Steven Walters: State budget included major tax-policy changes

Steven Walters

August 17, 2015

The new state budget included important changes in tax policy, although they were overshadowed by the controversy over proposed open-records law exemptions that would have kept secret all records of who governors and legislators consult on pending issues.

Among the changes that are now law:

-- Parents or guardians of disabled children can set aside up to $14,000 per year by opening new Achieving a Better Life (ABLE) tax-deferred accounts. Those who care for the disabled can set aside a total of up to $425,000 to pay medical and other bills.

-- The total amount family members can contribute to Edvest, Wisconsin's college savings plan, was raised from $330,000 to $425,000.

-- More than 690,000 taxpayers will get a new $21 million tax break, but not until they file 2016 income taxes. The first step on fixing the so-called “marriage penalty” will only be worth about $30 per taxpayer, however.

-- About 35,000 tax filers will save about $24.2 million when they file their 2017 income taxes because they will no longer be subject to the Alternative Minimum Tax (AMT). Without that new break, the number of taxpayers owing the AMT would have soared from 7,656 in tax year 2012 to 38,500 in tax year 2017. As a result of the change, about 2,100 taxpayers will pay the AMT in tax year 2017.

-- Wisconsin's K-12 teachers can claim a tax deduction of up to $250 per year for classroom school supplies they buy. This will save teachers $1.1 million per year in taxes.

-- The state Department of Revenue will hire 113 new auditors and revenue agents. Of those, 102 will conduct audits that collect more taxes, and 11 will work on collecting outstanding state debts.

Two Republicans, Rep. Dale Kooyenga and Sen. Howard Marklein, both CPAs and members of the Legislature's Joint Finance Committee, drafted the tax policy changes that were added to the 2015-17 budget just before the committee endorsed the sweeping open-records law exemptions. The exemptions generated so much criticism that Gov. Scott Walker and Republican leaders promised to kill them just two days after the committee approved them.

Kooyenga and Marklein found enough cash elsewhere to cover costs of their tax cuts. One way was by slightly dialing back—from 5.52 percent to 5 percent for this year only—the tax break under the Manufacturing and Agriculture Credit approved two years ago. That one-year reduction will save about $16.8 million.

But the Manufacturing and Agriculture Credit tax break then increases to 7.5 percent in 2016, as scheduled. Democrats have called for limits on or repeal of that credit, saying it's unfair while the state budget cut $250 million in UW System aid.

In an interview, Kooyenga called the $21 million tax break a “good-faith down payment” toward eliminating the marriage penalty. The penalty most hurts families whose two incomes are about equal. If he's back on Joint Finance in two years, Kooyenga said he would push for another tax-code change to reduce the penalty even more.

Kooyenga said he and Marklein had to delay both the new marriage penalty and AMT tax break because the overall budget had to fix a deficit. The marriage-penalty fix won't begin until tax year 2016; the AMT fix won't help the wealthiest taxpayers until tax year 2017.

In a budget that cut UW System aid by $250 million, Kooyenga said, “You really can't go too crazy on tax cuts.”

Democratic legislators criticize Republicans' changes that will dramatically reduce—from about 38,500 to 2,100—the number of taxpayers paying the AMT in tax year 2017. It will most help filers with taxable incomes of between $200,000 and $500,000, according to the Legislative Fiscal Bureau.

Kooyenga said the AMT fix was needed because, when tax rates were lowered a few years ago, legislators didn't realize that would force more taxpayers to pay the AMT.

“Politicians didn't realize what they had created,” Kooyenga said. “Not a single Democrat understands the AMT.”

But Democratic Sen. Jon Erpenbach, who is also a Joint Finance member, disagreed. Erpenbach said the AMT was enacted to make sure every taxpayer pays some income taxes.

“It must be nice to be the smartest person in the Capitol,” Erpenbach said of Kooyenga.