Not many taxpayers in Wisconsin are familiar with the alternative minimum tax since it affects so few state residents — generally those with six-figure incomes and lots of deductions or credits.
But tucked into Gov. Scott Walker’s $504 million basket of tax cuts are significant changes to the state’s alternative minimum tax that could deliver some $50 million in savings to roughly 30,000 filers by 2016 and beyond, according to a Legislative Fiscal Bureau memo.
While most tax filers will enjoy some savings under Walker’s proposal — the estimated average is $177 — the alternative minimum tax changes will mainly benefit the wealthiest in Wisconsin, including factory and farm owners already benefiting from another huge tax break passed specifically for them in 2011.
“The governor didn’t mention the alternative minimum tax during his State of the State speech but this is clearly only going to help upper income people,” says Jon Peacock of the liberal Wisconsin Budget Project.
The federal alternative minimum tax (AMT) was enacted in 1969 after Congress learned that 155 affluent Americans had actually paid no federal income taxes. Wisconsin passed its own version of the AMT in the 1980s.
The measure is designed to capture at least some revenue from individuals who have so many deductions or credits they otherwise would owe no income tax at all.
“Maybe the easiest way to explain it is that the AMT makes sure that generally higher income filers can’t claim significant deductions to where they whittle their tax liability down to nothing,” says Dale Knapp, research director of the Wisconsin Taxpayers Alliance.
Republicans have had their sights on the alternative minimum tax in the past. Rep. Dale Kooyenga (R-Brookfield) had proposed eliminating it as part of a package of reforms he proposed last year.
Conservatives have also called for eliminating the AMT, saying it acts as a second income tax and complicates an already complex system.
But Democrats, including Rep. Jon Richards of Milwaukee, have argued that eliminating the state AMT would only benefit the wealthy and that lawmakers should focus on changes that benefit middle and lower income taxpayers.
Only 7,660 taxpayers in Wisconsin were subject to the state AMT in 2012, generating about $7.5 million in revenue.
But the number is expected to jump to 30,000 by 2015 because of the lower rates on upper income earners passed by the Legislature last year and the sweeping manufacturing and agriculture tax credit for business owners.
Included in Walker’s first budget in 2011, the M&A credit virtually eliminates income taxes for owners or investors in manufacturing or farm related businesses in Wisconsin. It has been called the most significant change in state tax policy in history, delivering an estimated $130 million annually in savings to a select group of filers.
To preserve those M&A credits in full, the latest Walker proposal changes the formula as it relates to who falls under the AMT, retroactive to 2013. The governor’s plan — which he now says is open to tweaks — would also impact two smaller credits beginning in 2014: an historic rehab credit and a state research credit.
If all three provisions are adopted, revenues would be reduced by an estimated $11.3 million in 2013-14, $25.5 million in 2014-15, $40.5 million in 2015-16 and $50.8 million in 2016-17 and thereafter, according to the LFB.
By their very nature, income or property tax cuts benefit wealthier households or businesses or landlords with significant real estate holdings. The governor’s plan does take a stab at helping those on the lower end by cutting the bottom income tax bracket from 4.4 to 4.0 percent.
Still, even without factoring in the changes to the alternative minimum tax, an analysis by the Institute for Taxation and Economic Policy calculated that the top 5 percent of tax filers, those who made $161,000 or more in 2013, will enjoy 18 percent of the proposed tax cuts. The bottom 40 percent, filers with incomes under $37,000, will get just 15 percent of the benefit.
“The cuts have been characterized as helping everyone in the state but some are getting more help than others,” says Peacock.