Budget trims tax credit for working poor
Critics say proposal amounts to tax increase for some families
By Patrick Marley of the Journal Sentinel March 6, 2011
Madison — Gov. Scott Walker’s proposed budget would reduce a tax credit program for many of the working poor by $41.3 million over two years – a change that critics say violates his pledge not to raise any taxes.
Opponents of the change were also critical of reducing the tax credit because it is included in a budget that would roll back taxes on corporations and gives a new tax break on capital gains for those who invest in Wisconsin businesses. Walker’s proposal also would stop the adjustment for inflation of the homestead tax credit, a change that would cost low-and moderate-income workers $8.1 million over two years.
“He is increasing taxes on the working poor,” said Scot Ross, executive director of the liberal group One Wisconsin Now. “Where is the shared sacrifice? The wealthy, as always, are coming out ahead.”
Walker would make the tax credits slightly better for low-income people with one child, but would make them worse for those with two or more children.
For years, the working poor who have children have qualified for a state income tax credit that is meant to boost their wages and offset Social Security taxes and other taxes they pay. Walker’s proposal changes the formula so those workers get less in credits.
The credits are refundable, meaning qualifying people can get money from taxpayers even if they have no state income tax liability themselves. According to the nonpartisan Legislative Fiscal Bureau, 77% of those who qualify for the credit do not owe any state income taxes and get a check from the state.
The remaining 23% owe state taxes and the credit lowers their liability. Under Walker’s plan, they’ll get less of a credit – and thus owe more in taxes.
Walker repeatedly insisted he would not raise taxes throughout his campaign and signed a pledge last year to “oppose and veto any and all efforts to increase taxes.”
“I’m not looking for a cigarette tax, a liquor tax, you name it,” Walker told the Journal Sentinel in April.
In a recent interview, Walker said he did not consider the change to the earned income tax credit a tax increase because most of the recipients have no state income tax liability and receive a check from the state.
“What you’re essentially looking at is people being given money from other taxpayers,” he said. “In this case, we’re ultimately not raising taxes. It’s how much money they get back from other taxpayers. But it’s not raising what the tax is.”
Rep. Robin Vos (R-Rochester), co-chairman of the Legislature’s Joint Finance Committee, said he thought Walker was proposing a “reasonable reduction” in the program and did not consider the change a tax increase.
Families to feel pain
Jon Peacock, research director for Wisconsin Council on Children and Families, disagreed.
“It amounts to a tax increase on the working poor,” he said.
He said the program helped keep people out of poverty and should be maintained.
“The budget is about priorities, and the governor has prioritized tax relief for multistate corporations and the wealthy while he is cutting programs that help a broad range of Wisconsinites,” Peacock said.
The program was started in 1989. The credit, like one at the federal level, was championed by Republicans because it created an incentive to work, said Todd Berry, president of the Wisconsin Taxpayers Alliance.
“I think it’s good tax policy and good social policy because it rewards work rather than discouraging it, which is what the old welfare system did,” Berry said.
As for Walker’s proposed changes, Berry said: “I would have looked for savings somewhere else.”
Cut of $20 million a year
Under Walker’s plan, the earned income tax credit would be reduced by more than $20 million a year – a reduction of more than 15% when compared with the $129.2 million paid out in the last fiscal year.
Under the program, low-income workers receive a state tax credit that is based on a percentage of a similar federal tax credit they receive. Walker’s plan changes the size of the credits they can receive, raising the credits slightly for those with one child and dropping it for those with two or more children.
The new plan would mean those with one child would be able to claim a state credit of 5% of their federal credit – up from 4%. But for others, the amount they could claim would drop – from 14% to 8% for those with two children; and from 43% to 40% for those with three or more children.
In 2010, the maximum state credit was $122 for someone with one child, $705 for someone with two children and $2,436 for someone with three or more children, according to the fiscal bureau.
Walker’s proposal also stops the inflationary adjustment of the homestead tax credit, a long-standing property tax break that appears as a credit on income tax returns for low-income homeowners and renters.
In 2009, lawmakers indexed the tax credit for inflation, but Walker’s plan would end that practice and freeze the credit at its existing level.