax cut that was inserted into the budget pretty much gives a break to everyone that isn’t in poverty, and it doesn’t give any break to those above that 2nd tax bracket (whose top levels are single people making $23,520 and married filers making $31,360). This is good targeting and limiting, and makes the tax code more progressive

But it’s also much smaller than Evers’ proposed tax cut which would have given a few hundred dollars to most Wisconsinites of working, middle, and upper-middle incomes. And in addition to the not allowing Evers to reverse the capital gains tax cut (which overwhelmingly would have affected the rich), the GOP plan also continues tax cuts of more than $250 million a year for manufacturers that have not resulted in better job or wage growth as long as they have been in effect.

The JFC also took up a bill that was outside of the budget, but deals with an issue that Evers wanted to resolve as part of it. It relates to a screw-up from the Lame Duck laws of last December where the bill was no one noticed that a tax cut to offset sales taxes that were collected from online retailers was only valid for this year (I talked about that situation in this post).

Not only was that mistake corrected in the new bill, but the laws were tightened up to make sure more online businesses paid sales taxes. That extra sales tax money was then used to give an income tax cut that was targeted to the lowest two brackets.

First, the 2019 tax rate reduction would target the tax rate for the second tax bracket (currently, 5.84%), replacing the current across-the-board tax rate reduction under which each of the four tax rates would be reduced in proportion to its share of gross taxes. Second, the 2019 tax rate reduction would not be made ongoing, so the new rate for the second tax bracket would apply only in tax year 2019. Finally, the tax rate reduction taking effect in tax year 2020 would be based on estimated sales and use tax collections between October 1, 2019 and September 30, 2020, both from remote sellers and from marketplace providers. As under the original bill, the rate reduction would target the tax rate for the second tax bracket and the tax rate reduction would be ongoing and apply to future tax years.

FISCAL EFFECT OF ASA 1

As noted, the sales tax provisions affecting marketplace providers would take effect on the first day of the calendar quarter that is at least three months after publication. Assuming these provisions take effect on October 1, 2019, it is estimated the provisions will increase state sales and use tax collections by $50,300,000 in 2019-20 and by $67,100,000 in 2020-21.

WisPolitics reports that the offsetting income tax cut will be done through lowering the rates at the bottom two brackets.

*the lowest rate of 4 percent would drop to 3.89 percent in tax year 2019. It would then go to 3.76 percent in tax year 2020.

*the second lowest rate would drop to 5.21 percent from the current 5.84 percent under the budget the committee approved earlier Thursday. The bill would take that reduction to 5.08 percent in tax year 2019 and then 4.93 percent in tax year 2020.

The state’s top two brackets of 6.27 percent and 7.65 percent would remain the same.

Sounds like a winner all around. No wonder it got a rare 16-0 unanimous vote of approval in Joint Finance. So put those two income tax cuts together, and that's an income tax reduction of around $458 million over the course of the budget.

So what's not to like about today's action? Quite a bit, unfortunately. The GOP bill removed $362.3 million that would have been raised by having the state tax code match provisions from the GOP Tax Scam of 2017. Unlike prior moves to “federalize” the state’s tax code, this time GOPs went against their fellow party members in DC, and chose certain tax breaks to continue at the state level past this year.

Here are a couple of examples of items the GOP turned down.

Under the individual income tax, taxpayers may deduct business losses from their regular income, subject to certain limitations. For example, passive losses and excess farm losses cannot be deducted in the year incurred, but can be carried forward. For tax years 2018 through 2025, the Act limits the amount of business losses by not allowing excess business losses to be deducted. The Act defines excess business loss as the taxpayer's aggregate deductions for business purposes that exceed the sum of the taxpayer's gross income or gain plus $500,000 for married joint filers or $250,000 for other types of filers. Excess business losses may be carried forward and claimed under net operating loss provisions, as amended by the Act. Also for tax years 2018 through 2025, the limitation relating to excess farm losses does not apply. Excess farm losses comprise losses occurring in the same year that certain farm subsidies are received, provided the farm is not a C corporation…

12. Limitation on Deduction for Interest. Under state and federal law, interest paid or accrued by a business was generally deductible from taxable income prior to tax year 2018, with certain limitations. However, deductible interest on indebtedness allocable to property held for investment was generally limited to net investment income for the taxable year, provided interest exceeded 2% of AGI. Investment interest that could not be deducted could be carried forward to the following year. A deduction could be disallowed for disqualified interest paid involving related parties or to a taxable real estate investment trust subsidiary if the payor's debt-to-equity ratio exceeded 1.5 to 1.0 and the payor's net interest expense exceeded 50% of AGI.

