Tax cut’s savings go to Wisconsin’s wealthiest 25%

If a $2.4 billion income tax cut from Republicans on the Legislature’s budget committee becomes law, three out of four of Wisconsin’s households will see less than $7 a week on average in additional cash.

The bulk of the benefits from the tax cut proposal will go to the wealthiest one-quarter of the state — people with incomes ranging from more than $80,000 to more than $1 million. For that group, the average tax savings would range from about $450 to $2,935 a year.

“We have this economic divide, and we’re doubling down by excluding people with low incomes from a huge tax cut,” says Tamarine Cornelius, an analyst for the Wisconsin Budget Project and Kids Forward, a policy organization that advocates for children and families.

In its final day of deliberations, the Legislature’s Joint Finance Committee completed its rewrite of the state 2021-2023 budget Thursday night, voting 11-4 on party lines to send the document to the full Legislature.

After a report June 8 that projected revenues over the next two years would exceed earlier forecasts by more than $4.4 billion, the Legislature’s Republican majority began pursuing a tax cut. While Gov. Tony Evers and Democratic lawmakers urged the committee to reconsider items that had already been cut from the two-year spending plan, they were repeatedly rebuffed.

Thursday night, the GOP lawmakers fulfilled their aim, with a series of tax cuts totaling $3.4 billion included in the budget. The single largest component was a $2.4 billion reduction in income taxes, achieved by lowering the tax rate for the state’s third income-tax bracket to 5.3% from 6.27%. For people filing singly, the bracket applies to annual incomes between $23,930 and $263,480.

The same budget motion also included a child and dependent care tax credit, set to take effect in 2022, totaling $9.8 million. The new tax credit, valued at 50% of the corresponding federal tax credit, would take the place of a current tax deduction for child and dependent care expenses.

A table attached to the motion with calculations from the nonpartisan Legislative Fiscal Bureau projects the combined impact of the tax rate cut and the child and dependent care tax credit in 2022. The calculations used a simulation from the Wisconsin Department of Revenue, according to the Fiscal Bureau. Although the table includes both the child care tax credit and the reduction from the tax-bracket change, the latter accounts for the bulk of the tax reduction shown.

The income tax cut’s disparate impact on people depending on their income was already evident to Democrats on the finance committee, who criticized it in Thursday night’s debate.

“The majority of the benefit is going to the minority of [income tax] filers,” said Rep. Greta Neubauer (D-Racine). “The gap in our state and nationally, between working people and wealthy people has grown over the past several decades. We can all see it. Wisconsinites can feel it in their daily lives. And history is not going to look favorably on this time, when some in government failed to help those who needed it most.”

Defending the change, Rep. Tony Kurtz (R-Wonewoc) name-checked constituents of his who would benefit, including a local police officer, a teacher and others. “This is going to give them a tax cut,” Kurtz said.

According to the fiscal bureau’s calculations, more than 75% of households in Wisconsin have incomes of $80,000 or less. At the top end of that range, people with incomes of $70,000 to $80,000 would see an average savings of $353 a year, or less than $7 a week, the Fiscal Bureau’s calculations show.

Altogether those households with incomes of $80,000 or less would share about $157 million from the combined tax reductions — about 16% of the total $989 million projected tax cut for 2022.

More than 60% of households have incomes of $50,000 or less; they see 3.5% of the tax savings.

For households with incomes of $25,000 to $30,000, the annual tax savings from the combined tax credit and tax bracket reduction would be $115 on average — a little more than $2 a week.

“People basically earning under $30,000 or less are going to see very, very little of this tax cut,” Cornelius said — “less than one half of 1% — even though they are 40% of all tax filers.”

At the other end of the income scale, 84% of the tax savings would go to the top 25% of Wisconsin households by income, ranging from $80,000 to more than $1 million, according to the fiscal bureau’s calculations. The average tax reduction for that group would range from about $450 to $2,935 a year, increasing along with incomes.

Cornelius notes that, in calculating the “average” tax cut for each income group, the Fiscal Bureau’s methodology includes only those households that receive a tax cut. The bureau’s calculations indicate that the majority of households with incomes of $40,000 or less won’t see a tax cut at all: less than 40% of $30,000-$40,000 households, 7.6% of $25,000-$30,000 households, and still fewer households with incomes below $25,000.

By contrast, 74% of households with incomes in the $40,000-$50,000 range will see a tax cut, regardless of how small. So will nearly 95% of households with $50,000-$60,000 incomes. At incomes above $60,000, where the dollar value of the tax cuts gets larger, anywhere from 98% to 99% of households will benefit. 

The same Wisconsin households that are largely left out of the proposed tax cut are already paying a larger share of their household income in taxes, according to the Institute on Taxation and Economic Policy (ITEP), a Washington, D.C., research organization.

ITEP calculates the total tax burden by income from sales, property and income taxes for each state. In Wisconsin, according to the organization’s current calculations, all taxes combined take a little more than 10% of the incomes of people whose incomes range from less than $22,100 to $198,000. For people with incomes from $198,000 to $512,600, all taxes take an 8.5% bite, and for people over that level taxes account for 7.7% of their income.

“People who already pay a higher share of their incomes in state and local taxes than people of higher incomes are being excluded from a tax cut,” Cornelius says.