How A Tax Break For The Jobless Soared, Then Collapsed

By Erik Gunn, The Wisconsin Examiner

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May 13, 2021

A fleeting moment of bipartisan agreement to provide some extra help for people who lost jobs during the COVID-19 pandemic died on the Senate floor Tuesday.

The outcome probably reinforced the most cynical observers’ appraisals of the body.

After a GOP majority passed a Democratic lawmaker’s bill in a committee May 5 that would provide a state income tax break for people who had been unemployed, the Senate’s Republican leaders declined to schedule it for Tuesday’s floor session.

And when the bill’s author, Sen. Tim Carpenter (D-Milwaukee), tried to work the same language into another piece of legislation that was on Tuesday’s schedule, lawmakers rejected his attempt on a party-line vote.

Carpenter says the tax break is worth about $500 for a typical qualifying family, according to an informal estimate he got from an accountant.

While Republican Senators helped advance the tax break, the same party’s Senate leaders put it aside a week before people’s income tax returns are due. “Essentially what they did is, they raised taxes,” Carpenter says. “They basically raised taxes on unemployed people. And I don’t think that’s fair.”

A tax break for the jobless

Carpenter’s bill (SB-267), like its Assembly companion (AB-268), authored by Rep. Tip McGuire (D-Kenosha), was a proposal to give people laid off in 2020 and 2021 a state tax deduction on the first $10,200 they received in unemployment compensation.

Three months ago, the GOP majority in each house of the Legislature rejected opportunities to provide that benefit to unemployment compensation recipients.

In February, the Legislature passed a bill giving a state income-tax deduction for recipients of forgiven loans under the pandemic-inspired federal Paycheck Protection Program (PPP). In both the Assembly and the Senate, Republican majorities rejected Democratic amendments to pair that $400-million-plus tax break with a state tax deduction for unemployment comp recipients.

The bill containing the PPP tax break included a number of other routine reforms to the state tax code requested by the state Department of Revenue (DOR). After the Democrats failed to amend it, it went on to pass with bipartisan support and was signed by Gov. Tony Evers.

The PPP-expense deduction was unorthodox by conventional accounting and tax standards: It allowed businesses to take a deduction from their taxable income on expenses that were not paid out of that taxable income — but, instead, had been covered by an outside source of funds that was already tax-free.

In providing that state tax deduction for PPP recipients, lawmakers pointed out that they were simply aligning Wisconsin’s tax code with the federal tax code: Congress, in late 2020, authorized a federal tax deduction on the PPP-covered expenses.

Using that same argument, Carpenter in the Senate and McGuire in the Assembly resurrected the proposed unemployment comp tax break as its own piece of legislation. Congress, Carpenter has pointed out, has already waived federal income taxes on a person’s first $10,200 in unemployment comp income during the pandemic.

And in the Senate, the measure that Republicans had spurned in February suddenly gained steam.

Red fast track for a Blue bill

In the Republican-controlled Legislature, bills primarily authored by Democrats get introduced, assigned to a committee — and usually just stop there. The unemployment comp tax break bill was one of a handful of exceptions, getting a public hearing on April 20 in the State Labor & Regulatory Reform Committee, chaired by Sen. Steve Nass (R-Whitewater).

Then Nass scheduled the bill for a vote on Wednesday, May 5.

The fast track for the minority party measure raised eyebrows in the Capitol. Two days before the vote, Nass produced an amendment, sharing it with Carpenter. Raised eyebrows turned to jaded squints.

That amendment poked one of the festering hornet’s nests in the fractious relationship between the Republicans who control the Legislature and the Democratic governor in the executive wing.

Nass’s amendment directed the governor to refund the state DOR up to $242 million for what it would lose due to the tax break — estimated in a fiscal note from the Department of Administration at $121 million for 2020, and perhaps as much for 2021. The money, the amendment stated, would come from the state’s allotment in federal COVID-19 relief funds under the American Rescue Plan Act (ARPA).

State law puts the governor in charge how federal funds to the state are spent, but Republican legislative leaders had already twice tried to exert control over the ARPA money — first, by writing a bill giving them effective veto power over Evers’ spending plan, then, with a series of bills that would directly funnel the money to their chosen priorities rather than the governor’s. To their consternation — but no one’s surprise — Evers vetoed all of those measures.

Suspicions and skepticism

With that history, some Democrats saw the amendment as a provocation at best. And there was a darker interpretation: that it was a monkey wrench thrown in the gears. ARPA language limits states from using the federal funds to offset state tax cuts. That led Capitol skeptics to speculate that the amendment, if approved, would render the bill effectively void.

But a lawyer for the nonpartisan Legislative Reference Bureau reasoned otherwise. A U.S. Treasury Department statement in early April permits ARPA money to be used to offset state revenue losses, if those losses are due solely to matching up the state tax code with the federal one.

Democrats remained annoyed that the amendment was still another GOP attempt to assume control over the executive’s authority to spend the ARPA funds. They also noted that, by contrast, the PPP-tax-break bill — costing the state more than twice what the unemployment comp bill would cost — is paid for from the state’s general revenues.

Still, the federal finding that appeared to support the Nass amendment offered a path for the bill that could theoretically get it to the governor’s desk.

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In the Senate labor committee, however, the two Democrats were not mollified; Sens. Bob Wirch (D-Somers) and LaTonya Johnson (D-Milwaukee) both voted against the amendment and the amended bill.

With the legislation advancing to the full Senate on a divided vote, Carpenter hoped the measure would yet be scheduled on the calendar for this week’s floor session Tuesday, May 11. But when leaders posted the rundown of bills on Friday, May 7, for the session, his bill wasn’t on it.

Pivot to Plan B

“Last Friday when they didn’t schedule it, I kind of thought we were in trouble,” Carpenter says. But reviewing the rest of the bills, he saw an opportunity: An Assembly bill delaying the state’s income tax filing date to match the rescheduled federal filing deadline.

He saw it as an appropriate vehicle for an amendment creating the unemployment comp tax break.

In February, Carpenter had spoken for seven minutes on behalf of the unemployed workers he had hoped would benefit from the tax break he proposed then. “There are people that work in the restaurant industry, the tavern industry, the healthcare industry,” he said. “Those people aren’t making lots of money already.”

On Tuesday, his turn came toward the end of the Senate’s five-hour session. His speech was just two minutes long.

“I would like one last shot for my constituents,” Carpenter said, “to allow those people to have an exemption, like [they have] in their federal taxes.” With the tax deadline on Monday, May 17, “this is the last opportunity before people turn in their taxes unless they do an extension. I’m just asking the body one last time.”

The amendment was rejected on a 22-11, party-line vote.

“You know, that’s the third strike,” Carpenter said after the session adjourned. “Whatever they did in committee, instead of passing a bill that could become law, they just torpedoed it.”

Still, he says, while the Senate isn’t scheduled to return until June, he hasn’t given up on the measure. He’s contemplating offering it as a budget amendment, and on any bill arising “that deals with unemployment compensation,” Carpenter says. “I’m going to continue to press forward.”

The Wisconsin Examiner, a nonpartisan, nonprofit news site, offers a fresh perspective on state politics and policy through investigative reporting and daily coverage dedicated to the public interest. The Examiner is part of States Newsroom, a national 501(c)(3) nonprofit supported by grants and a coalition of donors and readers.