Beyond income tax cuts, a lot of last-minute fixes to the Wisconsin tax code

I wanted to give a few words about a multi-part bill cleaning up several tax provisions that passed the Joint Finance Committee today.

One part of this bill would allow older Wisconsinites with lower incomes to get a larger Homestead Credit.

Current law provides an exemption from taxable income for up to $5,000 annually of payments or distributions received from a qualified retirement plan under the IRC or an individual retirement account by an individual aged 65 or older. This treatment is limited to taxpayers with federal AGI below $15,000 ($30,000 if married). The substitute amendments would convert this exemption to a subtraction. According to DOR, eligible taxpayers must claim the exemption described above, whereas a taxpayer may choose whether to claim (or not claim) any of the subtractions provided under current law.

In certain instances, requiring a taxpayer to claim the retirement income exemption can lead to the taxpayer receiving a lesser homestead credit than if the exemption were optional. This is most likely to occur for individuals who would not owe state income tax regardless of whether they claim the exemption. As a result, their decision whether to claim the subtraction under the substitute amendments would not impact individual income tax revenues. However, homestead credit expenditures would increase under the substitute amendments, in cases where electing not to claim the subtraction would lead to receipt of a greater homestead credit.

The amount of added money is small ($200,000) but I’m sure it’ll be nice for the people that get more of a Homestead Credit as a result.

Other provisions will adjust the state’s tax code to match the changes in the federal tax code that hit in 2019 and 2020, and it’ll lead to several millions of dollars in lower taxes and higher tax credits, along with improved tax simplicity.

In a separate bill, the Joint Finance Committee signed off on an item Governor Evers wanted to include in his original budget, and was resurrected by the WisGOPs as part of their farmer's aid package (even though most of the benefits of this won't go to farmers).

A deduction is provided under current law for medical care insurance premiums paid by self-employed individuals. The deduction amount is limited to an individual's aggregate net earnings from a trade or business that are subject to Wisconsin tax. Nonresidents or part-year residents of Wisconsin are required to reduce the amount of the deduction according to the proportion of their total net earnings from a trade or business which are taxable in Wisconsin.

Beginning in tax year 2020, the substitute amendments would direct that the deduction amount instead be limited to the individual's total wages, salary, tips, unearned income, and net trade or business earnings that are taxable in Wisconsin. The substitute amendments would similarly modify the proration calculation for nonresidents and part-year residents (described above) to provide that the deduction be reduced according to the percentage of the person's total wages, salary, tips, unearned income, and net trade or business earnings that are subject to Wisconsin tax. DOR estimates this provision would decrease individual income tax revenues by $9,500,000 in 2020-21, and by $9,100,000 annually thereafter.

Interestingly, because these provisions not only reduce taxes but also reduce the amount of money sent to the state’s Rainy Day Fund (by reducing the extra revenues that get sent into the Rainy Day Fund), it won’t change too much on the bottom line - $3 million in this Fiscal Year and $8 million in the next one.

However, you also have to add these provisions to all of the other bills that are being debated, from the $250 million GOP income tax cut that the JFC passed today, to the $27 million write-off for farmers on their equipment, to the $1 million - $5 million effort to increase the state’s dairy exports, or even $600,000 more a year to give to dairy processing grants. The $300 million or so in cushion that we are projected to have remaining if all of these items become law could go away really fast, especially if the economy takes a dive in the next 16 months. But hey, the GOP Legislature has to go on their 10-month paid vacation. So why not have it become Christmas in February, pass everything, and let Evers sort it out?

It gives the governor a great opportunity - sign off on the relatively smaller tax cuts that a lot of people agree on, but vetoing the most questionable and largest items that got out of JFC, and tell them to get back to Madison and get serious about funding our schools and cutting property taxes for homeowners.