Walker may find many ways to slash state’s income tax
Republican Gov. Scott Walker is looking for the best way to cut income taxes by between $300 million and $350 million over the next two years, with the down payment coming before he seeks re-election in November 2014.
Walker and the Republican who leads the Assembly, Speaker Assembly Robin Vos of Burlington, say the tax cut should go to “middle class” taxpayers with taxable incomes of between $20,000 and $200,000 a year. Democrats say anyone with a taxable income of $200,000 isn’t “middle class,” but they can’t vote against a tax cut.
In 2011—the latest year for which data are available—1.69 million taxpayers had taxable incomes between $20,000 and $200,000. That was 58 percent of the 2.9 million residents who filed income taxes that year, according to a Legislative Fiscal Bureau analysis.
It’s important to remember that Walker and Vos say the tax cut could total $350 million over two years.
Let’s do the math on a potential first-year tax cut, since it’s the one that voters would get before Walker’s re-election bid: If the first-year down payment on the tax cut is $150 million, the average taxpayer would get a tax break of about $88.
That, however, would not offset the 2 percent increase—from 4 percent to 6 percent—in the federal payroll tax that pays for Social Security.
Walker acknowledged that last week: “We can’t make up for all of that (federal tax increase), but if we could make up for some of that it would help.”
There are many ways to cut income taxes.
Tax rates or tax brackets can be adjusted. Wisconsin now has five tax brackets and rates that range from 4.6 percent to 7.75 percent.
When Democrats controlled the Capitol, they created the 7.75 percent rate for married filers with taxable incomes of more than $310,210, and single head-of-household filers with taxable incomes of more than $232,660. Although Republicans took control in 2011, they had to fix a deficit and couldn’t repeal the 7.75 percent tax rate.
Taxpayers—read: voters—could also notice an income tax cut by adjusting what is withheld from their paychecks.
Vos, who chaired the Joint Finance Committee during the 2011-12 session, is interested in tax withholding tables.
In an Oct. 18 meeting of an income-tax study committee he co-chaired, Vos said Wisconsin workers make “upfront interest-free loans” to state government when too much is withheld from their paychecks.
But Wisconsin taxpayers may be addicted to cashing spring tax-refund checks.
In its budget request, the state Revenue Department suggested another way to cut income taxes: Fix the marriage penalty that is now part of the tax code.
One way to fix the marriage penalty is changing the married couple credit (MCC), which officials said was created “to offset the marriage tax penalty some couples may face when both spouses are working.” Current law caps the MCC tax break at $480 for married-filing-jointly taxpayers.
Revenue Department officials said the MCC eliminates or reduces the marriage penalty for “many two-earner joint filers” but does nothing to help one-earner couples and taxpayers with no incomes.
And, “Moreover, a marriage penalty still exists today for many joint filers even after the MCC. In 2013, 51 percent of married couples are expected to have a marriage tax penalty under current law.” DOR officials spelled out the two-year costs—ranging from $62.9 million to $1.08 billion—for each of six ways to fix the marriage penalty. Walker could dial up or dial down the size of the fix, depending on 2013-15 estimates of tax collections.
One of those fixes would double—from $300 to $600—a tax break tied to property taxes paid by married couples.
Doing that would cost $215 million in the first year—money couples would see before Walker’s re-election—and $159 million in the second year. That’s about the size of the largest potential tax cut mentioned by the governor and Vos.
But Walker may not recommend fixing the marriage penalty because only 1.2 million taxpayers—or only 41 percent of all taxpayers—file married-filing-jointly returns.
Vos prefers to cut income taxes by adjusting tax brackets or rates. Last week, Vos said he was aware of problems with the marriage penalty but, “We should be using credits less.”
Steven Walters is a senior producer for the nonprofit public affairs channel WisconsinEye. This column reflects his personal perspective. Email email@example.com.