In general, the deduction for business interest is limited under the Act to the sum of: (a) business interest income; (b) 30% of the taxpayer's adjusted taxable income (ATI); and (c) floor plan financing interest of the taxpayer for the taxable year. Business interest income means any interest paid or accrued on indebtedness allocable to a trade or business, but does not include investment interest or investment income. ATI means taxable income of the taxpayer computed without regard to any: (1) item of income, gain, deduction, or loss not properly allocable to the trade or business; (2) business interest or interest income; (3) net operating loss deduction; and (4) the 20% deduction for certain pass-through income. Wages are not included in ATI. For tax years 2018 through 2021, ATI is computed without regard to deductions allowable for depreciation, amortization, or depletion. Floor plan financing interest includes any interest on indebtedness used to finance any self-propelled vehicles (such as on the floor of a car dealership) and is not subject to the deduction limitation, but not on indebtedness used to finance construction machinery and equipment.

So Wisconsin businesses are still able to write off as much interest as they want at the state level, and can still write off as much of a loss as they want. These are items that were put into the Tax Scam to try to limit its cost (didn’t work, but hey, Paul Ryan tried), and closing these state loophole would have accounted for more than $307 million in this state budget. But GOPs in Wisconsin chose not to go along with it, and keep the extra breaks coming for their corporate donors.

The GOPs also didn't go along with Evers' proposals to institute a tax credit for First Time Homeowners (total cost $4.1 million), an attempt to expand the state's Child Care Credit for parents ($9.9 million). As if we don't have enough problems holding on to young families in this state, now the GOPs are turning down initiatives that would offer stability and incentives to that group.

And GOPs had already shot down Evers' attempts to expand the Earned Income Tax Credit and Homestead Credits, which continue to lose claimants and dollar amounts as it fails to keep up for inflation.
And one other item infuriated me. It started in a great way, as it required WEDC to send $30 million it had lying around to the General Fund by next January 1. That's a nice payback of the fact that we found out this week that $31 million more than previously expected was going out WEDC's door due to Enterprise Zones handed out by Walker and WEDC since Evers' election.

But is that $30 million going into schools or roads or some other kind of service that didn't get the boost Evers wanted it to? OF COURSE NOT.

Increase GPR FUnding for the Wisconsin Lottery. Provider $30,200,000 GPR in 2019-20 and $28,400,000 in 2020-21 to support the Division of Lottery, for the purpose of increasing total GPR funding for the lottery to $70,200,000 in 2019-20 and $68,400,000 in 2020-21...

And then that extra money is used in a shell game to cut property taxes through the Lottery Tax Credit. Are you seriously telling me you couldn’t have given that $58.6 million to local services or infrastructure, and still allowed property taxes to be limited? And why has WisGOP chosen to stop having our lottery be self-sufficient, especially in a time of record ticket sales?

Yes, the income tax cuts are nice and surprisingly fair, and I'd expect Evers to accept the adjustments when the budget hits his desk. But there's a whole lot else that WisGOP took out that would have made things a lot better, and it reiterates that this budget is merely a first step in correcting all of the fiscal and policy wrongs that have been imposed on this state over the last 8 years.

UPDATE- To add on to my point about the extra tax dollars being thrown into the Lottery Credit, Tamarine Cornelius of the Wisconsin Budget Project notes that it overwhelmingly favors rural areas over urban ones.

The lottery credit is slanted in favor of rural areas where people are least likely to rent. In Florence Co, 13% of households rent; in Adams Co, 15%. That's about 1/3 the rate of households that rent in more urban areas like Milwaukee Co (50%) or Dane Co (42%).

— Tamarine Cornelius (@Tamarine608) June 14, 2019