Tax credit loophole cost state $27 million over past 4 years
A tax credit loophole slated for elimination in Gov. Scott Walker’s budget proposal has already cost the state $27 million over the past four years, according to the Legislative Fiscal Bureau.
The Manufacturing and Agriculture Tax Credit loophole has allowed several hundred state tax filers each year to claim the credit for income taxes paid to other states since the credit started in 2013, according to the nonpartisan fiscal bureau. Tax filers can also claim a separate tax credit for income taxes paid to other states, effectively creating a double benefit.
The tax credit, which the Legislature slipped into the 2011-13 budget on the last day of deliberations, has been hailed by Wisconsin Manufacturers & Commerce as a boon to business that has improved the state’s economic climate, but Democrats want to eliminate it, saying it’s a giveaway to the wealthy that hasn’t spurred the promised manufacturing job growth.
The credit has been phased in since 2013 and in the current year, its first of full implementation, is expected to cost $284 million, or $155 million more than projected when proposed.
Walker has touted the tax credit in speeches around the country, but his proposal to eliminate it is the first sign of Republicans seeking to rein in its cost to state tax coffers. Eliminating it is expected to generate $19.4 million in additional revenue over the next two years.
WMC opposes Walker’s proposed change and is actively working to have it removed from the budget, said Scott Manley, WMC’s senior vice president of government relations.
Manley noted the separate tax credit that Wisconsin tax filers receive for income taxes paid in other states prevents them from being taxed by both Wisconsin and the other state for the same income. Walker’s proposal reduces the manufacturing and agriculture credit by the amount a tax filer receives for the other credit.
“WMC does not support this proposal because it is a tax increase on Wisconsin manufacturers and farmers,” Manley said.
Walker said Monday his proposal is “reasonable.”
“We believe what we proposed in the budget does what was ultimately intended, and it will still continue to be a positive impact in terms of encouraging those in both manufacturing and agriculture to continue to invest in the state of Wisconsin,” Walker said.
Rep. Gordon Hintz, D-Oshkosh, received an analysis of the loophole’s impact from the fiscal bureau, and his office provided it to the Wisconsin State Journal. LFB fiscal analyst Rick Olin said the information in the analysis comes from the Department of Revenue.
According to the fiscal bureau, 740 tax filers would have paid $2.6 million more in 2013 had Walker’s proposed change been in effect. In 2014, 960 filers would have paid $7.1 million more. In 2015, 930 filers would have paid $8.2 million more, putting the loophole’s average benefit at about $8,800.
Last year 620 filers would have paid $9.1 million more, though those figures are a projection not based on actual tax return data. Filers are still completing their 2016 tax returns.
The loophole is the latest issue connected to the controversial tax credit. Previously, the fiscal bureau projected 11 taxpayers who earn more than $35 million a year are projected to claim $21.5 million from the credit this year. The credit now can be claimed on 7.5 percent of state manufacturing and agricultural income, effectively wiping out state income taxes for filers who can claim the benefit. The credit is not refundable.
Last year, Department of Revenue Secretary Rick Chandler said he anticipated no changes to the credit in the upcoming budget. “It’s a credit that’s showing a lot of benefits the way it’s structured,” he said, and “one part of an overall tax-reduction and economic development strategy.”
Department of Revenue spokesman Casey Langan said Chandler was speaking about substantive changes to the law last year and the proposed changes fall under the category of “technical changes.”
