State Rep. Dale Kooyenga, R-Brookfield, is out with a sweeping plan to cut income taxes in Wisconsin by nearly $800 million over the next two years. It would lower rates across the board and change Wisconsin’s progressive income tax structure by adjusting the brackets to where someone making $14,510 pays the same rate as someone making $319,460.
The proposal, which is being cheered by anti-government groups like Americans for Prosperity, aims to simplify what many agree is a complex system.
But critics are already warning the plan is fraught with fiscal risk, deep social unfairness and comes at a time when the state economy is still struggling.
Here are six reasons some say the proposed GOP income tax cut is exactly the wrong medicine at the wrong time:
1. It is using a one-time surplus based on future projections for a permanent income tax rate reduction.
The Kooyenga plan is based on May estimates from the Legislative Fiscal Bureau, showing that revenues by 2015 will be $575 million higher than were forecast in January.
But as the Wisconsin Taxpayers Alliances notes, a lot of that new-found money is primarily due to taxes on non-wage business and investment earnings, in part from a recovering stock market. In fact, income tax withholding from wages paid to workers has been relatively weak, the LFB reports.
WisTax goes on to warn that the LFB projections are just that: projections. Should the economy slow or not perform as well as expected, these dollars may never materialize.
Rather than using a projected surplus as justification for another tax cut, WisTax suggests keeping more of a cushion — in part because Walker’s 2013-2015 budget proposal leaves an ending balance of only $23 million, or less that 0.2 percent of spending.
“Unfortunately, politicians on both sides of the aisle have a long and rich history of taking extra money and running with it,” says WisTax president Todd Berry.
2. It changes what had been a fairly progressive state income tax system and makes it much more regressive.
The GOP plan takes what had been five income tax brackets in Wisconsin and reduces that to three, creating a very broad middle bracket that lumps together low-wage earners and CEOs.
As a result, someone working for $8 an hour at a fast-food restaurant would pay the same effective income rate as a corporate executive making $250,000 — even before the deductions kick in that help the wealthy.
Robert Kraig of Wisconsin Citizen Action notes that the plan redistributes income upward by giving 60 percent of the benefit to those who make $100,000 or more. It also gives the lowest-income earners the smallest tax rate decrease.
“This is a stunningly unfair proposal,” he says. “It makes a tax system that is already rigged against the middle class and working Wisconsinites even worse.”
3. The credits being eliminated don’t come anywhere close to making up the projected $787 million in reduced tax collections over the two-year budget.
An accountant by trade, Kooyenga deserves kudos for trying to simplify the tax code. His plan eliminates more than a dozen narrowly-designed tax credits worth about $5 million.
But closing those loopholes won’t begin to cover the reduced tax collections from upper-income earners.
If middle-income tax relief is truly the goal — Gov. Scott Walker claims that was the reason for including $343 million in tax cuts in his new budget — that could be better accomplished by eliminating deductions that primarily benefit upper-income earners. Instead, Republicans have been cutting things aimed at helping lower-income taxpayers such as the Earned Income Tax Credit or the Homestead Tax Credit.
In fact, the last budget cut $56.2 million from EITC, which Ronald Reagan once called “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”
4. Factory and farm owners in Wisconsin are already virtually exempt from state income taxes.
An item tucked into Walker’s first budget already provides a tax credit for manufacturing and agriculture business owners in the state, which when fully implemented by 2017 will effectively eliminate income taxes for those specific groups.
The “domestic production tax credit” will deliver an estimated $360 million in tax savings to manufacturers over the next four years and some $130 million each year thereafter, according to the non-partisan Legislative Fiscal Bureau.
Kooyenga's plan does remove a provision that would have allowed those receiving the producers tax credit to use any excess against other income, such as capital gains.
Still, critics have called it one of the largest income tax windfalls in state history — and one that few people know much about.
5. Slashing income taxes on the wealthy sets up the state for future revenue shortfalls, which could provide the justification for future cuts in spending on things like education or public employee salaries and benefits.
Two years ago, the state was facing an estimated $3.3 billion budget deficit, which Walker said was the reason Wisconsin needed to implement Act 10, which essentially eliminated collective bargaining for almost all public workers and forced them to pay more for their pensions and health benefits. The last budget also included deep cuts to the UW System and aid to local governments.
By permanently reducing income tax collections by lowering rates, Wisconsin is potentially heading toward another fiscal cliff if the economy slows.
To Winnebago County Executive Mark Harris, another large budget hole could provide cover for additional — and painful — cuts to government spending down the road.
“You cut taxes, then starve the beast and when the bank breaks in a down year, you can say ‘look we’re broke,’ and suddenly the public will tolerate cuts they would not have otherwise,” he says.
6. The tax proposal is simply another example of trickle-down economics that have done little to create jobs or boost wages for the vast majority of Wisconsin citizens.
Despite a series of policies designed to spur job creation and slogans that Wisconsin is “open for business,” the state continues to lag the rest of the nation and its neighbors in job creation.
Rep. Gordon Hintz, D-Oshkosh, one of four Democrats on the 12-member legislative budget committee to which Kooyenga introduced his tax plan, says more tax cuts are not the answer.
“The song remains the same in Wisconsin,” Hintz says. “By any economic measurement, Wisconsin’s economy is lagging, ranking 44th in the nation in job growth, and faces immediate and long-term challenges. Instead of creating a state budget that invests in our future, Republican leaders remain committed to spending one-time money on permanent tax cuts at the expense of Wisconsin’s economy.”
Rather than more cuts, Hintz is urging the Legislature to use any surplus to invest in workforce development or higher education, restore cuts to public schools or simply deposit one-time revenue in the rainy day fund.
“Just like the tax policies of the past two years, this proposal does nothing to improve our economy,” he says. “If we are going to overhaul our tax code, let’s do it in a way that maximizes the benefit to Wisconsin’s economy and not just for the sake of reducing revenue.”