Wednesday, March 13, 2013

Scott Walker’s tax cuts are a bad choice for Wisconsin’s working families

Restoring the Earned Income Tax Credit would benefit the state better

Scott Walker’s tax cut is a terrible plan for Wisconsin’s working families.

Now I know what you’re thinking: how can a tax cut be a bad thing, especially for middle and lower income families?

The answer is simple: when it fails to work in their interests, an income tax cut won’t do them any good. A simpler, much less expensive plan, would do much more good for working class Wisconsinites.

To explain this point further, some background is needed: in 2011, Gov. Scott Walker reduced the Earned Income Tax Credit (EITC) for working families. The 2011 budget reduced the EITC by $56 million total. Keep that number in mind for later.

The gutting of this popular tax credit amounted to significant losses for the middle class and poorer Wisconsinites -- a single mother with three children working minimum wage, for example, saw her tax credit reduced by more than $500 last year. A two-parent household with two children saw their credit reduced by $154.

Let’s now consider Gov. Walker’s tax cut proposal. In practice it would affect how the state’s income tax brackets calculate what is owed by taxpayers. By reducing those brackets, however, it also reduces the taxes of not just the working class but also the wealthy as well.

A classic argument there is that the wealthy deserve an income tax break, too, seeing as they pay most of the income taxes the state collects. Indeed, many Wisconsinites don’t even pay income tax after their credits are calculated into things.

But the poor do pay other taxes -- sales tax, property tax, and other excise taxes that help fund the state. And when you calculate those taxes into the totals, you get an effective tax that’s overwhelmingly regressive wherein the poor actually pay a higher percent of income than the rich.

Wisconsin's effective tax rates burden the working class
According to a study by the Institute on Taxation and Economic Policy (PDF), the lowest 20 percent of income earners in the state pay 9.6 percent of their paychecks towards state taxes. That’s significantly lower than the top 5 percent of taxpayers, who pay an effective rate of 8.3 percent of their income towards taxes. The top 1 percent pays even lower: 6.9 percent.

In short, it’s the state's poor who bear the burden, paying a larger chunk of their pay towards taxes than the wealthy.

But a tax cut is a tax cut, right? Walker’s proposal to cut the income tax will benefit middle class and poorer Wisconsinites, will give them SOMETHING back, so we should quit complaining.

Well, not so fast. What Wisconsinites receive back from this supposed tax cut (PDF) pales in comparison to what they lost two years ago.

A family with a median income in Wisconsin (roughly $50,000 annually) will receive a whopping tax cut of $74, and that single mother working minimum wage won’t even see more than $21 back in tax cuts per year under this proposal.

Obviously that $21 is a significant difference compared to the nearly $500 she lost in tax breaks from Walker’s gutting of the EITC. But wouldn’t it cost the state more to restore her lost EITC than to give her the tax break Walker is proposing?

Surprisingly, no -- it’d actually be economically better for the state to restore the EITC to pre-2011 levels than to implement Walker’s tax cuts. Remember how I said to keep in mind the $56 million that Walker took out from the EITC in 2011 above? That’s because Walker’s proposed tax cuts will end up reducing state revenues by more than $300 million.

So for the cost of restoring the EITC to what it previously was -- about one-sixth the cost of what Walker is proposing in tax cuts -- we could double a working family’s tax savings, and increase the tax savings of a single mother of three children (working minimum wage) more than 20 times over.

The choice should be obvious: we should restore the EITC and invest the remaining costs of Walker’s tax cuts into other programs that have seen cuts as well, such as education and health care. But that’s not the choice Walker wants to make. Why? Because it doesn’t give tax breaks to the rich, his core base.

That’s what this is all about in the end -- who gets the tax breaks. As I already mentioned, it’s the poor who are really burdened by the tax code in our state. They have a higher effective tax rate even if they don’t pay a significant portion of the income tax.

We should do what’s best for the people of Wisconsin who are still struggling. What’s more, we shouldn’t give crumbs to those in need when the costs of giving something substantial back to them is less.

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