Monday, April 10, 2023

Evers and GOP income tax plans are very different. Time to check back in with them.

Now that election season has passed, it's time to go back into budget season in WIsconsin. And the Wisconsin Policy Forum has given a handy breakdown comparing the income tax cuts that Governor Evers set out in his 2023-25 budget, and comparing it to the flax tax plan that Senate GOP Leader Devin LeMahieu has expressed support for.
In tax year 2023, the Evers plan would lower taxes for taxpayers as a group in each income class up to $200,000 in annual AGI. Taxpayers with income up to $20,000 a year would receive an average tax reduction as a group of $70 and a total decrease of $70.7 million (see Figure 1). Taxpayers with AGI of $1 million or more would see their tax liability rise by $295.2 million collectively, with an average increase of $39,586 per taxpayer, the DOR data show.

The LeMahieu proposal would produce sharply different impacts. After being fully phased in by tax year 2026, the legislation would lower the taxes owed by those with AGI up to $20,000 by $7.4 million for an average tax cut of $8 per filer for all those in the group. Taxes owed by those with income of more than $1 million would decline by a projected $1 billion for 2026, with each filer receiving an average cut of $107,876.

The Policy Forum brings up that there are a lot more Wisconsinites on the left side of the charts than on the right side, which means that the large amount of tax breaks going to Wisconsin's richest is going to a very small group of people.
Some context on how many tax filers there are in each group and what they pay under current law may help readers in evaluating the proposals. For example, filers with income up to $20,000 a year are projected to account for one million tax returns in tax year 2023. Though some taxpayers in this class owe taxes, as a group they are currently projected to receive net payments from the state of $85.4 million in 2023 once refundable tax credits have been subtracted from their net tax liability. Taxpayers with AGI of $1 million or more file just under 7,500 returns and are projected to owe $1.27 billion as a group for the current tax year.
The Policy Forum report also gives the additional context that Wisconsin has a relatively high income tax compared to most other states, but we also have a budget that relies more on those income taxes than a lot of other states. This means there is further room to cut to get the state's highest tax rates down to the 3.25% that the GOP plan wants to make it to, but it also means that the budget hole that develops becomes a lot larger than we would see in other places.
U.S. Census Bureau data show Wisconsin collected about $8.51 billion in individual income tax revenues in 2020. That amounted to 2.8% of personal income and $1,448 per capita, which rank 13th and 12th-highest in the country respectively. That could be seen as justifying cutting income taxes, but it also means major changes would have a greater impact on Wisconsin’s budget than in states where income taxes account for smaller portions of the overall revenue pie.

As Figure 5 on page 7 shows, individual income taxes made up 27.4% of all state and local taxes in Wisconsin in 2020. That was greater than the 22.8% average across all 50 states and ranked 13th-highest nationally. In a state like Arizona, where individual income taxes made up 15.3% of state and local taxes, a substantial income tax cut would produce a smaller budget impact. For example, a $5.06 billion income tax cut – or one that is about the size of the Wisconsin flat tax proposal – would more than eliminate Arizona’s income tax but only cut Wisconsin’s roughly in half.

This is especially true for the state level, given that it is illegal under Wisconsin law to have a local income tax.

The flip side of this is that Wisconsin has relatively small sales and gross receipts taxes compared to a lot of other states, if you look at the Tax Foundation’s summary of that Census Bureau report. Just over 1/5 of state and local tax collections come from the sales/gross receipts taxes in Wisconsin, which is below the US average of 23.8%, and only 18 out of the 50 states have a lower share of their taxes be made up that way. And Arizona? It has over 42% of its taxes come via these sources, vs Wisconsin's 20.3%.

That leads to one item that wasn’t mentioned much in the Policy Forum’s report, but should be considered. Evers’ tax cuts are generally paid for with the increased taxes on the rich and corporate, but the GOP’s flat tax scheme has no such offsets, or at least any that they have mentioned. But given how it would take the $7 billion Wisconsin is slated to have in the bank in July, drain it during the next 3 years or so, and the hole would grow larger after that, I would bet GOPs would jack up the (mostly regressive) sales tax at both the state and local levels to make up the difference.

Now that the April elections have passed, we now get back to the more “normal” business of discussing the state budget for the next 3 months. And between the plans of Governor Evers and the WisGOP flat tax plans, there are major differences to choose from and (likely) compromise over. Know the numbers, and know who will (or won't) be getting the benefits.

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