Child care tax credit most likely to survive among tax bills GOP sent to Evers

Preschool children play in a child care center. A bill that would raise Wisconsin's child care tax credit is one of four tax-cut bills going to Gov. Tony Evers, who has said he will sign some but not all of the measures. (Getty Images)

A $2.1 billion tax cut package that Republicans in the Legislature introduced after Gov. Tony Evers vetoed previous tax cut proposals will now go to Evers for his signature, another rejection, or a little of both.

The package includes four separate bills that passed the state Senate on Tuesday after passing the Assembly a week ago . Wednesday morning Emilee Fannon, Capitol correspondent for Milwaukee TV station WDJT Channel 58, tweeted that Evers said he would sign “some, but not all” of the bills but didn’t elaborate.

The most promising candidate for Evers’ signature is AB-1023 , a bill increasing the Wisconsin child care tax credit. The tax credit is a modest offset for family child care expenses.

All but four Democrats in the Assembly last week and three in the Senate on Tuesday joined Republicans in passing the child care tax credit — making it seem likely that the Democratic governor will go along. Bipartisan support has been a leading predictor of whether Evers will sign legislation that reaches his desk.

The Senate voted Tuesday  to concur with the Assembly on the three other bills in the GOP package:

• AB-1020 passed 22-10 on party lines. The measure raises the income ceiling on the second-lowest state income tax rate of  4.4% to $112,500 for single filers and $150,000 for married couples filing jointly.
• AB-1021 passed by a vote of 23-9. It exempts from the state income tax retirement income up to $75,000 for single filers and $150,000 for joint filers.
• AB-1022 passed on a 22-10 party-line vote. This measure almost doubles the tax credit for married couples.

The marriage tax credit is applied to 3% of the annual income for the lower-paid spouse in a two-income household. The credit is currently limited to $480; the bill would lift that cap to $870. The proposal got no debate in either the Assembly or the Senate.

Retirement income tax break

Wisconsin currently waives taxes on the first $5,000 of retirement pay for incomes of $15,000 or less for individuals and $30,000 or less for couples. The state also doesn’t tax Social Security payments.

Proponents of the bill to waive state taxes on retirement income up to $150,000 for people 65 or older suggested it could persuade many who split their time between Wisconsin and states with lower income taxes, or none at all, to maintain their domicile up north instead of elsewhere.

“Because they won’t have to pay income taxes, you’ll probably collect more sales tax,” Senate Majority Leader Devin LeMahieu (R-Oostberg) said on the Senate floor Tuesday. “They don’t have to go down to Florida for six months and one day, they can stay up here a little longer.”

Sen. Rachael Cabral-Guevera, the Senate author of the legislation, called it help for struggling seniors. “I feel that during these hard economical times, these individuals that are on fixed budgets should not continue to be penalized through taxation,” she said.

Sen. Tim Carpenter (D-Milwaukee) argued that the bill’s income ceilings are higher than they needed to be. “A couple making $150,000?” Carpenter said. “You know how many families can live on that? And you want to give them tax cuts.”

He urged Senate Republicans to consider a compromise, reducing the cap for single filers to $50,000 and for couples to $75,000. Sen. Bob Wirch (D-Somers) and other Democrats introduced an amendment that would make that change, which was rejected on a 22-10 party-line vote.

When the vote came for the bill, however, Carpenter joined the Republicans, mirroring the Assembly vote last week when Reps. Katrina Shankland (D-Stevens Point) and Lakeshia Myers (D-Milwaukee) cast votes in favor of the bill.

Expanding the No. 2 tax bracket

Senate Republicans insisted Tuesday that the shift in the 4.4% state income tax bracket would benefit the average Wisconsin taxpayer and was responsive to Evers’ past statements that he wanted to sign legislation offering tax relief to the middle class.

Wisconsin’s lowest tax rate, on incomes below $14,320, is 3.5%. The second rate, 4.4%, applies to incomes from $14,320 to $28,640 for single filers and $19,090 to $38,190 for married couples filing jointly.

The third bracket, 5.3%, is the state’s second-highest tax rate. It applies to incomes up to $315,310 for single filers and $420,420 for joint filers. The highest tax bracket, 7.65%, kicks in above those respective income levels.

Evers vetoed previous Republican attempts to eliminate the 5.3% bracket, which would have cut taxes to 4.4% on incomes up to that $420,420 level for joint filers.  When GOP lawmakers rolled out their latest bill , they pointed out its more modest ambitions.

The new bill applies “to families only earning up to $150,000 — that’s a teacher and a construction worker. That’s social workers, it’s government employees,” LeMahieu said. “This is meaningful tax relief to hard-working families in Wisconsin.”

Sen. Brad Pfaff (D-Onalaska) proposed a rewrite to the bill that would create an income tax credit for homeowners or renters for whom property taxes exceed 4% of their income. The credit would be refundable, meaning that taxpayers would receive the full value back from the state, even if it exceeded their income tax liability.

“This is a bigger tax reduction than what the income tax proposal would provide,” said Pfaff, arguing that it more effectively targeted “working and middle-class families.”

The Senate rejected the proposal on another 22-10 party-line vote. Senate Democrats went on to argue that the savings from the Republicans’ proposed income tax change would still be skewed toward the wealthy.

