Wisconsin Governor Scott Walker (R) yesterday signed Act 145 into law, a budget bill that makes a number of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. changes. These include:
- Reducing the lowest income tax rate from 4.4% to 4.0%, a tax reduction for all income taxpayers (a $98 million reduction over two years).
- Increases net operating loss carryforwardA Net Operating Loss (NOL) Carryforward allows businesses suffering losses in one year to deduct them from future years’ profits. Businesses thus are taxed on average profitability, making the tax code more neutral. In the U.S., a net operating loss can be carried forward indefinitely but are limited to 80 percent of taxable income. s from 15 years to 20 years, aligning the state with federal law
- Caps tax revenue and state aid that can be received by technical college districts, and increases state aid to those districts. The hope is that the two items together will have the effect of reducing local property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es by several hundred million dollars
- Recoupling Wisconsin depletion rules to federal law
- Clarifying that taxpayers are not required to use net operating loss (NOL) carrybacks, but may do so at their option
- Tightens the job tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. to require beneficiaries to increase net employment in Wisconsin
- Allows several tax credits to be used against the state alternative minimum tax (AMT)The Alternative Minimum Tax (AMT) is a separate tax system that requires some taxpayers to calculate their tax liability twice—first, under ordinary income tax rules, then under the AMT—and pay whichever amount is highest. The AMT has fewer preferences and different exemptions and rates than the ordinary system.
- Clarifies definitions related to sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. es on the printing industry
These reductions and reforms are retroactive to January 1, 2014, except the technical college reforms that will start in 2015. The corporate tax changes that align the state with federal law are especially welcome, as they reduce duplicative tax preparation and reduce Wisconsin’s corporate tax rule disadvantages relative to other states. They also build on previous reforms to align depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. rules and net operating loss carrybackA Net Operating Loss (NOL) Carryback allows businesses suffering losses in one year to deduct them from previous years’ profits. Businesses thus are taxed on their average profitability, making the tax code more neutral. In the U.S., a Net Operating Loss cannot be carried back (only carried forward). s with federal law, and will improve the state’s business tax competitiveness.
The income tax changes also build on earlier reductions since 2012. While the top rate has dropped only slightly, from 7.75 percent to 7.65 percent (compare that to neighboring Illinois’s proposed 8 percent top rate and Minnesota’s recent increase from 7.85 percent to 9.85 percent), all rates have dropped and one mid-level bracket was deleted (see table). Using his own executive authority, Walker has also reduced Wisconsin's excessive tax withholding, which is presently designed to withhold 120 percent of projected tax liability. Taxpayers get the excess money back when they file their taxes, but it is essentially a forced-interest free loan to the state in the meantime. The money also sat on the state's books as a liability, worsening the paper deficit by some $323 million.
|
2012 |
2013 |
2014 |
||||
|
Bracket |
Rate |
Bracket |
Rate |
Bracket |
Rate (pre-cut) |
Rate (post-cut) |
|
>$0 |
4.60% |
>$0 |
4.40% |
>$0 |
4.40% |
4.00% |
|
>$10,570 |
6.15% |
>$10,750 |
5.84% |
>$10,910 |
5.84% |
5.84% |
|
>$21,130 |
6.50% |
>$21,490 |
6.27% |
>$21,820 |
6.27% |
6.27% |
|
>$158,500 |
6.75% |
|||||
|
>$232,660 |
7.75% |
>$236.600 |
7.65% |
>$240,190 |
7.65% |
7.65% |