What's In The Evers Budget Tax Proposals?

By Erik Gunn, Wisconsin Examiner

February 21, 2023

In pushing back last week on Gov. Tony Evers’ new 2023-25 budget proposal, Republican lawmakers claimed it raises taxes — but left out of their statements who would bear those increases. For the average Wisconsinite, “this is not a tax increase budget, it’s a tax cut budget,” said Department of Revenue (DOR) Secretary Peter Barca during an online press conference the day after Evers’ budget address.

Evers’ budget plan does include some tax hikes, but they are targeted at wealthy people and profitable businesses. Meanwhile, the plan lowers taxes by 10% for nearly four out of five earners in the state — people with incomes of $100,000 a year or less.

Evers’ proposal also includes a new tax break for family caregivers and expanded breaks for low- and moderate-income workers as well as for people caring for children or other dependents.

The details Evers and his allies in the Legislature have pushed the income tax cut to the forefront. The DOA estimates overall savings to taxpayers of $840 million over the two-year period. More than 1.9 million tax filers would benefit from the cut, saving more than $200 per year each on average, according to the department estimate. A 2018 calculation by the Institute on Taxation and Economic Policy (ITEP) in Washington, D.C., estimated that 80% of Wisconsin taxpayers had incomes of $100,000 or less. More recently, the Legislative Fiscal Bureau has calculated about 70% of Wisconsin taxpayers are in that group.

Taxpayers who are married and filing jointly would qualify with incomes up to $150,000, with the credit phasing out gradually for those with higher incomes up to $170,000. Single taxpayers would qualify with incomes up to $75,000, with the credit phasing out for higher earners as their incomes approach $85,000. DOA estimates a savings of $195 million to 240,000 qualifying taxpayers over two years, about $400 per person.

Federal Earned Income Tax Credit

Wisconsin gives those same taxpayers a state EITC that is 4% of the federal credit for families with one child, 11% of the federal credit for families with two children, and 34% of the federal credit for families with three or more children, according to the UW-Madison Extension Financial Education program. Evers’ budget proposal would increase the state credit to 16% of the federal credit for families with one child and 25% of the federal credit for families with two children.

The change would affect about 200,000 low- or moderate-income filers who have children, saving them $300 per family on average, or more than $124.5 million over two years, the administration estimates., the administration estimates.

Raising taxes

The Evers proposal does include some tax increases, largely targeted at high incomes. “Currently if you’re a manufacturer, you don’t pay a nickel on any of your profits,” Barca said. He noted that some of Wisconsin’s fastest growing industries, including retailers and the Madison health care software company Epic, don’t enjoy the same exemption that manufacturers currently get.

Nearly two weeks before Evers unveiled his budget, State Sen. Dianne Hesselbein (D-Middleton) released reports she had requested from the nonpartisan Legislative Fiscal Bureau. One showed that manufacturing employment has grown faster in three out of six Midwestern states than in Wisconsin from 2012 to 2021, and that Wisconsin’s average annual manufacturing employment growth over the decade lagged the U.S. as a whole.

Average manufacturing wages have lagged the U.S. in that same period, rising 27% in Wisconsin and 34% nationally — while non-manufacturing wages in Wisconsin have risen 41%, the second report found. Hesselbein called the credit “an abject failure” that didn’t live up to promises it would be “a boon to job creation.”

“It is time to end this failed credit,” she declared in her Feb. 2 statement. Evers’ budget doesn’t end the credit, but limits it to the first $300,000 of manufacturing profits — yielding $655 million for the state, the administration estimates.

The agriculture portion of the credit remains unchanged in the proposal. Evers proposes limiting that break to single filers with incomes below $400,000 or married-joint filers with incomes below $533,000.

“The modifications will preserve the exclusion for low- and middle-income investors while creating greater equity in the tax treatment of different sources of income for higher-income taxpayers,” the governor’s budget summary argues.

The change would reap about $340 million in new revenues from the change over two years, according to the administration’s estimate.

The state’s separate 60% exclusion on capital gains from the sale of farm assets would not be affected under the proposal.

Boosting a business tax break

At the same time, however, Evers is proposing to expand one business tax break in particular: a tax credit on research and development spending. The tax break is refundable — meaning that it sends money back to taxpayers who qualify for the break but who end the year with no tax liability at all.

Currently 15% of the credit is refundable; Evers is proposing to make that 50% starting with the 2024 tax year. The administration argues that refundability allows the credit to benefit start-up companies that typically don’t have a tax liability they need to offset with credit. The administration estimates the change will offer $16.1 million in savings to businesses in the 2023-24 fiscal year and $64.4 million in the following fiscal year and annually thereafter.

One economist’s perspective

Tim Smeeding, an economist at the UW-Madison’s Robert M. La Follette School of Public Affairs, says the Evers proposals generally add up favorably for the state. In cutting taxes, the Evers administration is calling for help “for people who need it the most,” he says. “That’s the middle income, the working class and the middle class.”

At the same time, gains to the earned income tax credit and the child and dependent care tax credit can help draw more people into the workforce, Smeeding believes.

“We have a system now that already gives a break to people at the top and this will give a huge break to people” in the middle and at the bottom of the income ladder, he says.

He sees no evidence that cutting taxes more for the wealthiest — the net effect of legislative leadsers’ proposed “flat tax” that would reduce everyone’s income tax rate to the same figure, 3.25% — will benefit the economy of a state as a whole.

Nor does he think it would draw more investment, or people, to Wisconsin. “It’s pretty blatant,” Smeeding says. “Give really low tax rates to rich people who are already here.”

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