“Three quarters of the benefits under your tax cut goes to people making over $100,000 per year,” said Sen. Chris Larson (D-Milwaukee).

Larson and other Democrats didn’t break down their reasoning on the Senate floor. Nevertheless, according to a Legislative Fiscal Bureau analysis of the income tax cut, nearly three out of every four dollars from the proposed change would go to taxpayers with incomes of $100,000 a year or more — including to people in the state’s top two tax brackets.

Taxpayers whose income is $100,000 or more account for slightly more than 40% of the filers who would see their taxes reduced, but they would get nearly 74% of the overall tax savings, according to the fiscal bureau.

Taxpayers whose income is less than $100,000 a year account for just under 60% of all taxpayers who would see their taxes cut. They would collect about 26% of the overall tax savings from the change, the fiscal bureau estimates.

For the under-$100,000 taxpayers, the average annual tax cut would be about $201. For incomes in the $50-60,000 range, the average cut would be about $145. In the $90-$100,000 range, it would be about $445, the bureau calculated.

Higher return for higher incomes

For all taxpayers in the new proposed 4.4% bracket, the average tax savings would range from about $40 a year at the bottom to about $600 a year at the top. Meanwhile, taxpayers in the state’s top 7.65% bracket would save more than $900 a year on average from a tax cut whose authors say is targeted at people with incomes up to $150,000.

That’s because expanding the 4.4% tax bracket would not just cut taxes for households with incomes up to $112,500 or $150,000. It would also cut taxes for anyone who takes in more than that.

“In Wisconsin, the tax rates that apply to a taxpayer’s income go up as that income rises,” said Jason Stein, vice president and research director for the Wisconsin Policy Forum. “Each successive chunk of income falls into a higher bracket and tax rate as an individual’s income rises.”

For an earner filing singly, the first $14,320 in income is taxed at 3.5%. The portion of income from $14,320 to $28,640 is taxed at 4.4%. Income above $28,640 is taxed at 5.3%. The highest tax rate, 7.65%, is only levied on the income that is above the third bracket — roughly $315,000 or more.

“If you apply a lower rate to a lower bracket — or make a lower bracket cover more income as proposed here — then it benefits taxpayers whose income tops out in this lower bracket,” Stein said. “But it also benefits those with greater incomes because some of their earnings also fall in this lower bracket.”

For a single filer whose income is $100,000, the bracket change would reduce the tax on earnings above $28,640 to 4.4% from 5.3%.

And for people with incomes of $200,000, $500,000, $1 million and so on, the tax rate on that $28,640 to $112,500 band of income would also go down to 4.4%.

Child care tax credit

Seven Democratic senators crossed over to vote for expanding the state’s child care tax credit along with all the Republicans Tuesday.

An income tax credit directly reduces a person’s income tax bill. The child care tax credit uses a complex formula that cuts a family’s income tax and offsets the cost of child care.

Under the federal child care tax credit formula, a family can apply the credit to up to $3,000 a year in the cost of care for one child and up to $6,000 a year in the cost of care for two or more children.

The credit itself is worth a percentage of that amount — at least 20% for all families with incomes above $43,000 dollars, and a gradually higher percentage for lower-income families. Families with incomes of $15,000 or less can get a credit equal to 35% of their first $3,000 (for one child) or $6,000 (for two or more children) in child care expenses.

At that income level, the tax credit is worth up to $1,050 for one child (35% of $3,000) or up to $2,100 for two or more children (35% of $6,000).

For a family whose income limits the credit to 20% of the applicable child care expenses, the credit amounts to $600 for one child (20% of $3,000) and $1,200 for two or more children (20% of $6,000).

The current Wisconsin child care tax credit is 50% of the federal credit. Taxpayers with incomes under $15,000 can get a credit on their state income tax of up to $525 for one child and up to $1,050 for two or more children. Taxpayers with incomes of $43,000 or more can get a state income tax credit of up to $300 for one child and $600 for two or more children.

Under AB-1023, the state tax credit would increase to 100% of the federal credit. In addition, however, it would increase the applicable expenses to $10,000 for one child and $20,000 for two or more children.

For a family whose income qualifies them for a credit worth 20% of their expenses, it could provide up to $4,000 a year for a family with two or more children or up to $2,000 a year for a family with one child.

One catch, however, is that the credit does not return more than the family’s total state income tax liability. A family for whom the value of the tax credit is greater than what is owed in state income taxes won’t get the full value .

Larson introduced an amendment that would make the state credit refundable, so that a family for whom the credit exceeds the state income tax liability would receive cash back for the rest of the credit’s value. The amendment failed on a party-line vote.

When the Senate voted on the bill, Larson along with Sens. Melissa Agard (D-Madison) and Kelda Roys (D-Madison) cast the only opposition votes.

Addressing the Senate afterward, Roys said she couldn’t vote for it in good conscience because of its limited scope.

“This is a tax credit that helps families that already have child care. It puts more money in their pockets,” Roys said, predicting it will get signed. “That’s great. It’ll benefit a family like mine, where we’ve got two adults in the home with good jobs and we’re able to afford our child care.”

But, she added, the state’s struggling child care services need much more. “It’s not going to help thousands of families across the state that need the help the most.”

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