Not just the budget- other tax bills starting to add up

Last week, the Wisconsin Legislature sent a couple of bills to state committees that seem rather small, but still have some tax effects that could endanger other items in the state budget. And both bills are a good example of when a small move that might have good intentions can lead to bigger effects down the line.

The first involves changing Wisconsin tax law to line up with what the Feds allow for write-offs. The Wisconsin Department of Revenue estimates and describes the change this way.

Under current federal law, individuals aged 70 1/2 years or older may exclude from taxable income up to $100,000 distributed from an individual retirement account (IRA) directly to a qualified charitable organization. For Wisconsin income tax purposes, the distribution amount must be included in income, but individuals may claim the itemized deduction credit for the charitable contribution.

Beginning in tax year 2017, this bill adopts federal law as it relates to charitable distributions from an IRA. The provision is expected to reduce revenue by $4.2 million in fiscal year 2017, $4.8 million in fiscal year 2018, $5.2 million in fiscal year 2019, and similar amounts annually thereafter. If the provision becomes law after or near the end of fiscal year 2017, the fiscal effect attributed to fiscal year 2017 will instead fall under fiscal year 2018.

While it may be a nice thing for consistency’s sake to “federalize” this provision, it also means that if this bill were to pass, the $14.2 million in reduced taxes that would result would make Gov Scott Walker’s budget impossible to pass. This is because Walker’s budget only has $6.7 million in “wiggle room” available by the end of Fiscal Year 2019.

There’s also no doubt that this tax cut would almost exclusively benefit rich old people. After all, who has $100,000 to give away to a charity? Certainly not anyone who’s relying on their Social Security check to make ends meet.

And let’s go further on that- what defines a “charity”? I went down the rabbit hole of IRS regulations, and from what I can tell the Wisconsin bill only deals with donations that fall under code number 170(b)(1)(A), instead of the wider 509(a)(2) exemptions.

The kinds of organizations that usually qualify under the IRC 170(b)(1)(A)(vi) support test are museums, libraries, community centers and community funds such as the United Givers organizations.

When the Tax Reform Act of 1969 was enacted, an additional category of publicly supported organizations was added to the Code. (IRC 170(b)(1)(A)(vi) had previously been enacted, effective all years beginning after December 31, 1963.) The new category of publicly supported organizations, described in IRC 509(a)(2), was intended to include organizations that receive a major part of their support from the performance of an exempt function. Thus, in computing an IRC 509(a)(2) organization's total support the same formula (other than the exclusions) used in computing an IRC 170(b)(1)(A)(vi) organization's total support is used, except however gross receipts from admissions, sales of merchandise, performance of services, and furnishing facilities in any activity (that is not an unrelated trade or business) are included. The items excluded from total support, in the case of IRC 509(a)(2) organizations, do not include amounts received from the exercise or performance by the organization of its charitable, educational or other IRC 501(c)(3) purpose. Thus, payments from a governmental unit for performing its exempt function are included in total support. The unusual grant rules remain the same.

So my fears about these donations going to some fake Koch/Bradley “educational” organization don’t seem to apply in this bill, which is a good thing. But given who’s in charge in Congress and the Supreme Court in the post- Citizens United era, that definition could be widened pretty fast.

And there’s another targeted sales tax exemption that’s been introduced in the Legislature that would give an extra benefit to those that would do work on higher education buildings in the state. As the Legislative Reference Bureau notes,

Current law provides that the sale of tangible personal property that becomes a component of a facility in this state that is owned by a county, municipality, school district, or nonprofit organization is exempt from the sales tax and the use tax. The exemption applies to tangible personal property purchased by a construction contractor who transfers the property to the county, municipality, school district, or nonprofit organization as part of constructing the facility. This bill expands the exemption to apply to tangible personal property transferred to a technical college district, to any institution or campus in the University of Wisconsin System, or to the University of Wisconsin-Extension.

The DOR estimated that adding higher education to this list of sales tax-exempt projects would reduce the state’s intake by around $2.5 million a year. Although it should be added that if contractors reduce their projected costs on projects as a result of these write-offs, then taxpayers would get some of that tax cut back.

Interestingly, the expansion of the sales tax exemption to local government buildings just took effect starting last year, State officials said this move would have a price tag of $6.4 million a year to the state, although the memo noted that local governments would would see a projected reduction of $4.1 million for construction costs. So now this new bill is the logical 2nd act to that measure, which allows more places to be in on the tax cut.

Again, this sounds nice and consistent on the surface, but because we have such a tight budget, there would barely be room for this $2.5 million sales tax cut to fit under Governor Walker’s budget if that bill was passed and took effect in 2017.

And that’s the point I want to make here. Even outside of the state budget, there are other tax changes and actions that are being proposed that would make the 2017-19 budget even more impossible to balance. It also might be a nice tipoff for what we could see in those notorious last-minute “999” measures where Joint Finance members throw in all sorts of hidden goodies that often end up hampering the state’s finances for years to come.