We knew Governor Evers was going to ask for a reversal the manufacturing part of the Manufacturers and Agriculture credit in the budget. But the justification to do so as part of the Budget in Brief, and the supporting evidence for why the giveaway to manufacturers needs to go away is interesting to read.
The other large reversal of a Fitzwalkerstan-era tax cut comes with a plan to remove a capital gains tax cut.
In raw terms, manufacturing employment gains in Wisconsin have been slower in the five full years after implementation than in the three years preceding it. Between January 2010 and January 2013, Wisconsin manufacturers created 33,000 jobs. In the five years between January 2013 and January 2018, Wisconsin manufacturers created only 17,000 jobs. Wisconsin's stagnant share of national manufacturing employment in that time demonstrates that the Manufacturing and Agriculture Credit has been ineffective at its stated goal of spurring manufacturing job creation in this state. Considering that the credit costs the state approximately 2 percent of its total general fund tax revenues annually, it is time to reevaluate this costly tax expenditure.
What the credit has done, however, is provide extraordinarily large tax benefits to a narrow sliver of Wisconsin taxpayers. In tax year 2017, a mere 6,230 taxpayers, less than 0.3 percent of all individual income tax filers with a net tax liability, claimed the manufacturing portion of the credit for a total of $209.8 million in utilized credits, approximately $33,700 per claimant. Eighty-one percent of the aggregate dollar claim went to taxpayers with adjusted gross incomes in excess of $1 million and approximately half of that was to taxpayers with adjusted gross incomes in excess of $5 million.
The result of this is that Wisconsin taxpayers with adjusted gross incomes over $5 million pay a lower effective rate than many middle-class filers do. In 2017, the average effective rate for filers with incomes over $5 million was just under 5 percent, lower than filers with incomes between $130,000 and $140,000 a year.
Another expensive tax break that has benefits skewing toward a relatively small share of the overall taxpayer population is Wisconsin's 30 percent exclusion for long-term capital gains realizations. That tax expenditure provides a preferential rate for disproportionately high-income earners' income derived from capital asset sales, which tend to be corporate equity holdings. For very high-income Wisconsin taxpayers subject to the highest tax bracket, instead of facing the ordinary 7.65 percent marginal rate that applies to wage and salary income, investment gains qualifying for the capital gains exclusion have an effective preferential rate of 5.355 percent. This effectively means that middle class workers who receive a raise face a higher marginal rate on their hard-earned wages and salaries than do wealthy investors on their stock sales. To improve equity between different forms of income, the Governor recommends limiting the current 30 percent long-term capital gains exclusion to those taxpayers with adjusted gross incomes below $100,000 for individuals and $150,000 for married-joint filers. This preserves the exclusion for 81 percent of those currently claiming the exclusion on their Wisconsin income tax returns, helping ordinary retirees and small investors. Wealthier investors would simply pay the same tax rate on their capital gains that they would on wages and salaries. That is a fairer tax system for all Wisconsinites. The Governor's proposal would also retain specific capital gains incentives for investments in Wisconsin businesses as well as retaining the current law 60 percent exclusion for capital gains derived from farm assets. The limits to the 30 percent long-term capital gains exclusion will raise an estimated $285.1 million in fiscal year 2019-20 and $220.0 million in fiscal year 2020-21.I like this a lot. Much like with the M&A tax cut being on top of the GOP Tax Scam giveaway to corporations, capital gains already gives richer Americans a major tax break at the federal level. Why are we giving these guys even more of a break at the state level?
The Evers Administration was cagey enough to leave farm assets out of the capital gains changes, so it takes away the sob story that GOPs like to spin where they equate “capital gains” with “selling the family farm” (which is more sympathetic than “trading paper and real estate”). Likewise, I love the Evers Administration’s framing of “work vs selling stock”, as not only does it stress restoring tax fairness in this state, but it has the added benefit of being true.
The tax cuts Evers has proposed also takes the state’s tax system in a more progressive direction. We’ve already discussed Evers’ 10% tax cut for single Wisconsinites that make less than $80,000 and married couples making $125,000 or less, so I don’t want to talk about this too much other than the fact that it’s got the eye-rolling name of the Family and Individual Reinvestment credit (the FAIR credit, get it?).
So instead, I’ll discuss two other tax cuts Evers is proposing. The first expands the state’s Earned Income Tax Credit for lower-income working individuals.
For working families with one or two children, the Governor also recommends increasing the Wisconsin Earned Income Tax Credit (EITC) as a percentage of the federal credit to bring Wisconsin's EITC more in line with other states' credits. Beginning with tax year 2019, the Governor's budget will increase the percentage of the federal credit that filers with one dependent child may claim from 4 percent to 11 percent. For filers with two children, the rate will increase from 11 percent to 14 percent, restoring the cut made in the 2011-13 biennium that increased taxes on hardworking families with children. These increases in the proven EITC program will encourage work while providing needed relief to low and moderate income families with children. Under the Governor's budget, nearly 200,000 filers with children will receive $26.4 million in fiscal year 2019-20 and $26.7 million in fiscal year 2020-21.This could conflict with the 10% Evers tax cut, as that is “non-refundable”, so if a person’s state tax liability is $0, then it doesn’t give anything. So I'd be interested in seeing what the distribution of benefits might look like if everything was passed.
The other low-income tax cut would allow more people to take advantage of the Homestead Credit.
The Governor also recommends enhancing the Homestead Credit to provide increased relief to lower-income Wisconsinites to meet their property tax and rent burdens. First, the Governor's budget will restore indexing for the credit beginning with tax year 2020, which is vital for those on fixed income streams such as Social Security or disability payments. For those taxpayers, restoring indexing will prevent the credit from losing value to inflation. Second, the Governor's budget will increase the maximum eligible household income under the program to $30,000 in tax year 2020 in order to extend property tax and rent relief to a large segment of Wisconsinites who have lost that relief due to inflationary pressures over the past two decades.As the Wisconsin Budget Project has noted several times in recent years, there has been significant erosion in the usage and amount of the Homestead Credit since WisGOP came to power in the state after 2010.
While any version of these tax proposals are unlikely to get through the gerrymandered GOP Legislature, that’s almost not the point. The point is to show what vision of Wisconsin Evers and Democrats want (one of tax fairness and ending the free ride that the rich and corporate have had for 8 years) with a Republican Paarty that’s perfectly happy to see the state underperform and have most people continue to fall behind while GOP donors and interests get even richer.
And Evers and other Dems need to keep pushing on this theme, and not drop the pressure after a few days or weeks (as Dems have a bad habit of doing). Because as more Wisconsinites have to write checks to the IRS due to the GOP Tax Scam in DC, they are primed to listen and agree with a theme of “Republicans don’t care about you and only want to help their rich cronies.” So SAY IT, Dems!