A measure tucked into Gov. Walker’s 2011 budget that effectively eliminated state income taxes on owners of factories and farms in Wisconsin is costing way more than predicted and contributing mightily to the current budget shortfalls.
The Manufacturing and Agriculture Tax Credit was hailed at the time as a job-creating effort that would let businesses invest the savings in new hires and equipment.
But recent figures from the Legislative Fiscal Bureau show the credit will cost the state at least $275 million in additional lost tax collections over the next biennium, or more than double what was originally estimated.
That’s roughly the amount of the proposed $300 million cut to the UW System.
The credits started in 2011 and are being phased in over time. They apply to profits derived from manufacturing or agriculture and are available both to corporations and shareholders of limited liability companies, S corporations or others who report business income on their individual tax returns.
Top bracket taxpayers who qualify will see their state income tax rate fall from 7.75 percent to zero by 2016, when the credit fully kicks in.
Initial projections from Fiscal Bureau said the credits would amount to about $130 million in lost tax collections annually when fully implemented in 2016. But the Fiscal Bureau is now putting the cost at $224 million in 2015-16 and $284 million in 2016-17. The state fiscal year runs June to June of each year.
“I always believed that the credits would cost significantly more than the original projections,” said Winnebago County Executive Mark Harris, who has long warned about the budget implications of the tax cuts.
Rep. Gordon Hintz, D-Oshkosh, noted that the credit allows someone with an income of $2.5 million to pay the same effective income tax rate in Wisconsin as a minimum wage worker.
In a statement Thursday, he rapped the Walker administration for “very poor choices” that created a budget crisis which in turn led to proposed cuts in everything from the UW System to the state parks.
“At a time of relative economic prosperity, Wisconsin finds itself in a crisis budget, making massive cuts to the programs that have always offered economic opportunity,” Hintz said.
During a Wednesday budget hearing before the Legislature Joint Committee on Finance, Hintz asked Revenue Secretary Richard Chandler if the tax credit phase-in could be delayed by two years to restore some of the cuts in Walker’s budget.
But Chandler said Walker would not support a delay in the credit’s full implementation and defended borrowing in other areas like transportation to cover the cost of the tax cuts.
Critics have called the manufacturing and ag tax credit little more than a straight giveaway to some of the wealthiest individuals in Wisconsin. It received little media attention during the 2011-13 budget discussion despite being one of the biggest changes ever in state income tax policy.
After the credit was included in the budget and signed by Gov. Walker, Wisconsin Manufacturers & Commerce called it the "most exemplary public policy initiative in support of manufacturing in more than 35 years.”